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The Chicago Boys of Nigeria

President Mohammed Buhari has announced a new economic team that will offer him economic advice on a timely basis.

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No foreign exchange for food and fertilizer importers - Buhari, Gas project, Buharinomics, Buhari, metric, FG okays N100 billion for the completion of Kano Free Trade Zone , Nigeria saved N670 billion from Petrol Importation in half year 2019  , The Chicago Boys of Nigeria, Buhari signs Production Sharing Contract (PSC) Amendment Bill into law , Nigeria generates N876.09 billion in 9-month, as revenue shortfall poses threat 

Quote 1: Every leader is only as effective as the advisers that surround the leader.” Anonymous

Quote 2: “The trouble with good advice is that it usually interferes with our plans.” Croft Pentz

President Mohammed Buhari has announced a new economic team that will offer him economic advice on a timely basis for managing and directing the Nigerian economy. This new team will report directly to him.

This is a positive development, especially when one looks at the composition of the new team — almost all the members are economists. The team includes Dr Doyin Salami, Prof Charles Soludo and Bismark Rewane. Quality.

As with every advisory team, their success is based not just on the quality of sound advice given, but by the amount of their advice that gets taken and implemented by their principal. In Chile, a group of economists were also given the task of advising the President on turning around a Chilean economy that had stalled. They were called the Chicago Boys (because they attended the University of Chicago).

The Chicago Boys implemented a broad programme of economic reforms that liberalized the economy and slowly reduced the over-controlling hand of government. Their policies achieved some success. The World Bank stated, “Between 1990 and 2000, poverty was reduced from 40% of the population to 20%. 60% of this reduction can be attributed to GDP growth, with the remaining 40% attributable social policies.”

The economic reforms implemented by the Chicago Boys were studied and adopted by subsequent governments — for instance, the Chilean model of Defined Contributory Pension Scheme was adopted by Nigeria.

To me, there are three economic issues that hang over the Nigerian economy at the moment. They are:

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  • Should the naira be devalued to reflect fair prices outside the CBN official window of N306.90?
  • Should the Nigerian government keep subsidizing the price of imported PMS?
  • Should Nigeria pass and implement the Petroleum Industry Bill PIB?

The debate on these policies are not new; every economic decision has a cost and a benefit. President Buhari has his own personal economic ideologies which he has to reconcile with Nigeria’s fiscal realities, and it is the job of the new economic team to not just present the facts, but to guide the President into making those right decisions. Let’s delve into these decision points.

Devalue naira?

Nigeria currently has multiple exchange rates: the official rate, the Investors and Exporters forex window, the Inter-bank window, the window for Small and Medium Enterprises (SMEs), Business Travel Allowance (BTA), Personal Travel Allowance (PTA), etc.

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These multiple rates allow the Central Bank of Nigeria (CBN) to offer devalued naira at N360 on the Investors and Exporters window, while maintaining N306.90 at the official rate window. So what is the CBN policy on naira? Devalued? Strong? Both?

The reason for the multiple rates is a lack of forex inflow. A strong naira has not attracted enough Foreign Portfolio Investment into Nigeria. Thus, CBN has configured fx rationing via a list of 43 items banned from accessing the CBN Forex market. Bismark Rewane, a member of this new team is quoted in June 2019 as saying, “Unifying the exchange rate will impact the Nigerian economy more positively than the current multiple exchange rate regime does, which creates opportunity for arbitrage.”

Remove the PMS subsidy?

The Nigerian National Petroleum Corporation (NNPC) stated that it spent N650.2 billion in subsidizing petrol from April 2018 to March 2019. To put this in perspective, the amount is more than what the Federal Government spent on Power, Works and Housing, Health, Water, Education and Agriculture COMBINED in 2018 budget year.

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Is there really a debate about whether Nigeria should spend more on education and agriculture than PMS imports? The Economic Team will need to articulate this imperative to a President who is clearly not keen to remove subsidies on PMS because the removal “will hurt the poor.” However, we have another member of the team Prof Charles Soludo speaking on PMS subsidies. “I am convinced that President Buhari has the moral authority and legitimacy to quickly remove the (PMS) subsidy and privatize the refineries. The fundamental case against subsidy removal is not economic. It is the fact that the citizens do not trust the government to optimize the use of the proceeds for their welfare. If President Buhari does not deal with these issues NOW, I wonder when, if ever.”

Pass Petroleum Industry Bill

The Petroleum Industry Bill (PIB) aims to bring in sweeping reforms to the entire petroleum sector in Nigeria. We cannot go into detail on this vast law but the summary is that existing laws governing the petroleum sectors are now outdated, in terms of fiscal arrangements and cost sharing. The PIB increases the Nigerian government take from oil and gas assets while reducing direct ownership.

Former Chairman of the NNPC, Ike Kachikwu, said that the non-passage of the PIB was costing Nigeria N3 trillion a year. You would think any bill that guarantees $15 billion a year in investment would have been passed 18 years ago but the PIB has been stuck in a holding pattern of legislative and executive wrangling. Dr Doyin Salami has made the case that Nigeria is an “oil dependent nation” not an oil rich nation.” if that statement has any value, then a PIB to boost investment in the oil and gas sector in Nigeria is welcome.

In Chile, advice from the economists and experts was not only given but also heard, accepted and implemented, and the results were positive and apparent.

The Nigerian economic think tank has to ensure that their own recommendations, which are based on economic realities and past positions held by the economists, are heard, understood and acted upon.

Success comes from action.

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    Columnists

    How EFCC’s proposed lifestyle audit will affect your finances

    While enforcing lifestyle audit, the relevant agencies must take note of the fact that social media influencing has become a serious business in Nigeria.

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    Access, GTBank, two others pay PWC & EY N1.5 billion as Audit fees in H1 2020 

    On Wednesday, the 24th of March 2021, Lauretta Onochie, a presidential aide, took to Twitter, to announce the legality of lifestyle audit in Nigeria, with a view to tackling corruption. She also mentioned that those who flaunt lifestyles they cannot afford can now be investigated by any of the antigraft agencies such as the Economic and Financial Crimes Commission (EFCC) and Independent Corrupt Practices Commission (ICPC) to give information about their source of wealth.

    Some Nigerians have already expressed delight in the government’s action, hailing it as a great move, while others have heavily criticized it, adding that such lifestyle audit should be for those in public offices and those holding political positions in Nigeria.

    READ: $1.3 billion Malabu oil field sale was lawful – Former Shell Executive

    The implication of lifestyle auditing

    Lifestyle audit basically involves an inquiry into the lifestyle of individuals for the purposes of revealing unreported cases of unjust self-enrichment and suspicious affluence that may suggest that such individual perpetrates fraud or is involved in corrupt activities. In carrying out such an audit, there is a comparison of the living standards of the said individual with his known source of income.

    There is also an inquiry into the consumer index of such an individual, which includes the income of his or her spouse, the monthly expenses of the family, the declared assets of the family and related personal expenditure of such individual. It is considered a major tool in fighting corruption.

    Whether such audit is conducted in the public sector, i.e. on those in public offices or employees of government, or whether it is carried out in the private sector, the major goal of a lifestyle audit is to consider whether or not an individual is living beyond his or her legal means, and whether there is a possibility that such lifestyle is funded by corruption or fraud.

    If during the course of the audit, the individual is unable to prove the source of funds or income, such funds may be taxed as undisclosed income, and if it is discovered during such investigations that the individual is involved in fraud or any criminal related activity, such individual may be prosecuted.

    READ: FBI ranks Nigeria 16th in its 2020 International Crime Victim Countries

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    Is Nigeria the first to legalise lifestyle audit?

    Countries like Kenya and South Africa have been carrying out lifestyle audits. Kenya for instance has embraced lifestyle audit as a means to reduce corruption in both the private and public sectors. Government institutions in Kenya audit their staff by comparing the lifestyle of such staff with their income, in order to reveal any inconsistencies.

    In the private sector, lifestyle audits are also carried out on employees who declare their wealth, allowing for an investigation into the existence of any questionable source of income or revenue.

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    The Ethics and Anti-Corruption Commission of Kenya in 2008 took a financial controller who was earning Sh306, 000 a month to Court. But the EACC said he owned seven houses or plots, four vehicles, six bank accounts (one in London) and had Sh4 million in cash in his house. What the EACC wanted was for the court to agree he had “unexplained assets” and that the assets should be seized. The lower court rejected the EACC’s case on a variety of grounds based on the Constitution. However, the Court of Appeal held that the Financial Controller had not shown how he had acquired some of the assets.

    READ: 6 types of pension plans: Deciding which is right for you

    In 2018, the Kenyan Government intensified the war on graft by announcing that all public servants will undergo a compulsory lifestyle audit to account for their sources of wealth. In an article published by the Katiba Institute, Kenya, on 27 June 2018, it was reported that various corruption scandals have been exposed and over 40 persons have been arrested as a result of corruption scandals resulting from lifestyle audit in Kenya.

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    In South Africa, the government has carried out lifestyle audit for the public sector in order to curb corruption and fraud. However, lifestyle audit in South Africa is not limited to the public sector as the South African Revenue Service (SARS) since 2007 has been carrying out lifestyle audit on private individuals and using it for several criminal investigations. The SARS encourages members of the public to report people living a lifestyle beyond their known means of income. The SARS would usually ask the individual to fill a questionnaire to aid them in their inquiry.

    Business Insider South Africa has stated in an article published recently, that SARS has been using lifestyle audits on private individuals since 2007 and they have used it to conduct thousands of criminal investigations.

    READ: Corruption erodes the constituency for aid programmes and humanitarian relief – IMF

    Possible challenges Nigeria may face

    While enforcing lifestyle audit in Nigeria, the relevant agencies may need to take note of the fact that social media influencing has become a serious business in Nigeria today. What usually happens is that these influencers present a lifestyle to the public which they may not be able to afford or which cannot be said to be at par with their income.

    The reason for such presentation is to get more followers on social media and attract brands and businesses that would usually enter into an agreement with them to influence the public to patronize the products of such brands in return for a fee. The question now arises, what becomes the fate of such influencers in the face of the legalizing of lifestyle audit in Nigeria? What effect would it have on their businesses since they are not considered illegal?

    In an interview with Elsie Godwin, a YouTube content creator, Lekan Bamidele, the Managing Partner of Lekan Bamidele & Co stated that there is a huge possibility that lifestyle audit may lead to an invasion of the privacy of the audited individuals which is an infringement of their fundamental human rights as guaranteed by the Constitution of the Federal Republic of Nigeria 1999 (as amended). This is because, in carrying out such audits, the private properties of such individuals such as their phones, bank statements etc. may be looked into even without their consent.

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    He also added that lifestyle audit may result in abuse by the authorities, as the Nigerian Police having no right to conduct lifestyle audit on Nigerians may want to usurp the powers of the relevant agencies; and that lifestyle audit should generally be restricted to public officials.

    However, based on the provisions of the Nigerian constitution the right to privacy is not absolute and an invasion of privacy would not be considered as an infringement where it is for the purpose of public morality, public order, etc. The actions of the agencies carrying out such audit may be considered as falling under this exception and would not be illegal.

    Moreover, since Nigeria still battles with issues such as police brutality and sometimes, unwarranted profiling which led to the recent #EndSars protest, lifestyle auditing may give unscrupulous officials the leverage to treat citizens with indignity and may also lead to the abuse of the entire auditing process. It, therefore, opens a lot of Nigerians to the risk of harassment and unnecessary profiling.

    Additionally, it is a notorious fact that one of the major problems facing Nigeria is corruption. Corruption is a phenomenon that has eaten deep into the systems and permeated every level of governance in the country and even the agencies of government. It may, therefore, pose a major threat to the smooth running and enforcement of lifestyle audit in Nigeria.

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    Conclusively, the relevant body or agencies should take these and more into consideration, and a formal structure should be put in place, and legislation enacted, in order to effectively carry out lifestyle audit in Nigeria. Also, there should be no overlapping of duties in the enforcement. That is, only agencies that are vested with such powers should exercise them. This would ensure that Nigerians are not faced with a situation where just any person would claim the right to investigate the source of their income.

     

    Written by Nwankwo Tochukwu

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    Columnists

    State governments must devise innovative means to improve their IGR

    States need to create an enabling business environment to attract Foreign Direct Investments.

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    Based on the Q4 and full-year 2020 IGR data published by the National Bureau of Statistics (NBS), the Internally Generated Revenue (IGR) of the 36 states of the federation, including the Federal Capital Territory (FCT), declined by 2% y/y to N1.31trn in 2020 from N1.33trn in 2019.

    This performance reflects the effect of the Covid-19 pandemic, which caused significant macroeconomic headwinds especially in the first half (H1) of the year. To put it in context, the total IGR as of H1 2020 declined by 9% to N632.26bn from N693.91bn in H1 2019. The poor H1 performance outweighed the positive growth of 6% y/y to N673.82bn recorded in H2 2020 from N637.82bn in H2 2019, thus resulting in negative growth of 2% y/y for FY 2020.

    Further analysis of the data revealed that save for Pay As You Earn (PAYE) Taxes which showed moderate growth (+5% y/y), other components of the IGR declined in 2020; Direct Assessment (-22.2% y/y), Road Taxes (-6% y/y), Other Taxes (-24% y/y) and MDAs Revenue (-1% y/y).

    We think the decline in Direct Assessment reflects the low-income level of self-employed individuals and informal businesses arising from reduced work activities and tough business conditions. Similarly, restricted vehicular movements both within and out of states, closure of markets, malls, recreational centres and limited running of revenue-generating MDAs especially during the second quarter (Q2) contributed to the fall recorded across the remaining key constituents of the total IGR of all states including the FCT.

    Despite the complete shutdown of Lagos, Ogun, and Abuja in Q2 2020, Lagos State remained the leader in revenue generation with an IGR of N418.99bn (equivalent to 32.1% of total IGR), followed by Rivers with N117.19bn (9.0%), FCT with N92.06bn (7.1%) and Delta with N59.73bn (4.6%). On the other hand, Taraba with N8.14bn (1.9%), Adamawa with N8.33bn (0.6%) and Yobe State with N7.78bn (0.6%) recorded the least IGR.

    Worth noting is that while most states have continued to rely heavily on FAAC allocation to meet budgetary commitments, Lagos (78%) and Ogun (57%) states including the FCT (57%) had the most healthy composition of IGR revenue to its respective total revenue in 2020. The vast economic activities in Lagos and Ogun states, an offshoot of their positioning as a good spot for import and export of materials and finished products, enable a good flow of commercial activities.

    Many states continue to rely solely on FAAC allocations from the Federal Government which are totally dependent on dwindling oil revenues. State governments need to come up with innovative ideas to improve IGR and also create an enabling business environment to attract Foreign Direct Investments (FDI) to avoid the current situation where many states cannot as much pay salaries when oil receipts begin to fall.


    CSL Stockbrokers Limited, Lagos (CSLS) is a wholly-owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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