Flaws with Nigeria’s economy

Posted on July 12, 2016 12:43 pm

More than a year after the electoral victory of President Muhammad Buhari, Africa’s largest economy’s expected growth hasn’t materialised.The economy is still unable to show a satisfactory performance, although the government has issued many policy packages since June last year.The latest data showed that the economy grew only at less than five percent in the first quarter of 2016. It is also down from expert’s growth target of between 5 percent. What is wrong? Initially the packages raised high expectations as it was believed that the government under President Buhari would miraculously drive up economic growth. Why did the initially bullish climate turn sour? This is of course a delicate question taking into account the global economic malaise, but the Nigerian economy does not only depend on exports. The economic packages introduced by the Buhari government can be divided into two groups with one meant to enhance the purchasing power of consumers and the other to boost investment and raise industrial competitiveness. They are very important because the two sides of the economy, namely demand and supply, should be balanced and work hand in hand. The packages consist of new regulations or replacements for old ones. The question is, since the regulations have been in place, are there any other economic activities that could be run efficiently and effectively? In other words, has the Nigerian economy been managed according to economic laws?Let me start with the agricultural sector. By observing this sector from one state to another, it is clear that most of them produce similar products.From the statistical data available to researchers, it was found that productivity was different from one region to another.

Some states had the highest productivity, almost 6 tons per hectare of different crops, while others only had around 3 tons per ha. Why is the principle of comparative advantage not applied as it is in international trade? If agricultural specialisation is implemented, the sector could contribute a higher proportion of gross domestic product.This is a picture that could mirror the larger context of the Nigerian economy. From GDP data for 2015, it was found that the tradable sectors contributed less than twenty percent to GDP, while the non tradable sector contributed 80 percent in current prices, but a publication for 2015 shows that the tradable sector obtained only 21 percent of the total credit, while the non-tradable sector obtained the lion’s share of 62 percent. The figures hide the economic incentive of the whole economy. The non tradable sector consists of, among others, housing, commercial buildings, apartments and real estate in general. The potential profit in this sector is usually higher compared to other sectors. The housing ministry’s data show that the demand for housing is very high, making the housing sector a producers’ kind of a market. Such a situation enables the developers to enjoy the rent by raising the prices of their products, which become a barrier for the general public to buy the offered housing or flats.This is a vicious circle leading to economic inefficiency. The continuous rise of housing prices, flats and real estate in general become a source of economic attractiveness for investors. Unfortunately it has a negative impact for the economy as a whole, distorting the investment.

In the case of Nigeria, many people buy apartments or houses not to use them immediately, but just for investment, expecting high capital gains. The lion’s share of bank credits going to the non tradable sectors, such as the construction sector and housing, has partly contributed to the poor economic situation.The high interest rates in the country would only be suitable for activities with a potentially high return on investment. Such an expectation would be fulfilled by the real estate sectors in general. How can such negative prospects be improved? A deep and detailed economic analysis should be conducted before an appropriate economic policy is implemented to ensure that the new policies would be able to make a positive impact on the real sector.A policy or a policy package that is not based on analysis of the real sector, but just derived from another economic setting, will be doomed to failure.The role of an efficient price formation for all products, accompanied by an appropriate tax system, should be emphasised so that there will be no economic rent component in the prices of any products leading to misallocation of resources. The land component in housing and construction activities in general are usually susceptible to malpractice. A low capital gains tax in real estate will boost the potential profits in that subsector, raising its attractiveness to investors.Nigerian economy experts have for advocated a lower capital gains tax on real estate. However, from economic point of view, this is distortive, because there will be a reallocation of funds from other sectors to this sector, lowering the potential growth in the Nigerian economy. Why do i say so?Its clear that the majority of the cost component of real estate is just land.Hence the lack of attention by the policy packages to the internal structure of activities that would be influenced by the intended regulations could be a source of their ineffectiveness. Without knowing exactly what is inside the activities to be regulated and the interaction between the activities, the Buhari’s government regulations could be doomed to fail.

Contador Harrison