The Importance of Strengthening State Economic Management Systems

Being an address delivered by His Excellency, Atiku Abubakar, Vice President of Nigeria 1999-2007 at the Royal Institute of International Affairs (Chatham House) on Wednesday April 25, 2018.
Protocol:

I thank the Royal Institute of International Affairs for giving me this platform to speak to such a distinguished audience. I specifically want to thank Dr. Alex Vines for inviting me to give this address.

I particularly want to thank Nigerian nationals who are present here today. Your love for Nigeria is evident in that you have left your regular pursuits to be here to interact with lovers of Nigeria on issues that, if implemented, will lead to the progress of Nigeria. Your presence inspires me.

To friends of Nigeria here present, I appreciate your friendship and it is my strong desire that our collective wish to see Nigeria fulfill her potentials are realized in the not so distant future.

I am a widely traveled man, and everywhere I visit around the world, there is agreement that Nigeria has the potential to make that leap from third world to first that Singapore, under Lee Kuan Yew, made. We have the human and material resources required to make the leap and in fact, many of our nationals have helped other nations make that transition.

And it is not that we have not made progress, after all, within a decade we were able to move from being the third largest economy in Africa to being the largest bar none.

Yet, there is still that consensus that we are not meeting up with our potential and all things considered, that verdict is true.

The question becomes why is Nigeria not living up to the promise of her potentials?

More specifically, why are we saddled with a heavy and almost unsustainable debt burden twelve years after President Olusegun Obasanjo and I provided the leadership that paid off Nigeria’s entire foreign debt of $32 billion in one fell swoop?

After paying off a monumental debt accumulated by previous governments, then President Olusegun Obasanjo on April 22, 2006 said "Nigeria will not owe anybody one kobo”. Today, almost exactly 12 years to the day, you can almost say ‘Nigeria is now owing everybody more than one kobo’.

What happened in the intervening years to turn the dream that our administration had, into this present reality where Nigeria now owes double what we paid off in 2006?

In talking about the Importance of Strengthening State Economic Management Systems, we must identify the structural defects in Nigeria’s federal structure that prevents all levels of the Nigerian government, federal, states and local governments, from operating at optimal levels.

After nineteen years of uninterrupted democracy in the fourth republic, it is now an indisputable fact that today’s Nigerian states essentially have been reduced to parastatals of the Federal Government and are addicted to the monthly allocation they receive from Abuja.

There is nothing as addictive as states that are dependent on their monthly share of revenue from crude oil sales and the only way to get them to manage their economies in an economically viable way is to cure them off that addiction. Nigeria needs to be restructured. We must commit to a new development agenda with focus on wealth creation by the federating units, rather than wealth distribution from Abuja to state and local government capitals. We must undertake far reaching economic reforms to attract private resources, including financial resources and build bigger, stronger and more dynamic sub-national economies. We must expand the frontier of private sector activity beyond the realm of the oil sector and build a new Nigeria without oil.

If oil could save a nation then surely it would have saved Venezuela, the nation with the largest proven reserves of oil in the world. But you and I know what is up with Venezuela and if oil has not saved her, it will not save Nigeria.

If we want to help states strengthen their economies, we must come up with creative ways to encourage them to look inwards rather than outwards.

Before we outline the steps we will take to support the states, we remind ourselves how we got to where we are.
1. We have promoted, tolerated and indeed celebrated a defective political structure. The federalism we practice is not smart. We politicized the creation of states and local governments over the years. States and local governments became too weak to meet their constitutional responsibilities and consequently the Federal Government emasculated them and took away those responsibilities which belong to them. Many of the states are small, subsistence economies with very limited capacity to sustain growth and lift their citizens out of poverty. It is therefore very attractive for these states and local governments to become addicted to revenues from federation accounts and to care less about their internal revenue opportunities. As a result, combined Internally Generated Revenue from all the 36 states came up to less than 1% of Nigeria’s nominal GDP and less than 12% of their 2016 budgets! Internally generated revenue is far less than what the states require to run their administrations - and many state and local governments survive by consuming more resources than they can generate internally - thanks to the generous ‘handouts’ from the federation accounts.

2. We allowed crude oil to ‘crowd out’ the non-oil sectors which were Nigeria’s lifeline in the 1960s and 1970s and celebrated the windfall from oil exports - which resulted in a steep rise in the volume of funds allocated to all tiers of government in the federation. We preferred to survive on rent than on hard, productive efforts. We were too drunk to remember to build a revenue buffer - for the proverbial ‘rainy day’. There has been no effective revenue stabilization programme and effective strategic planning to cushion the effect of falls in the price of crude oil.

3. We lived on another structural fault line for too long and pretended all was well. The Nigerian economy remains fragile and vulnerable to the vagaries of the global oil market, making the fiscal position of the national and sub-national economies become precarious. However, this faulty economic structure has always been shielded by increased revenues from crude oil sales. Its deficiency is only exposed when global oil prices collapse with impact on investments, consumption and growth.

Now the big question: what can we do to help the federating units strengthen their economies?

1. There is no alternative to a policy which promotes the growth and diversification of the sub national economies. How much revenue they generate locally from taxes and fees depends on the size and structure of their economies. The bigger and more diversified the better. The federal government will create a business-friendly macro-economic environment, through the pursuit of appropriate monetary and exchange rate policies, to leverage private sector investments especially in agriculture to promote economic diversification. Indeed, achieving diversification is central to our economic development strategy. Let us begin to visualize Nigeria without oil or one not predominantly dependent on hydro-carbon.

2. Our economic policies will be coherent, consistent and therefore more predictable by the business community. Nothing could be more threatening to investment flows than an environment that is full of policy flip-flops.

3. We will ensure spatially balanced investments, through a carefully designed incentive regime, in order to provide more opportunities in the poorer and less endowed federating units.

4. The sub-national economies will be assisted in reforming their economic management institutions, including the revenue generating agencies which are seen by many as failed and ineffectually managed institutions within the state service. They need to be reformed and strengthened to make them more innovative and efficient in service delivery. The reformed agencies will be expected to improve tax-payer compliance, develop potentials of non-tax revenue sources and block all leakages associated with tax administration.

5. Beyond institutional and administrative reforms to improve operational efficiency of the revenue agencies the federating units will be challenged to double their efforts in rebuilding the fiscal-social contract, by enhancing service delivery in key areas such as health, education, water supply and infrastructural development. Only this would change the predominant perception that government revenues are diverted to the private bank accounts of politicians and their cronies.

6. And it is for the purpose of making states lose their addiction to federal allocation, to make them look inwards, and return to the healthy competition of 1957-1966, when Nigeria practiced her unique brand of true federalism known as regionalism, that I suggest the introduction of matching grants to states, that have succeeded in increasing their internally generated revenue.

My idea is for the introduction of Matching Grants to be taken from the revenue accruable to the Federal Government for the purpose of matching the Internally Generated Revenue of each state in order to encourage states to become self-reliant. If I have my way, the Federal Government will match state’s IGR up to $250 million per state.
Even with this policy, the Federal Government will continue to offer support (in the form of intervention programmes) for states that rank below the average development index, until such a time as they are able to become self-sufficient and sustaining.

7. In furtherance of strengthening their economic management systems, another policy I would recommend to Nigerian state is to follow the example President Obasanjo and I laid between 1999 and 2007 when we privatized and liberalized many aspects of the Nigeria economy. It had the almost immediate effects of reducing our wage bill and increasing services, capacity and jobs in the private sector.

By privatizing those state government owned public enterprises that gulp huge sums by way of recurrent expenditure yet give little returns by way of return on investment, state governments can free more of their revenue from recurrent and devote it to capital expenditure.

8. We will promote and insist on fiscal efficiency at the federal level to lead other tiers of government by example. The states will be challenged to adopt sound fiscal management strategy so as to reduce wasteful spending. Many view government spending as wasteful, imprudent and lacking in priorities. Typically, recurrent costs constitute between 60% and 72% of state and local governments.

As I said in a recent interview, if I had the opportunity, I would disrupt Nigeria’s budgeting process. We would have a budget heavy on capital expenditure. Roads will be built in every state. Mass housing schemes would pop up in every local government area. Railways will be extended to every state capital. Rivers would be dredged to open up the hinterlands of the North. Licenses would be given to state governments to begin immediate exploitation of resources in their jurisdictions.

While this is happening on a macro level in the Federal Government, I would create the enabling environment for this to be done on a micro level in the states.

When citizens are working, especially in construction and the service sector, the economy benefits because they pay more taxes, they utilize their increased purchasing power in buying goods and services, which improves Value Added Tax revenue and helps the private sector. The multiplier effects are almost limitless.
I am not talking about what can happen. I am talking about what is currently happening in Rwanda. According to the International Monetary Fund, Rwanda’s economy is expected to grow by 7.2 per cent in 2018. This is an economy that already grew by 6.1% in 2017. Their growth is being driven by the services sector, construction and tourism.
In my private capacity, I am already doing this. There has not been a year in the last twenty years that I have not set up a new enterprise to employ Nigerians. The latest being that we brought the Chicken Cottage franchise to Nigeria which will be creating direct and indirect jobs all across the country.

If states are to strengthen their economic management system the Debt Management Office, which our administration set up in the year 2000 to centrally coordinate the management of Nigeria’s debt must be given more independence than it already has. The head of the DMO must be a person with proven ability to say no to powerful persons otherwise the states will keep on borrowing at an unsustainable rate as we see in today’s Nigeria.

In her just released book, “Fighting Corruption is Dangerous –The Story Behind the Headlines”, Dr. Mrs. NgoziOkonjo-Iweala, former Managing Director of the World Bank and two time Nigerian minister of finance and coordinator of the economy who served during my time in office, revealed that she almost got beaten up by a particular Governor at a meeting of the National Economic Council, because she would not approve his request to take out more foreign loans for his already over indebted states.

There are already statutory parameters in place before the Debt Management Office could approve foreign loans to states, but I would want such parameters strengthened such that Nigerian Governors who are close to the President would not use that relationship to get the ministry of finance and DMO to approve wasteful, unnecessary loans that in many cases are squandered on white elephant projects.

There are states in Nigeria who are unable to pay workers’ salaries, yet have taken out huge foreign loans to build stadia and secretariats. Projects that would not improve their financial position.

We have seen in recent years that both Fitch and Standard and Poor’s have downgraded Nigeria just as the Egmont Group has suspended us. As one who worked very hard along with President Olusegun Obasanjo between 1999 and 2007 to bring Nigeria back from the brink and pay off our entire foreign debt, these negative indices bother me.

9. It is also imperative that our foreign reserves and revenue buffers are boosted to insulate the economy against adverse shocks and to strengthen countercyclical fiscal capacity.

We will streamline the operations of the Sovereign Wealth Fund, the Excess Crude Account and the Stabilization Account which is currently embedded in the Revenue Allocation Formula for more effective stabilization outcomes.

Unless these stabilization vehicles are reshaped Nigeria will continue to be subject to the vagaries of the world oil market.

Let me end by providing more detail on restructuring - even at the risk of me repeating myself. Restructuring Nigeria is no longer an option. It is a necessity. This is why I said in February to Nigeria’s elite that ‘restructuring will not cheat you. It will free you.’

Restructuring will foster the spirit of co-operation and consensus in a nation of diverse ethnic groups, cultures and religions. It is desirable, in fact you may even say it is required to establish, nurture and sustain a strong and effective democratic government.

We must also remind ourselves that restructuring is not a new or strange phenomenon. A number of developing economies have had cause to restructure their economies, for greater efficiency or to correct imbalances or to reorient them towards, for example, more open and market-oriented systems with greater reliance on the private sector as engine of growth. Even the United Kingdom is restructuring its political and economic systems to enable a better union among its component parts. Businesses restructure for better performance. Even families do!

Faced with the reality of non-performance, Nigerians have clamored for the restructuring of the economy towards a more diversified structure. Similarly, in line with current global realities, citizens have come to appreciate that the old economic model, built on public sector supremacy is no longer a viable, sustainable option. They have therefore called for a re-orientation of the economy to leverage resources from the private sector and stimulate growth and development.

To make this, that is, economic restructuring happen would require appropriate political intervention. In particular, it would require that we establish and sustain a model of governance which would nurture a spirit of participation and consensus on key national issues and accommodate all the diverse segments of the society.

In other words, if we accept the wisdom behind calls for a restructuring of the economy, we must be ready to build a foundation for its success: we must, in other words re-structure the polity.

Nigeria has operated for too long a faulty system of federalism especially under military governments. True federalism ensures that a strong federal government guarantees national unity while allowing various parts of the country or the federating units to set their own priorities.

As a consequence, the Federal Government appropriates, along with these responsibilities, huge resources. For example, in the allocation of revenue from the Federation Account the Federal Government is unduly favoured at the expense of the States and Local Governments. Out of every Naira in the Federation Account, 56k will go to the Federal Government and four other ‘special accounts’ which it manages! This is neither efficient nor equitable.


Let me use this opportunity to once again emphasize why everyone of us must be involved in the discourse on re-structuring. When I carry the gospel of restructuring Nigeria around, I don’t carry it for mere political convenience, I am in this crusade for the purpose of making Nigeria work. Africa and indeed the world needs a Nigeria that is working.

While maintaining all the other niceties inherent in promoting the restructuring discourse in Nigeria, today, I want to add that beyond the healthy competition among the federating units which a restructured Nigeria would engender, is the unique opportunity for the retooling of the leadership recruitment process in the country. Governance would be elevated to a serious business manned by equally serious-minded people. The attraction to power would no longer be a chance to stumble upon privileges not worked for. But a carefully calibrated move to demonstrate ingenuity and quality in creating wealth for the country.

The restructured Nigeria that I talk about, is a Nigeria that not only provides opportunities for everyone to work but even more specifically challenges the leadership to demonstrate capacity to create wealth for every layer of governance.

It is time for serious minded people to get involved and take the lead in making our country work. It is time for citizens to demand as a matter of right, from people aspiring to lead them, a plan on not just how to manage their wealth but most fundamentally how the wealth is going to be created. Slogans cannot take the place of plans and propaganda is a poor substitute for proper agenda.

For long, our leadership has been pampered. We work into managing a wealth we have little input into how it is created. And because we are not involved in the creation, we rarely appreciate it. Hence, we turn out as either bad managers or killers of the greater Nigerian dream.

For instance, I insist, anybody who cannot tell Nigerians at the State level how, he/she is going to generate the required resources to run the State he/she is aspiring to govern is not worthy of the electorates’ votes. Nigeria needs a leadership that can create wealth for the country and make it work. Every part of Nigeria has enough wealth to sustain it. What is lacking is the leadership with the required capacity and vision to tap and manage the wealth on behalf of all.

To me, any skeptic of restructuring Nigeria, is submitting to the leadership indolence which has denied the country its cherished position of leading Africa to greatness.

Restructuring is not just about the devolution of powers to the states, it is about transforming the role of the federal government. In matters of territorial governance, the federal authorities must learn to cooperate with, and in some instances defer to state authorities; in matters of economic governance, the federal authorities must learn to cooperate with, rather than displace or ignore, the private sector.

If we want Nigeria to succeed, we must break with the misguided notion that the Federal Government, or the President, knows best, and that no one else can be trusted. When I talk about restructuring, I am not talking about just constitutional tweaks, I am talking about a cultural revolution. It is not about re-shuffling a few responsibilities or resources, but about disrupting the authoritarian politics our democracy has inherited from its military and colonial rulers.

And there is nothing abstract about it: just think about the open skies agreement [Single African Air Transport Market (SAATM)], which African governments agreed on in January, and which the Nigerian government underwrote without consulting our airline industry. You do not have to convince me that we must integrate African markets, that we need arrangements like the open skies agreement. I am a believer. But you will never convince me that a government can build an open market economy or transform trade relations if it refuses to cooperate with the private sector.

We, as a nation, must rekindle the spirit of enterprise we experienced two decades ago, when we prepared our return to democracy. We must rediscover the pragmatism that guided us through the difficult transition we were facing at the time. And we, as leaders, must recognise that this time, we cannot do it alone: we must encourage cooperation, we must embrace openness, and we must rebuild trust - with our people, but also with our international partners.

These are some of the ways I believe Nigeria’s states can improve their capacity, increase their revenues and better manage their local economies which are critical to the safety, prosperity, and welfare of all Nigerians and will allow my homeland to realize its true potential.

Let me end with these words: Some Nigerians states are poor not because they are not receiving a fair share of oil money but because they are not receiving a fair shot at true federalism. Only restructuring can correct that.

Thank you all and may God bless Nigeria.


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