News Detail SPEECH DELIVERED BY THE HONOURABLE MINISTER OF STATE FOR FINANCE, REMI BABALOLA AT THE NIGERIAN – BRITISH CHAMBER OF COMMERCE, LONDON INVESTMENT CONFERENCE TITLED “OPPORTUNITY NIGERIA” THE NIGERIA STORY – THE BLUE-SKY STORY REDUCED DEBT BURDEN & ENHANCED FOREIGN RESERVES AS CATALYSTS PROTOCOL It is my honour and privilege to address the eminent personalities of the Nigeria – British Chamber of Commerce on the occasion of this Investment Conference, aimed at telling our story. The Nigeria Story. The Blue-Sky Story. Few weeks ago, I would have been listening as a private sector practitioner in this gathering. Today, I am sharing my perspectives with you as the man in the middle of the storm. 2. Since Nigeria’s reduced debt burden and enhanced foreign reserves are part of the macroeconomic reform measures to stabilise the Nigerian economy and provide a platform for sustained economic diversification and non-oil growth, I took the liberty to widen my scope and present to you the Macroeconomic Reform Agenda of the present administration. 3. It is a well known fact that Nigeria is the most populous country in Africa, with the third largest GDP behind South Africa and Algeria. Despite the huge potentials, including human and natural resources, Nigeria experienced a prolonged period of economic stagnation, rising poverty levels and degradation of public institutions. 4. With the transition to civilian rule on May 29, 1999, the key challenge before the Federal Government of Nigeria was to bring the public policy formulation and implementation frameworks in line with the basic needs of the domestic economy. Given the huge existing gaps in the diverse sectors of the economy, as a result of successive gaps in the nation’s capital formation process, this task was dimensioned in terms of a change programme narrowly focused on reforms to the tax system, continued privatisation of state-owned enterprises (SOEs), and greater transparency in the system of governance. 5. Proponents of change were persuaded that in order to boost the economy, these reforms were desirable. Equally important, reforms along these lines had the potential for attracting the foreign capital component required to supplement official and private domestic spending, while ensuring lower domestic costs. 6. Given the experience of foreign investments in developing economies, especially East Asia’s emerging markets experience with “hot money” during the 1997/8 Asian financial crises, the Government was also sure that given a choice between foreign bank loans, portfolio investment, and foreign direct investments (FDIs), effective policies should be such as to promote the latter (FDIs). The primary economic reform deliverable was therefore to ensure economic stability, by smoothening out existing volatilities in the economy. 7. The second Obasanjo’s Administration (2003-2007) embarked on a comprehensive economic reform program based on a home-grown strategy, the National Economic Empowerment and Development Strategy (NEEDS). This was initiated at the Federal Government level and was expected to be embedded at the States and Local Government levels (SEEDS & LEEDS) respectively. The Government embarked on various reform programmes ranging from macroeconomic, structural, institutional to governance reforms. I will limit my searchlight only on macroeconomic reforms. 8. The decade of 1993-2003 witnessed an average annual GDP growth rate of 2.3% and an average annual population growth rate of 2.8%. These resulted into contraction in per capital GDP over the aforementioned years, leading to serious decline in Nigerian living standards. During this period, inflation averaged 30% per annum; interest rate was higher; while exchange rate was extremely volatile. 9. The Nigerian economy became one of the most volatile economies in the world, driven largely by external trade shocks and the country’s over-dependence on oil export earnings. This volatility adversely affected the real growth rate of Nigeria’s GDP by inhibiting investment, productivity and reducing public and private investment. In addition to the volatility in oil price; wrong policy choices have also contributed in no small measure to the Nigerian problem. 10. Fluctuation in public expenditure reflected both the over-reliance on oil earnings and weak fiscal discipline by previous governments. Fiscal expansions financed by oil revenues often resulted in domestic currency appreciation, creating Dutch-disease concerns and reducing competitiveness of the non-oil economy. We had incomplete capital projects, accruals of arrears of salaries and contractor payments, while long-term planning by private sector was hindered. A cycle of low growth, persistent fiscal deficits and debts accumulation ensued. 11. It is very apparent that Nigeria’s revenue volatility is directly correlated to its dependence on oil proceeds for the bulk of its fiscal revenues, with over 86% of all federally collected revenues related to oil. This revenue over-dependence and volatility complicates monetary and exchange rate policies. As with most developing nations with limited access to flexible international borrowing, underdeveloped bond market, revenue volatility is also correlated with expenditure volatility. 12. A major challenge is to de-link public expenditure from oil revenue earnings by introducing an appropriate fiscal rule. This fiscal rule will enable the accumulation of government savings, for precautionary, smoothing of public expenditures and for intergenerational equity. Conservative oil prices of US$25, US$30, US$35 and US$40 were used in 2004, 2005, 2006 and 2007 respectively. The adoption of this oil based fiscal rule resulted in significant public savings currently over US$10B and foreign reserves in excess of US$45B. In 2008, we expect to continue in this stride by utilising an oil price set at $54 per barrel. This oil price base will continue to limit the transmission of external shocks into the domestic economy. 13. The improved implementation of fiscal and monetary policies has provided a stable macroeconomic environment, which is “crowding in” private sector participation in the domestic economy. Progress in oil revenue management and implementation of monetary policy was complimented by improvements in debt management and the budget preparation process. Public debt has declined substantially from 75% of GDP in 2003 to 14% of GDP in 2006. This was due largely to a successful debt relief agreement with the Paris Club and London Club in 2005 and 2006 respectively. 14. With a more conducive macro-economic environment, we are set to turbocharge the private sector investment rate and raise the productivity of both public and private investments. The private sector investment rate will be increased through a combination of macroeconomic stabilisation, financial sector deepening, improved governance and more openness to trade. 15. If investment is to increase in the short run, the necessary financing will come from higher savings by the Federal Government and the private sector. Until foreign assets reach adequate level, all oil revenue windfalls will be saved while shortfalls will be met by expenditure reductions. We will invest the oil windfall and spend the income generated from the investments rather than the oil proceeds itself. We can not afford to waste this second chance. 16. I thank you, appreciate your time and look forward to your investments and contributions to the growth of the Nigerian economy. REMI BABALOLA Honourable Minster of State for Finance. This speech was presented on 21/10/2007