December 22, 2014

Transcript of Exclusive Conversation with H.E. Ngozi Okonjo-Iweala,
Coordinating Minister for the Economy and Minister of Finance,
Federal Republic of Nigeria

December 19, 2014

J. PETER PHAM: Madam Minister, I know, but I think others need to know as well, that you've been very forward on the impact of low oil prices – prices at levels that haven't been seen in more than four years. When you were at the Atlantic Council in early October, you spoke about the need for Nigeria to diversify its economy. And you've led efforts by the government to respond to the immediate price shocks, including the devaluation of the naira and the imposition of taxes on luxury items. And, unlike some of your counterparts in other major oil-producing nations – which we won't name for diplomatic politesse – you've revised the budget to reflect the falling price of petroleum.

All that said, Madam Minister, would you like to open our conversation by describing the key steps you've taken and perhaps why you've made some of the decisions you have regarding measures to use – for example, the assumption of $65 a barrel oil, when Brent Crude went below $60 a barrel on Thursday and West Texas Intermediate went even lower? So, your thoughts on this, and the steps you've taken and the reasons for some of those assumptions.

NGOZI OKONJO-IWEALA: Well, thank you very much. Let me start with that question.

First, to say that when we first started the budget, we have a medium-term expenditure framework, which we normally send to the National Assembly, or Parliament, to approve, that has the key indicators for the budget. Our law requires that they approve this before we really construct the budget. We started at $78 after discussion with them on the benchmark price and agreement. We agreed at $78 a barrel. I sent them the medium-term expenditure framework at that price.

But not long after we did that, we noticed that oil prices began to slide. And we waited a little bit and saw it going below $80 and then going to the 70s, and we decided to revise the benchmark price at that time to $73. And then we did and we resubmitted. But again, prices continued to slide, as you know. And then we did a lot of work with the analysts and Citigroup and Goldman and Renaissance. And all forecasting is done at one's peril, so nobody has it down to a science. So it's still an art. But the intelligence we have on prices is that they are likely to stabilize anywhere between $65 to $70 a barrel, and actually average $70 a barrel next year.

So we then decided that, OK, perhaps the thing to do is to step the price to the lower bound of this and stick with that, regardless of the fact that, yes, Brent has – which is a comparable for our Bonny Light is falling below that, West Texas even lower than that, because the volatility is likely to continue, but we hope that by sometime beginning of next year, first quarter and so on, it will stabilize and we'll have an average price of $70. This is what all the analysis tells us, and that's the only thing we can go on.

So that's why we did that. And we revised our budget down to $65 to be realistic with what the oil market is showing. Now, we've told the nation – and it's down in black and white – that if prices for 2015 continue to stay below the $65 mark, the country will then have to take further adjustment measures. And what we're working on is, in fact, preparing those measures.

We already have a scenario for $60 and we will do a scenario for if below that. What else would we do, in terms of cost cutting and revenue measures that would enable us to weather that? So that's the approach we've taken. We've taken a scenario-based approach. So even though the budget is at $65, we have a scenario, what further measures for $60 and so on. But we do believe the average price will be, as we are told, around $70. So this is what has informed.

Now, in terms of what was done, this is a very difficult year. Nigeria will face tough challenges. But if we stick to the measures we put down, we will weather the storm. And what are these? We've taken measures on both the revenue side and the expenditure side. The rebasing of our [economy's GDP] showed us that the economy is much more diversified than most Nigerians believe. The oil stands at 14 percent of GDP, even though it accounts for 70 percent of our fiscal revenue. But the 14 percent...with services at 51 percent, agriculture at 22 percent, industry at 26 percent, et cetera, that it's much more taxable than we thought.

The challenge in this is that a lot of our economy is also informal, but we are looking to ways and means to try to bridge that. So what we've decided to do is tap this non-oil diversified economy to try to raise our revenues. And you know that it's the non-oil sector that has been pushing the growth of this economy for almost the past decade, non-oil sector has been growing at 7 to 8 percent. And it's been a trend.

So the measures on the revenue side seek to raise more resources. How are we doing this? Very lawfully. Twelve months ago, even before oil prices fell, we had decided that...that diversification would be to look for non-oil. So we had invited or engaged McKinsey to be embedded with our Inland Revenue Service, and they've been embedded with them for twelve months now to try to strengthen tax administration.

So they firstly did a diagnosis of all what is wrong, including that we're too slow with our audits. We do five to six a year per person, whereas we could do three or four times that when you compare with other countries. Twenty-five percent of our SMEs are registered taxpayers – as I said, informal, the economy is large. We have tax evasion. We have those who owe debt and so on and so forth, without an exemption. So they really did a thorough diagnosis.

We believe we need to strengthen tax administration. And so using that will be plugging the hole. We give them a target – OK, let's just see, so this need to bring in more revenue this year, and they've brought in half-a-billion dollars more with our Federal Inland Revenue Service. And we are just beginning to exploit those opportunities. So we are hoping to raise more revenue – another billion next year and another billion on top of that the following year, for a total of $3 billion over three years.

We are putting in a luxury surcharge. For those who own planes, yachts – as you know, Nigeria has a very wealthy class. There is quite a bit of inequality, which we need to break down. We thought that putting this tax on planes, on yachts, on luxury cars and champagnes and so on and so forth – there's both a psychological dimension to it, as well as a money dimension.

So we [did] that, and that will bring in another $100 million also. Not huge, but it's not trivial either, importantly. We are closing waivers and exemptions for companies because we found that 30 percent of the companies who are given this abused it. And when we close that, that brings in another 36 billion naira – probably another $200 million. And I could go on. So we have very specific measures on the revenue side.

On the expenditure side, we've also cut. In the short term, it's very difficult to cut things like salaries and wages. But what we've done is we've looked at agencies, committees and commissions. There are many of them in our country, duplicating functions. And we are working to close about six – ten of those in the short term. We cut travel by 50 percent in the budget. Hardly anyone can travel internationally, it has to be only domestic. Training has to be domestic. Those are saving us quite a bit of money. Some consumable items that the government normally buys each year we are not buying. And all sorts of savings of that nature – cuts – we've made those kinds of cuts.

Inevitably, some of the cuts are on capital spending. So what we've done is to try and focus the amount we have on top priority spending, on those things that can unlock economic growth – our infrastructure, security, of course, the sine qua non. And even within infrastructure we've prioritized. And then we've tried to safeguard our human development by trying to protect our social safety net, education as much as we can within the budget. So that's the thrust of what we've done in the short term.

In the longer term, on the revenue side, we are looking at things like VAT. We have the lowest VAT rate in the world – I think, at 5 percent. And if we were to double that, that will bring us 614 billion naira, 85 percent of which goes to our states. And we want to raise money for our states. Fifteen percent of that goes to federal government. That's for 2016 and on, not for 2015. So that's another big source of revenue. A communications tax, we are also looking at that.

And finally, on the expenditure side, in the medium-term, the cost of governance is too high. But it means sometimes reallocating agencies and reallocating people. There are some agencies that don't have enough – like the tax authority – and others that have too much. But we will rationalize, working with the National Assembly, and try to cut the cost of governance across the board, including with the legislators, the executive. We have to look at all of that.

So that is really the way that we've structured the budget. If you add up all what we've done, we've got enough. We raised additional non-oil revenue. We did some cuts on the expenditure side. And our fiscal deficit is at 0.79 percent of GDP. We have decided not to go a-borrowing to fund it, except for long-term concessional loans from the multilaterals and from China. So that's where we are with the budget.

PHAM: Thank you very much, Madam Minister, for that comprehensive explanation. I think it's a very impressive program and strategy you've laid out. If I could ask you, in quick follow up, how would you characterize the general public's understanding of what you're doing? For those of us who do policy for our bread and butter, it's certainly very thorough and it's understandable, but how about the general public in Nigeria? How do you judge their understanding of what's going on and the necessary raising of revenue, as well as the benefits of bringing more people into the taxpaying structure, and the necessary short-term cuts to certain things?

OKONJO-IWEALA: Yes. You know, there is uncertainty. And of course, people in the public are scared because when you have this kind of uncertainty, people don't know. So they are quite rightly asking what will become of us and so on. That requires a lot of public education. Of course, in an election year where you have a robust opposition and the election is in less than eight weeks, this becomes a bit of a scaremongering tactic. So we are working very hard to explain ourselves to the public, and I think it's working.

I had the budget speech broadcast nationally. Before that, I've gone on air to explain our approach. We've been very open and transparent. We shared with the public that it is going to be a tough year. We've shared the numbers on what this means. One of the things that they are scared about is, of course, the impact of inflation, given the devaluation of the naira and also the regional interest rates as well.

And so I explained to them, now one of the most important things that has happened as a result of the work that President Goodluck Ebele Jonathan has led is that agriculture is doing very well. We've been producing more food. Our food import bill has dropped dramatically, almost by – our total imports are almost a billion, and much of that is food – a billion dollars.

And we've produced, even this year, an additional twelve million metric tons of food. That is rice, maize, sorghum, and cassava. And you can see it in the food prices. The latest surveys show prices holding steady, or even dropping in some locations in the country. And that is borne out by the drop of inflation from 8.1 percent to the latest, 7.9 percent for November, according to our National Bureau of Statistics.

That is helping us a lot. And people go to markets in Nigeria – I myself was in the market to check for myself that the numbers we are getting are correct. And across the board, I saw prices holding.

So that is helping with the public a lot, because when you talk to them you can tell them the price of the bag of beans, the price of a bag of maize, rice – these are things they go to buy. So when you...they are experiencing a bit of an uptick in price. So that is helping out. And that shows that this agricultural transformation is really working. We are using all of this to try to explain to the public – it's a relentless communications campaign that we must make.

PHAM: Thank you. I think it's important for people to know that, while the projected growth of Nigeria's economy next year will, because of all this, necessarily be trimmed down by almost a percentage point – to 5.5 percent, I believe – that's still quite impressive when compared with many places in the world and what large areas of the world will be experiencing in the next year. Nevertheless, that modest downward revision isn't without its consequences. How does that modest trimming of the growth impact efforts to diversify the economy, Madam Minister? And do you foresee in some of your scenarios mitigating that by either dipping into the reserve accounts or other measures?

OKONJO-IWEALA: Well, thank you very much. Yes, we've trimmed our growth forecast to 5.5 percent – almost a percentage point, as you rightly observed. And the IMF has been here with us for two weeks under Article IV, and they are forecasting about 5 percent. So we are all in the same sort of ballpark. And as you say, it's still impressive when compared to what is happening in other countries. But as you again rightly observe this [is], yes, a downward revision. Of course, it's better you grow at six and seven than five.

But that does impact on our diversification. In fact, it makes us more determined because if you look at the sources of growth, it's all in the non-oil. And it shows that the strategy the president has adopted of pushing for the transformation of this economy and the fundamental diversification objective is working. It's spurring us to push and to open up more sectors. What do I mean by that? We've been seeing housing as a big source of growth. And this is a sector that was never really explored.

It's funny and strange that in the US, the UK, the housing sector is monitored almost every week, every day and is a big source of growth, but in our country we've never really consciously put a set of policies to support house ownership and mortgages and so on. So we decided to go for it by launching a housing mortgage finance program this year. The president launched it at the beginning of the year. And it's beginning to work.

So we set up a mortgage refinance institution, the NMRC, and we have tried to solve the problems in the way with land titling and the speed of obtaining title and deed, having an underwriting standard that we didn't have before and working with eighteen pilot states, out of the thirty-six in the country, who have to obey such new rules that make titling very fast. Instead of three years, we want to do it in three weeks. The cost of getting a house, instead of the 15 percent of the assessed value of the house, we are trying to drive it to 3 percent. All of this is going to grow the housing sector and spur jobs. So that's one source of growth.

We've opened up another one, the insurance sector and financial services. We just launched that last week. And there's so much interest from international insurers in buying into Nigeria. Outsiders bought our fourth-largest insurance company for 246 million. I mean, they bought a slice of it. Lloyds is coming in, Prudential. Old Mutual of South Africa is already in...and so on.

So we know this sector, which was not really paid as much attention – the insurance registration in Nigeria is low, about 0.4 percent of GDP, one of the lowest. And if we can push it to equaling the...of neighboring countries, it will create so many more jobs. So we set targets for the next three years – grow the sector from 300 billion in insurance premiums to a trillion naira, jobs from 30,000 to 100,000 and so on. And we are going to do this by strengthening a regulatory framework, enforcing – enforcement has to be there—training unskilled to drive jobs, et cetera, et cetera.

I'm just giving you example of two sectors that are there to open up growth. So that's the way we see it, that even though we have this tough time, we still have sectors in the economy that can address that and to help us mitigate the pain of unemployment. So that's how we are going to deal with it. And so we have some small amount in our – as we call our reserve account, the ECA, the Excess Crude Account– to be able to help us for a few months. But really – for a couple of months – really the drive should take the right measures to support the non-oil sector, and that's the way we are going.

PHAM: That's all very impressive, Madam Minister. Forgive me if I return for just a moment to the oil sector, because it is currently still an important part of government revenue and the economy. As you know, the United States has substantially reduced the amount of oil it imports from Nigeria. How do you see this shift in America's buying pattern affecting, if at all, the relationship between Nigeria and the United States?

OKONJO-IWEALA: Yeah, it's an interesting one. I think the US has even reduced its imports to zero. I don't think it's importing anything from Nigeria at all. And we are still asking why the quick shift in buying. It's still buying oil from other countries like Saudi Arabia. So Nigerians are kind of surprised. Why were we the first to be phased out? They are still buying, I think, from Angola, from Saudi Arabia, et cetera. So that's a question that many Nigerians have: Why was it that Nigeria was phased out so quickly?

Nevertheless, we have been lucky to find other markets, and India and China are now our largest importers. So that hasn't really bit us as much. We are struggling with other problems like quantity shocks that came from our pipeline vandalization and shutdowns on oil...and things like the price shocks that we are going through.

But, yeah, there is a question mark that Nigerians are – nevertheless, we have to learn the lesson. That's why we are saying just put this oil economy in perspective. This country is a non-oil country. Nigerians have to change their mindset, and the world. We no longer want to be known as this oil economy.

We've got what it takes to depend on non-oil and to tax better, more...after rebasing, our revenue-to-GDP ratio is around 12 percent. And non-oil is even much lower than that. So that can tell you that we have a lot of work. For me, I'm not happy, but I also see it as an opportunity. The day those numbers came in, I said...I said to Mr. President, we've got to move massively. We have an opportunity here to change it.

So this is where we are going. We hope that in this drive to become a non-oil [country] that we will have good relationships with the US based not on the purchase of oil, but on something much deeper: mutually beneficial trade in other items. We should exploit AGOA to be able to sell non-oil goods. And we would hope to continue the good relationship.

PHAM: Thank you, Madam Minister. All this brings me back around; as you mentioned earlier, the elections are less than eight weeks away. Any thoughts you would care to share with everyone on the elections, especially on the macroeconomic stakes in this election, perhaps some of the concerns of the market that you might want to address?

OKONJO-IWEALA: Yes. I think undoubtedly it will not be easy for the president and the ruling party that at the time they are going to elections you have also prices dropping and an impact on the economy. But I think the IMF will pronounce shortly that this country has taken very bold measures. At the end of the day, what people are looking for in any country is not that their country will not have problems – every country does. What they are looking for is, how is the government reacting? Are you doing the right things and the right measures?

And the sense we get is that voters are worried about the economic situation. They know times are going to be tough. And we've been very open with them. But one good thing is that they see the measures we are taking, and they believe that they have a team and a president that is supporting this team that is going in the right direction. No one has told Nigerian voters that you are going to have an easy time of it next year, and even in the medium term. No, we've told them, you want us to shift to non-oil? Well, see this as an opportunity for us to shift.

And I notice some of the conversation beginning to change from wondering, oh, what are we going to do, to saying, well, if the government uses this as an opportunity to continue the shift to non-oil, then this is something that will be good for the country. So if we can get more of that conversation going, I think that the government can come out, because this government has done so many positive actions, I have to tell you.

It's just that maybe our communications could be stronger because we are overwhelmed. Every time you hear of Nigeria the first thing is Boko Haram this, that, and the other. But everybody says the economy is well-managed and the economy is doing well. And we are not the only country impacted by oil. I think the international institutions feel we are taking the right steps.

Let me tell you something. FDI, foreign direct investment – the investors are not going away. We just signed yesterday the Azura Power Project – finally signed all the papers for a billion dollars to come in for a power plant and the attached gas plant. Can you believe it, in the midst of this? We thought, OK, these guys are going to flee because of this. No, they said no. We don't change our minds. We want to sign this. And we signed it yesterday. And in fact, the CEO of the company wrote a beautiful editorial on the back page of one of our newspapers today saying that, in spite of this, the international investors in the real sector – and those are the ones we care about the most – in the real sector see strength and resilience in the Nigerian economy. So they are going to stick with their investment.

I have not heard Unilever's CEO Paul Polman saying he is pulling back on the 115 million euros that he invested. Procter & Gamble are continuing. Aliko Dangote who is the biggest investor domestic, is continuing. So we are really happy that in the real sector, people – yes, there is uncertainty, but we have not had a massive pullback. But...investment, however, of course, has reacted to the uncertain situation, and the stock market has taken a hit. So we hope that all of that will stabilize as people see the measures that we are putting in place and confidence is gradually restored.

So that's the way I feel, that the government has done much in roads. They've restored rails that was not restored before. So they've focused on infrastructure. Agriculture, we have done very well. We have launched housing and this is going well. I'll have you know that Cantor Fitzgerald called us on their own – we didn't call them – saying that they like what we are doing in housing and they want to work with us on the value chain. Insurance, creative industries, telecommunications, these are sectors where we've done well. And I think we have a lot to showcase for the election. So hopefully that will help to mitigate some of the sentiment of uncertainty.

PHAM: Thank you, Madam Minister. Those were all the questions I had, but I wanted to give you the opportunity if there was anything else you feel we didn't cover that you would like to get out there.

OKONJO-IWEALA: Not really. I think your questions were excellent and they covered most of the subject, as people see it. All I want to say is two things.

The security situation in Nigeria, of course, causes uncertainty. And one cannot get away from that– the despicable actions of Boko Haram and so on. But people should have it in context. These people are operating in the far northeast of the country. Which area is sort of less than 5 percent of our area and the population is in there, and so we need to put it in perspective. I think the total population of all the states there is about nine to ten million. We are a country of 170 million people. This is terrible that the area is impacted, but people should also put it in perspective. Now, again, on the security issue, it's taking us time for our army to get the equipment and munition it needs to act, but they are doing so. And I know that with time, as they get more and more and better equipped, that the situation will also change. So those who know Nigeria really come in and they're a bit surprised at the amount of international coverage of this that makes it look like the country is not functioning, because they see a functioning country.

I think, for the election, we hope that democracy will reign and the best party to rule the country will win. And these are strengths. And I think that the country should be supported and encouraged to move on those strengths.

Thank you.

PHAM: Thank you, Madam Minister, and thank you for your time. And I hope to see you in Abuja at the time of the elections, if not before then. So thank you very much.

OKONJO-IWEALA: Thank you. And maybe I'll give you a call when I come into Washington as well.

PHAM: Please do. Please do. It would be a privilege.

OKONJO-IWEALA: Thank you for all your interest. And please give our thanks to all those who follow Nigeria. We are really grateful and appreciative for their support.

PHAM: OK. Thank you.

(END)

 

Transcript by Superior Transcriptions LLC

 

 

 

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