Mr. Johnson Chukwu is the Chief Executive Officer of Cowry Asset Management limited. In this interview with our correspondent, he bared his mind the Nigeria’s economy in the outgoing year, the massive lay off of employees in some companies, the clamour for more bailout funds by the state governors and many more. Excerpt;
What is your assessment of the nation’s economy in the outgoing year 2015?
Well, if you look at the statistics published by the Nigerian Bureau of Statistics, it is clear the economy went through a difficult period in 2015. We saw the GDP growth rate in the second quarter at 2.35% and which only improved marginally to 2.84% in the third quarter and this current quarter, it is likely the GDP will suffer further in view of the fact that we have major FX constraint and the policies of government are not enunciated and if you look at some other parametres in terms of GDP performance, you see the all share index has dropped and then you can see the market capitalization has dropped to N9.5 trillion from almost N11 trillion at some point.
So, give and take, I will give it that the basic you will see, you see high level of unemployment, we were seeing it among the populace the level of insurgency, we were seeing, price levels are increasing because the exchange rate has depreciated at least in the alternative market.
So, these factors have impacted negatively on the economy, we have seen manufacturing activities grow negatively by about 1.7% in the first quarter and there was even an improvement by a drop of 4% in the second quarter. So, we have seen the major sectors of the economy that should drive growth declining.
In summary, you could actually say that 2015 as it is coming to an end has been a very difficult year economically.
We noticed that some businesses are laying off their staff while some others who could not immediately lay off are cutting down on the salaries of their staff. To what do we attribute this development to?
Well, it is clear that this year has been one of the worst years in terms of economic growth. Like I did mention, we see the GDP in the average of 2.83%. That is one of the lowest in the past 16 years in terms of GDP performance. Of course, the declining GDP also means that some business concern is also going through some difficult times. We have seen the consumer purchasing power diminish as a result of the devaluation of the currency in the alternative market, we have seen local demand and consumption declined and this flaws has led to situations where companies no longer have need to keep the number of hands in their employment than they used to have and therefore like you mention, a period of laying off of employees and increasing level of poverty in the land.
So, companies laying off of their employees could only be as a result of fact that revenues are declining, opportunities are shrinking, so, the prospects are also weak because if you have a strong prospect, you will rather ride through the rough period but when you see a bleak prospect, then the only thing is you might cut down on your cost and remain slim to weather the difficult period.
So, the basic problems that we have is that we have low demand and to worsen matters, the economic variation in the country is not very clear and the outlook looks very doubtful which is why companies are retrenching.
Talking about the economic indices not being so clear, I remembered you assured sometime this year that with the appointment of the Ministers who will work with Mr. President, we are likely to see picture of where the economy is tilting to. Is that the case now?
Well, as at today, we have seen pronouncements by the Ministers on the policy orientations of the government. The snippets we have gotten at one point or the other from the statements made by the President or the Vice President in terms of the social orientation of the government but in terms of a defined economic policy orientation of the government, we are yet to see that. Hopefully in the next couple of weeks, the Ministers will settle down enough to understand their individual Ministries and come up with articulated policy positions which will help the private sectors in taking economic decisions on which way to go.
About a week ago or so, we saw some state governors going back to the President demanding more bailout funds to enable them pilot the affairs of their various state. We also saw them making some comments that have not gone down well with the labour union especially with regards to their inability to pay the N18, 000 minimum wage. What is your take on this?
I think that the basic thing that has happened is that the structure of the political environment or the political system was designed to encourage the Federating units to come cap in hand to the federation to collect resources and over time, the federating units, the states have build their cost profile based on the fact that they will continue to pick handouts from oil proceeds distribution. Unfortunately for them, that cake has diminished and their cost profile is still high as it was.
So, like I mentioned to a couple of media houses when the bailout was made that the action was at best to massage the problem, that it wasn’t going to address the fundamental problem. It was necessary that the President gave some relieve to employees who as a result of no fault of theirs, the state governments failed to pay them. So, that was understandable but the fact that it was without conditionalities attached to them, what it simply means was that it was like a windfall to the state governments and it was flittered away.
But beyond that, the key thing is that the structure of most states is such that they cannot generate enough revenue in the short term. Maybe in the medium term, a lot of all these things could change, in a long term, all of us are already dead. In the short and medium terms, many of the states are not financially and fiscally independent and will continue to remain appendage of the federal government in terms of revenue generation.
So, the solution is if the primary objective for the creation of a state is no longer obtainable, which was to create as many units as possible that will be sharers from the federation account, if the federation account is no longer there, then we need to restructure the polity and evolve legions of states that can be of economic of scale and were able to generate enough revenue as a result of the resources available at their localities to be able to meet their obligations and develop their states.
We used to have states when we had four regions that were developing on their own and contributing to the federation. The major resources of those regions are still there but they no longer attract the attentions of the various state governments. We have too many fragmentations that they do not form institutions, entities that can have economics of scale, we have 774 local governments, none of them generate revenue, they are all waiting for federation allocations and they are not doing anything tangible in terms of development; well, basically they are distribution centres for political patronage.
And I don’t think in a situation where the revenues are not forthcoming, that we should continue to run with the structure when the structure was designed for a different system that is no longer obtainable today.
Knowing fully well that the economy needs people who know their onion to manage it and looking at the team assembled by the President to help him manage the economy, do you think that President Buhari has got it right in terms of the crop of people in the economic management team or do we need to wait more for the right people to e appointed?
I think it will be too presumptuous to assume anything on the economic management team. It is too early and we should give them all the benefit of doubt. I believe they have had the private sector experience and they should bring their private sector experience to bear in the public service.
So, I wouldn’t think it is an appropriate time for anybody to make any comment on their competent. I want to believe, based on their pedigree, they should be able to deliver on their assignments. In due course, we should all be in a position to assess their performance. Like I said earlier, it is too early for anybody to impute or impinge on their capacities.
By now you should have seen the Medium Term Expenditure Framework of the Federal Government. What is different from what we used to have in the past and what we are going to have in 2016 in terms of the national budget estimates?
Well, the basic things are that we have seen an increase in the expected capital expenditure of up N1.8 trillion but we are also seeing a situation whereby the overhead, the recurrent expenditure is recording far more than enough the total revenue. The projected revenue is N3.8 trillion, the total budgeted borrowing is N2.2 trillion which means that given a N6 trillion budget, the only expected revenue is only N3.8 trillion.
So, that means that N2.2 trillion will be borrowed, of the N2.2 trillion that will be borrowed, N400 billion will still go to add to the overhead expenses. So, in effect, we are still running an Optus budget structure because the first thing we should expect is that at least, the revenues of the government should cover the recurrent expenditure so that if you are even borrowing, it goes into capital expenditure. If you are budgeting N1.8 trillion in capital expenditure and you are borrowing N2.2 trillion, the implication like I said is that N400 billion of your borrowing will go to consumption and the challenge of borrowing for consumption of course is that you are not investing in capital asset that will generate the necessary revenue meet the repayment obligation of that borrowing or that debt.
So, I think it is something that should be a food for thought for the government and the National Assembly in looking at the budget. We still don’t have a budget, what we have is a Medium Term Expenditure Framework. When the budget is finally prepared, I think the government would found that the N2.2 trillion that we borrowed will be going into overhead expense and I am convinced in my mind that that is not likely going to be the intention of the government.
There has been a recurring call for a reduction in the recurrent expenditure of the federal government. How do we achieve this dream?
You see, the issue of reduction in the recurrent expenditure of government is not as easy as people present it because the government’s primary objective is to improve the welfare and wellbeing of its citizens. So, when the government retrenches, it negates the primary objective of improving the welfare and wellbeing of its citizens.
So, for you to cut down overhead as it is presented, a number of things have to be done, one of which is a direct retrenchment and I do not think that the objective of government is to retrench and create more hardship.
The other aspect is rationalizing the Ministries. If you rationalize the Ministries, it will still lead to retrenchment but I think what they should do is to look at those parastatals that revenue generating agencies and make them semi-autonomous or financially independent so that they generate their revenue and pay the surplus to the government instead of a situation where employees in those establishments are not accountable and they do not have any revenue target.
So, if the likes of NNPC, the likes of NIMASA all become financially autonomous like what the initial PIB meant to do, to create autonomous entities from NNPC that will be self funded, I think that way, the government should be able to reduce the number of employees who do not have any revenue budget.
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