Three critical factors are crucial to drive economic diversification in the Nigerian economy. These are the quality of infrastructure, the quality of policies and the quality of institutions. It is crucial to get these key parameters right. It is equally critical to ensure proper alignment among these key variables to ensure sustainable economic diversification.
The policy factor has many dimensions – monetary policy, forex policy, interest rate policy, tax policy, trade policy, procurement policy and investment policy. Each of these policies has a major role to play in the economic diversification process. The policy mix must be right for the desired outcomes to be achieved.
The monetary policy for instance should be designed to drive domestic investment through a moderation of the monetary tightening stance of the CBN. This is needed to moderate interest rate in the economy. It is difficult to drive domestic investment at current levels of interest rate which is well over 25% for most economic players. The economy needs investment, especially domestic direct investment to drive diversification.
The foreign exchange policy is another very important policy component which impacts on economic diversification. A forex regime that perpetuates a rent economy would not serve the cause of diversification. It creates opportunities for arbitrage, corruption, resource misallocation, impedes the inflow of investment, and create transparency issues in the allocation of forex. The current multiplicity of rates is inimical to sustainable economic diversification.
The renewed aggressive tax drive is focused more on investors than consumers. The burden of taxation is more on the investors in the economy than the consumers. The Federal Inland Revenue Service [FIRS] has scant regard for due process in its drive for revenue. It is therefore inherently a disincentive to investment and economic diversification. The three tiers of government targets investors more than consumers. This is not in consonance with best practice principles in taxation. In an economy which is almost 50% informal, this structure of taxation is not investment friendly. The formal sector of the economy bears the largest burden of the tax system. The tax policy needs to be better attuned to economic diversification through a reversal of the tax burden from investors to consumers. The use of banks as collection agents for the FIRS [in its current form] is very disruptive, distracting, arbitrary, oppressive and unfair to investors. It is a serious disincentive to investment and the promotion of financial inclusion. This approach should be discontinued. Taxation should not be seen only as an instrument of revenue generation, it is also a potent instrument for stimulation of investment.
Trade policy: this is a key determinant of our imports and exports. Inappropriate trade policies could aggravate the cost of production of economic players. This happens when critical inputs are restricted from imports and local substitutes are grossly inadequate. A thorough sensitivity analysis of trade policy impact on the economy is essential before major trade policy moves are made. The same logic should apply to the forex exclusion policy of the CBN. Trade policies should be guided by sectoral competitive and comparative advantage to ensure sustainability. Institutional capacity to enforce the policies should also be considered in trade policy formulation. The Nigeria Customs service needs to demonstrate better sensitivity to the plight of investors. One of the biggest headaches of the business community is the Nigeria Customs Service. Policies should be focused on incentivizing resource-based industries which typically has competitive advantage and good impact on the economy because of the high multiplier effect. The relativity of tariffs between the Nigeria and neighboring countries should also be considered in the formulation of trade policy.
Procurement policy is another very important dimension of policy that has high implications for economic diversification. The procurement policy should be structured to favour sectors that have the potential to be diversification champions as well as leading backward integration firms. Due priority should be given to patronage of made in Nigeria products as an important component of procurement policy, and should be properly implemented.
Resource based industries should naturally get preferences in the deployment of incentives. They have the promote inclusiveness, poverty reduction, and job creation. This should be a major focus of investment policy.
Fixing the country’s infrastructure is at the very heart of building a competitive economy and a fundamental requirement for economic diversification and sustainable job creation. Transformation in the agricultural and manufacturing sectors depends to a large extent on the quality of infrastructure.
Role of Government Agencies
Agencies of government need to be more investment friendly. The recent initiatives of the government on the Ease of Doing Business is in consonance with this proposition. They should be facilitating investment growth rather than see themselves as revue generation agencies. They should also consider the limitations faced by investors, especially the SMEs in the economy. regulators should be seen to support the efforts of government to promote investment, rather become a burden on business. Regulatory agencies need to be better funded by government to reduce their dependence on fees, fines, levies for the running of the agencies. This arrangement often stifles investment and economic diversification efforts. Many regulatory agencies depend on the fees and levies imposed on business to run their operations. This should not be the case.
A key focus of diversification should be on resource based industries – agro allied, oil and gas, manufacturing with high local content. These sectors would strengthen the capacity of the economy to create jobs, drive inclusive growth, promote income redistribution, and generally impact positively on the economy. A great deal of potentials still needs to be unlocked in the oil and gas sector – refineries, fertilizers plants, gas based industries, petrochemicals. We need to put an end to being just a crude oil exporter to self-sufficiency in petroleum products and exporter of refined products and other gas related products.
LAGOS CHAMBER OF COMMERCE AND INDUSTRY