Yusuf: Monetary, Fiscal Policies Should Be Mutually Reinforced

Chairman, Nigerian Economic Summit Group (NESG), and Managing Partner at Verraki, Mr Niyi Yusuf, speaks on near-term outlook of the Nigerian economy among other issues as the country welcomes a new administration. Emma Okonji presents the excerpts:

With the incoming administration, what key policy changes do you anticipate the new government would implement to impact the Nigerian economy in the short and long term?

The new administration is coming at a time Nigeria and Nigerians desperately needed some real economic progress. The challenges of poverty, corruption, insecurity, fiscal crisis, and institutional weaknesses are multidimensional, and addressing these will require vision, focus, and collaboration with various stakeholders, and considering the real needs and challenges of Nigeria’s diverse population. Nonetheless, by prioritizing inclusive growth (i.e., economic growth that is distributed fairly across society and creates opportunities for all) as a key economic policy driver, the new administration should be able to maximize policy quick wins that will immediately impact the livelihoods of Nigerians in the short run and lay a solid foundation for longer-term inclusive growth. So, to answer your question directly, I would recommend that the incoming administration prioritise the following twelve thematic areas: Pursue national unity and inclusion – the need to make every Nigerian feel belonged and believe in the Nigerian project is key to progress. Prioritise national security – this is the bedrock, without which the economy will continue to struggle. Stop oil production losses – this will help address immediate fiscal weaknesses and provide resources for long term development projects. Implement a phased subsidy removal (Fuel, FX) – subsidies are needed in the short term, but we can no longer afford subsidies given that it distorts the market forces in the long term. Drive more public works including creating a national highway network to connect all state capitals with the FCT – this will help ease supply chain burdens across several sectors, from agriculture to consumer goods while also creating jobs and boosting economic activities. Rationalise trade restrictions, waivers, and tax exemptions to reduce leakages and implement fiscal incentives that will help subsidize production to stimulate employment growth.

Improve government financial practices, reduce leakages, and improve tax collection to expand government revenue inflows. Technology already exists that can help the incoming administration achieve efficiencies in these areas. Pilot a student loan scheme as this will help the country develop human capital capabilities in priority areas (such as STEM) over time. Establish Commodity boards to guarantee prices for Agric produce – the multiplier effects of price guarantees and off-takers in the Agricultural sector are enormous. Attracting investments – the country needs to attract long-term domestic private capital, foreign direct investment, diaspora remittances, as well as foreign portfolio investments. PPP schemes – Public-Private Partnerships (PPP) frameworks create incentive mechanisms that align private and public interests, especially for infrastructure investments. Judicial reforms/welfare of judges – this will give rise to judicial efficiency, independence, improved accessibility, and rule of law.

Sometimes, it may seem as if monetary and fiscal policymakers create policies that could be conflicting. To what extent do you think it is crucial for policy makers to come together and work in synergy to boost the economy. Do you see this synergy happening with the incoming administration?

Monetary policy affects financial conditions and the level of bank reserves (through money supply and interest rates regulation) while fiscal policy can put money directly in or take money directly out of people’s pockets (through taxation and government spending). Both aim to achieve price stability, full employment, and economic growth. Alignment of policy makers will improve policy effectiveness e.g., taming inflation by reducing money supply vs reducing government spending/fiscal restraint. What we are witnessing now is lack of alignment between the monetary and fiscal policy as we have expansionary fiscal operations, driven by massive borrowings vis-à-vis contractionary monetary policy with interest rate hikes.  

Achieving alignment between fiscal and monetary policy is a complex task that will require coordination and cooperation between the incoming administration and Central Bank of Nigeria. First, the government and central bank need to agree on common macroeconomic objectives, such as price stability, inclusive economic growth, low unemployment, and exchange rate stability. This alignment of goals provides a foundation for coordinated policy actions. Secondly, fiscal policy and monetary policy must be mutually reinforcing, and implemented in a way that supports the overarching macroeconomic objectives of the new government. Thirdly, there must be transparency in decision-making processes to foster trust and understanding between the government, central bank, and the public. Clearly communicating policy actions, objectives, and their rationale can help align expectations and minimise uncertainty. I would also advise the incoming administration to ensure that the institutional independence of the CBN is strengthened. Finally, the government must periodically and objectively evaluate policy outcomes to assess the effectiveness of fiscal and monetary policies and identify any misalignments. Adjustments can then be made to realign policies as necessary.

As part of its economic reform agenda, the federal government of Nigeria secured $800 million from the World Bank in April 2023 to mitigate the impact of removing the long-held fuel subsidy. The removal of this subsidy is expected to affect vulnerable and low-income households, as well as MSMEs that depend on fuel as a major source of energy. Considering this, what measures can the new government put in place to cushion the impact of fuel subsidy removal on these groups?

It is important to understand why fuel subsidy is considered bad for the economy. Subsidies distort market signals by artificially lowering the cost of fuel (petrol, diesel) for consumers. This discourages competition and investments especially in the downstream oil and gas sector. Fuel subsidies also impose a significant burden on government budgets (N3.36 trillion was earmarked for fuel subsidy in 6 months of the 2023 budget) and divert resources away from more productive sectors of the economy. We have also seen that subsidies tend to benefit higher-income households more than lower-income households. This is often referred to as regressive income distributional effect which exacerbates income inequality and socioeconomic disparities.

Fuel subsidy removal affects price level, the cost of living, reduces the consumption pattern, savings and investment level of the people and reduce overall economic production/GDP. To cushion impact of these on the macroeconomy and the vulnerable population, the government can consider the following initiatives: cash transfers and schemes for social safety net, human capital development (health, education, Income) via universal health coverage, universal basic education and universal basic income, improve power supply, renewable energy incentives, Autogas/CNG revolution, investment in public transport mass transit scheme for passengers and products, fiscal transparency and accountability, with proactive communication, and engagement with critical stakeholders.  

Considering recent shifts in the global economy, such as the profound impact of the COVID-19 pandemic, the growing prevalence of technology and Artificial Intelligence (AI), fluctuations in global oil prices, etc., are there any emerging industries or sectors that you think have the potential for growth and investment in Nigeria, and what opportunities do you see for businesses and investors in these sectors?

Nigeria remains an important investment destination. We have the largest population in Africa, youthful demographics with median age of 18 years, abundant natural resources, strategic location (Nigeria is a gateway to the Economic Community of West African States (ECOWAS)), and a growing middle class with very impressive technology adoption rates. The business case for investing in Nigeria remains strong, and discerning investors will find opportunities in ICT/Cybersecurity for digital infrastructure, utilities (electricity, water, waste), trade (ecommerce, retail), logistics, clean energy, health, financial services (payments, embedded finance) and construction. Considering what needs to be done to modernise our economy, address infrastructure gaps, fix marketplace frictions, deal with financial exclusion, and other challenges, the opportunities for investors in Nigeria are enormous and very rewarding in the long run.

The business environment has been very challenging in Nigeria and globally, with negative implications for unemployment and livelihoods. In your capacity as the Chairman of the NESG, what is your advice to Nigerian businesses as they navigate this uncertain landscape and position themselves for success? 

From what we know and have seen so far in 2023, the business environment will remain VUCA – volatile, uncertain, complex, and ambiguous. Therefore, I would encourage Nigerian business community to keep pushing and find innovative ways to institute more resilient and inclusive business models that targets the mass market, given the income distribution realities of the Nigerian marketplace.

There are various strategies businesses can implement, and a winning strategy will depend largely on the sector and unique business fundamentals. Nonetheless, let me state that this is the time that businesses must build cash reserves and protect revenue/cashflow by focusing on most profitable products/customer segments. I would also advise businesses to drive improvement in customer intimacy to understand changing customer needs and adjust products to achieve new product-market fit (PMF) especially affordability. Businesses should avoid concentration risk through diversification (market segments, customers, products, geography, etc), reduce customer churn/retain customers and protect critical employees. Other strategies include reducing cash burn, changing to asset light model where possible (outsource, hybrid workforce, work-from-home, cloud migration, software-as-a-service, etc.), protect supply chain, leverage financial instruments like insurance, hedging and credit, and automate where possible. A proven approach to navigating a VUCA environment is to build agility and flexibility with an antifragile mindset that allows the business not only to merely withstand shocks but improve as it benefits from the uncertainties. Reality is that some companies will come out stronger from the crisis.