Osinbajo: There is a time to remove subsidy

In a media interview, Vice-President Yemi Osinbajo unveils the economic policy direction of President Muhammadu Buhari, revealing plans to diversify the economy, scale up MSMEs, reduce pressure on foreign exchange, implement social investment to address extreme poverty and avoid recession.

Editor’s note: Transcript provided by office of the vice-president.

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The 2015 and 2016 budgets, where are we at that level? Maybe you need to shed more light on the Zero-Budgeting that government proposed.

Osinbajo: Of course you know the 2015 budget cycle is obviously coming to an end and that was the budget set in by the old administration which had up to 90% as the recurrent expenditure and the rest of it capital expenditure.  Of course we know that that is not a model that is sustainable for long term. We also understand some of the reasons why that has been so; some of them historical, some of it are legacy issues but we must rectify that and going into 2016 budget, we intend to put things slightly differently.

In the first place, this Zero-Budget system is the one we intend to adopt; it is the one we are working on.  We’ve started working on it very seriously in the past few weeks.  What that means is that we are doing away with the Envelope system and we are coming to a system which more or less, you know, involves you having to justify from practically nothing. You know, we are not just giving some funds to do with in accordance with what you have. In the Envelope system, as it were, you are given an envelope and then you spend from that amount of money.

What we’re trying to do now, is to ensure that every ministry, every department will plan based on policy, as a matter of fact, and the first point I think is important to bear in mind as far as Zero-Budgeting is that we are going to very strictly adhere to a policy, and this is going to be very policy-driven. That is why our National Planning Commission (NPC) working with Ministry of Finance and Budget Office have tried to develop, you know, a robust policy base, of course on the government own objective and aspiration, the party manifesto, based on other documents, trying to define what this government is about.

So we are more or less at the point where we have a clear policy document and of course at the same time we are doing the long term and the medium term review, the MTEF-Medium Term Expenditure Framework. We are also putting that in place in order to be able to ensure that the budget itself is purely policy driven because that is very important. If it is what it is, (that is without clear policy direction) basically we are just running government, you know, and implementing expenditure, capital expenditure, some capital projects and all of that.  But there is a policy here.

One of the critical issues for us is that in the past we seem to have budgeted on the basis that this is a country that is concerned only with, well, growth figures as they say, averages, may be about 6% in the past few years until last year into this year.  But growth figures by themselves don’t mean much. In a country where you have such a large population of extremely poor people, your budgeting has to reflect that, you know, because otherwise, you are going to have more of the same…one of the critical things for us is that the budget must reflect the fact that we want to deal with the fundamental question of poverty at the same time, we have huge infrastructure deficit which we must also deal with.

So those are two issues that go into our planning. We are looking into planning generally, into policy formulation.  We may be seeing for the first time a three to four year planning period and we are looking at social investment. I just take social investment for example…of course, we have one meal-a-day programme, we are looking at substantial investment in Micro, Small and Medium Enterprises (MSMEs), and we are looking at substantial investment in Conditional Cash Transfer (CCT) and all of that.

Now, how do we do that?  You know, given the cash constraint and all that.  So we are looking at how to do this over a three year, four year period; spreading the expenditure over that period. Whatever the programme we are doing, we have to spread it over that period, especially because we know that we simply don’t have the fund to attack this the way we wish to.  If we have the fund today we certainly would have wanted to implement every one of those policies in full from day one but the revenue situation seem not to justify that.  So that is part of why planning is crucial.

Zero-Budgeting is more or less for us a product of a style, you know one of the reasons why we think that budgets are not taken that seriously is because there is no policy champion.  There is no one to say look, this is what we plan to do, you know a budget is just essentially an estimate of what we intend to spend.  But we think a budget should also have some ideological content, it should be driven by thinking and some people should champion that way of thinking and in which case you don’t have more emphasis on getting things done.

The business community seems not to understand. They want a kind of clarification on the general economic policy direction of this government.

Let me explain, you see, and frankly I’m lost some time, when we are asked about general economic direction, I think it’s clear we’ve made that point repeatedly, you know sometime we mix up sectoral concern with general economic policy.  Our economic policy direction is very clear, we know what it is that we intend to emphasize.  Every one of us knows that oil and gas sector is our main revenue earner. But oil and gas revenue have dipped. We know that we must diversify our economy. We are committed to that diversification.  How are we going to diversify?  Agriculture is critical to that diversification effort and when we say agriculture, how do we intend to proceed?  We are going to look at certain critical areas, for example rice.

We think that some work has been done on rice production but we now strongly believe that if we are able in the next two years or so or three years, we can actually become self-reliant or self-sufficient in rice production.  So we are working with seven states that are, if you like, rice producing states.  And we believe that we must focus our attention on those states in helping them, by providing infrastructure, providing whatever components that are required down that value chain– silos, milling facilities. Already many of those states have silos but we can further encourage them. Kebbi State for example is one of the major rice producing states.  We were already advancing a concessional fund to Kebbi state to enable them work especially with the farmers directly to enable them increase their rice production.  In fact they have flooding recently which is a setback, but we are focused on those rice producing areas, we intend to work closely with them.  Even some of our infrastructure plan is directed at those areas because we believe that they must have all the required support.

So agriculture is very important in our efforts at diversification of the economy.  We also believe that putting funding to MSMEs is very important. If you look at a lot of the effort all through the past ten years you find that there has always been focus on MSME but the problem has always been that of scale, not the problem of execution but scale. It’s okay to initiate a YOUWIN programme with a couple of thousand people. But how can that affect the lives or the economy of a country of 170 million people? So you have a good idea but how do you scale it up?

So we identified Small and Medium Scale including the market women. So one of the critical issues that we are reviewing now is how to ensure that we’re able to invest in the market women, give them funding through their Cooperative Associations across the country, give them funding which will enable them to improve their capacities, and then also training, capacity building, financial planning. Capacity building planning just helps them because, you see, this is a country of traders and merchants.

You must recognize that even in our definition of what is MSME you must not forget that that is a very critical sub-sector and you can do scale-up in that sector. You already have established structures for doing so.  Then of course we are trying to create the windows for opportunities for Small and Medium Scale people – the artisans and the rest of them.  So that’s going to be a critical aspect – the Small and Medium Scale area for purposes of diversification of the economy.

Of course we are going to be looking at services and technology. Then we look at music and entertainment, and all of those areas because this is our natural strength and what we think that government ought to do aside from our major role of improving infrastructure, security and all of that which I may not have the opportunity to talk about now. Government is going to facilitate doing business in the area of agriculture, so that there is diversification. Everybody for instance who wants to know what Nigeria will be preoccupied with in another two to three years must know that agriculture is one of the keys. I just gave you an example of rice production and then looking at wheat. One of the reasons why we are targeting some of these things is because it will also reduce the pressure on our Foreign Exchange. We are spending a lot of money on foreign exchange.

In the oil and gas sector, you know, part of our policy in that sector is to reduce importation of refined petroleum and that is why we are trying to work on the refineries and all of that. There are those who will say look, we are now at $45 per barrel which means that what we are actually spending on subsidy is substantially lower.  There is a time for even removing subsidy or not removing subsidy.  But there is also a time, because we are not spending so much on subsidy and we may not and we don’t expect, but we don’t know what the Lord God Almighty will do. We may be back to $100 per barrel but the short to medium term projection is that we may probably remain close to where it is – may be $50 or probably $55, and all of that, which still means that we have some room in terms of what we can do now.

So we think that we also have opportunity to improve refining capacity.  We are going to encourage the major refinery that Dangote is putting up in Lagos – 650,000 barrels, which we hope, will come on stream by 2017. If that comes on stream, it’s private sector, it is not government funding.  It will resolve a lot of our consumption issues and of course lower almost to a minimum or almost completely our refined petroleum needs which of course put question on the economy, on the Foreign Exchange Reserve.  So I think that in terms of what our economic policy is, it is quite clear.  We made this point when I gave a speech at the ICAN conference, and went to great detail.

I talked of course of social investment, which is another aspect of our economic policy and we made the point that if you have a number of poor people that we have, you cannot ignore that number otherwise you are always going to have growth without jobs, growth without any real improvement in the standard of living of the people which is what we have experienced for years.  So you have the very, very poor who are dying daily because they simply don’t have any resource at all.  So we need to do something about that. That is why we have social investment.

The one meal-a-day, we expect will also energize the economy down the entire chain. Taking an example of a state that had done very well with the one meal-a-day programme- Osun state, and is No. 2 in terms of GDP in the country today, strangely, next to Lagos. In terms of the number of the poor, I think Osun is No. 3 in terms of states that have lowest poverty. You can hear about Osun state in the press that they have not paid salary, of course there are 23 states that haven’t paid salary. That is another issue. The indication is that because there is a lot of investment in the people, poverty has been reduced and that is what we need to achieve in Nigeria. We want to achieve a situation where as much as is possible, we have to deal with poverty otherwise most people are completely alienated, you know. And they are not even part of the system at all. And we need to deal with that.

So that is why our social investment policy is robust and there are those who have shouted, oh! How are you going to sustain it, you know. But I hardly hear this argument when you are talking about poor people. Nobody asked how we bailed out few Nigerians who owed almost N700 billion during banking sector crisis. Nobody said how you are going to sustain it.  In fact, the entire bail-out of the banking sector was N5.7 trillion. Even if you give out conditionally, if you give out cash transfer to 25 million people over a 4-year period, one year will cost you about N1.3 trillion. I have challenged some of our economists that look, if you like, you can think as if you are in the West. Sometimes it is almost as if you are running an economy somewhere in the West where all we are concerned about are interest rates and the macro economic issues and of course, the general hard core fiscal and monetary issues.  But we have to ask ourselves if you have growth at 7%, and you have graduate unemployment at 80% and you have 110 million poor. What growth is that, you know. I think that we need to really readdress the critical question that concern us and that is the thrust of our economic policy. At the end of the day, whatever it takes to get to the root of the problem, we have got to do it.

Maybe you can give us slight explanation considering the time we have on sectoral issues, for example what is the government plan on Public Private Partnership (PPP), government plan on Local Content like the major area which is the Oil and Gas sector.  You know, they say investors are worried.  They say they don’t understand government economic policy, for instance you are the Chairman of National Council on Privatization (NCP).  Investors made investment in power sector and some other areas so they are worried. They don’t know what the government is thinking, whether it will reverse some of the agencies like NITEL and the things that were done in the immediate past administration.

No. Let me say very quickly, first let’s take PPP. Of course, government is committed to PPP definitely. As a matter of fact we have no choice. Even in our budget projection, we expect that PPP will constitute substantially, the development of our infrastructure.  Let me at this point explain something about plans for infrastructure because that will address the PPP question. If you look at what has happened in the past, what happened is that for instance, you have the Lagos-Ibadan Expressway.  You set aside 200 billion in the budget to do Lagos-Ibadan Expressway and this is just an example.

Now, what happenned is that you don’t have that 200 billion when you are starting, so you put in 20 billion this year, next year you put in 10 billion. And that is what has happened with a lot of major projects because throughout the budget cycle you just keep putting a little money, a little money. So, we intend to set up an Infrastructure Fund.  Now that Infrastructure Fund is going to be a combination of our own seed money as well as concessional funding and private sector funds, which would be committed to certain projects which we think are strategic.

Now when you have that Infrastructure Fund you then have those different projects.  Of course you do an open bidding process. What is interesting about Infrastructure Fund? One of the advantages is that it is a disciplined process, you cannot have opaque process. Because Sovereign Wealth Fund (SWF), peoples fund from everywhere is involved, you know. So you must have a disciplined process – contracting, bidding and all of that. Because the money will be there, we expect that you should be able to take a project from start to finish. So PPP is extremely important because some of the projects, depending on what project, some of them are going to be PPP project. For example if you are doing a major road, depending on where it is – let us say Lagos to Sokoto or Lagos to Abuja, there will be tolling at some point, so that there is income stream for maintenance, income stream for private sector participants and all of that; depending on what the project is.  In fact, some power projects will be involved in this, just depending on the project. PPP is a very important component of our overall approach to this.

Look at what we are going to do on the Local Content, you see, a lot of excellent policies you know, are abused at implementation.  A person who carries a brief-case around the place in the Oil and Gas and of course he calls himself a Local Content participant, he has nothing and he’s not concerned in the infrastructure. A lot of individuals who have nothing that you can say is there to add to infrastructure or any kind of investment but he get good contracts and all of that, and they are middle men.

Our Local Content system and many other things have been abused by rent seeking individuals who are encouraged and who make the noise; there is no Local Content, and they are not encouraging Local Content.  For them Local Content is no more than a rent seeking arrangement. Why? Because I know who is in government. They give me an allocation and I lift crude oil.  What is important in local content is that it must be local content. It must mean jobs. If you give me a lifting contract or something, as part of my so called local content, I don’t provide job. Apart from my personal assistant or may be my drivers. Local Content is absolutely important policy but the most important thing is that it must achieve the result that is meant to achieve.

On privatization, obviously there is no intention whatsoever to roll back privatization, no intention at all. The government generally must honour its obligation, government is a continuum. But what has happened in some cases is, for example, if there was no bidding process, if it was just an allocation; some of the noisiest people about policies that does not favour them are people who have benefitted from the system where things were not done properly. There is no reason at all why anybody will interfere; there is no way you can even interfere with things that were done properly. But if they were just allocated without a bidding process, if someone allocates you a major government facility without any kind of process, it is the duty of government to ensure it goes through the right process.  There have been some occurrences, I don’t want to be specific because some of them are in court, when individuals were allocated resources that are very, very beneficial there was no process done, you simply approach and ask how much can you pay and that was that.

Look at the bidding process that took place for Telecoms, you know. In 2001 people came and bought licenses, even the bidding process that took place in NIPP plants, although that was stalled and we have to open that. People will come forward and make competitive bids.  That is the way that government grows its resources. You can’t give people gift of resources that belong to everyone. So privatization itself must have integrity. It must be open, transparent and must be proper. And one of the critical things as Chairman of NCP, I very, very strongly believe in privatization in the first place and I believe that it’s a way to go. I also believe that the process must be strictly transparent and must be clear to all that there is no backdoor. Nobody is being given any free bids and all that. So there is certainly no intention to roll back any of the privatization process that has already taken place, no such intention.

I am going to take you back on Zero-Budgeting. This policy, the word Zero-Budgeting is alien to Nigerians and they will really want to understand apart from the fact that it is going to be policy driven. You know zero- for nothing, you said it is going to be policy driven. What else?

There is nothing new about Zero-Budgeting.  Lagos state implemented Zero-Budgeting from 2001 and still implements that Zero-Budgeting till today. So there is nothing new, let it not be seen as something that has never been tried and tested.  This is something that has been done. Basically what it means is this. You know, we are told this is what we have, we have N1 million. We all agreed and that is the envelop system, take your N1 million, distribute it as you wish. This involves justifying at every stage; tell us what you really need to achieve this objective.  This is your objective; this is what you want to do.  So tell us what you need to achieve it.  So you come from the bottom-up as it were.  And you tell us what it is that you need at every stage.  So you cannot for example, say last year we bought 200 computers and this year we are also going to buy 200 computers, no. Budgeting is much more of a disciplined process and we are looking at every stage of that whole process.

What we are saying is that you don’t start from the top, you don’t say I have N1 million this is what I am going to give you, no you start from the bottom.  You have nothing, you are starting with zero, you tell me what your needs are so we are going to do it, that’s it.

Will the agencies still be allocated certain funds?

Yes they will.  What we are saying is the process. If for example under the old system you got N5 million for budget, we hope that this system will remove inefficiency because you are justifying it. We are not just giving you the money and say well, allocate it as you want. It is a much more rigorous system because it means that you have to show why it is that you need this. It’s much more rigorous.  That’s why, you know, it requires a bit of capacity and as we go along we try to develop that capacity.  You must show as we go along, why is it that you need this, why is it that you need that, you know. And then hopefully, you will be able to get what it is you want to achieve that objective but there must be a process for justifying it. The reason why policy is important here is because we are also trying to direct our resources towards the objectives we want to achieve.

If you know Universal Healthcare Insurance is your important objective you try to justify it. And we are trying to direct resources to the particular areas that we think must be concentrated on.

The Foreign Currency Policy where you cannot pay into your domiciliary account has one way or the other affected the availability of foreign currency somehow and then the foreign investors, they cannot easily pay their profit. Now, is there any plan to ease this. Is it a short time policy?

Of course you know that it is a policy option.  You have to make tough choices.  So the CBN faced with very, very low foreign exchange on account of the fallen oil prices.  It has to take some tough policy choices.  One of these was exchange control but you must accept that. Of course because there is not just enough foreign exchange and there is sharp drop, you must control foreign exchange especially when you are a largely import dependent economy.

Now here we are faced with several people who want foreign exchange. Some time you look at the actual demands and the demand is huge. I don’t want to come up with figures that I am not entirely certain about as at today. But it is a huge amount. You have to control that demand.  So the Central Bank adopted a demand management strategy for the short term and had been really successful so far.  One thing that happened is that our foreign exchange reserve has stabilized and our current account deficit has narrowed, it is short term and there is a reasonable degree of success. It cannot be a long term strategy.  For a long term strategy, we want an open foreign exchange market where that market must be one that has the resources to make operation robust open.

On the long term we expect that the Central Bank will ease restrictions as we go along in the medium to long term. Hopefully, we will be able to go back; more or less where it was a bit easy, where there was quicker freedom of movement of foreign exchange. Definitely it is short term there is no question at all that it is a short term measure.

On the general economy sir, there is this fear that Nigeria’s economy is slipping into recession. Is there anything or a quick fix that government is hoping to put in place?

You must know that all over the world, there is a slowing down in economies. Our slowing down is greatly affected by drop in oil revenue. But we think that in the next two quarters, especially when we are able to implement the budget, we think that we will be able to ramp up growth a bit more; you know we think that that will definitely improve growth. There is no question at all that if you have as it is now, a budget that was essentially meant to fill in the gaps, there is very little that can be done.  By the time 2016 budget is implemented, we will be able to ramp up growth. There is improvement in power, it will help industry to spring up and some of the policies we want to put in place will also be helpful. Agriculture will be kicking, we hope that funding for SMSEs will be kicking, the trajectory will be good. I don’t think we will, as some have suggested that recession is inevitable, I don’t think so. I think that we are well on the way, especially if we are able to implement our budget we will get out of the worse part of where we are today.

The TSA implementation is another issue causing a lot of pains to some people now, some of the MDAs are beginning to complain that the policy is biting hard and some of them say they no longer have access to funds, even their own expenditure budget is now holding up. My question is with media reports that some agencies – NNPC has been exempted from this TSA. Just yesterday one director was telling me that NNPC has not been “TSAed”.  We want to find out why would that be?

I am certainly not aware that any particular agency has been exempted. Clearly there is no exemption. I think some agencies have tried by way of explaining why they have difficulties getting certain exemptions so perhaps in the process of trying to get the exemption, of course you will wait for the outcome but nobody has been granted an exemption and I know that even NNPC has complied to a certain extent. I know that they may have some outstanding but NNPC has definitely started to comply but don’t forget that NNPC has several foreign accounts. Any MDA that has foreign account may be given a particular outlet with the CBN and all of that. I don’t believe that any MDA has been exempted. Certainly I am not aware that NNPC has been given any exemption. Those who complain about the TSA; as you know, any policy at all, especially the policies that may not allow the kind of laxity that has to do with running account of your own in several different accounts, in additional banks and all of what that implies, that does not necessarily mean that corrupt activities is going on.

One of the key issues why TSA was implemented is because government has a duty to know what its entire revenue profile is.  There is no government to my knowledge who does not know how much it has in terms of receipts.  Unfortunately what has happened in the past few years is that there are agencies that have accounts that government is not even aware of.  In some cases some revenue agencies will take the revenue and some of them interpret their laws to mean that you can take revenue, retain certain amount and give certain percent back to government. There is nothing wrong with thinking that way but the constitution is very clear. The constitution says that all revenue must be paid into the government coffers first.  Now you then have your budget.  When you then present your budget, you are then given the resources to run your organization but you cannot become the first repository of government fund.  Any normal government enterprise to the best of my knowledge must first pay into a bank. Pay it first and then run a budget of your own expenditure and I think that is very important, you see, the idea that you should first spend what you have, like in NNPC.  The NNPC was particularly guilty of running huge expenditure and then remitting some back to government and you saw how much NNPC expended in the past years. Even the PWC report, in about 18 months NNPC takes $1.85 billion on remuneration, and spent almost $700 million on travel and training.  If you have that kind of access to revenue then you can spend what you like.  Well, you ought to have a budget.  So if government says it cannot afford $700 million for training all we can give you is $100 million that’s all we get. But if you have access to all the money then you can decide how much you want for your training budget.

What it means is that you have your own budget that is not the budget approved by the National Assembly.  There has to be appropriation and that is what the constitution says. The constitution process is one that guarantees transparency in the process of expenditure of government revenue.  That is why it is so important that we have TSA so it gives government a clear picture of what it holds, what it earns and then decides how it spends its money.  Of course it will involve some problems initially. There is no question about that. And that is no reason to reverse or be bothered about a decision that obviously has greater benefits. Some may feel that they have been restricted but as we go down, things will be eased and things will fall in place.

What state are we regarding 2016 budget preparation, ?

What we are doing at the moment is that we are working on the MTEF and we expect that that will be submitted to the National Assembly very shortly. A lot of the ministries are already working, by Monday we will be sending the guidelines to the ministries – the guidelines for the Zero-Budgeting process. We have tried to sensitize them; several meetings have been held with revenue generating agencies – FIRS,   Budget Office, National Planning Commission, all the revenue generating agencies.  We are basically meeting and working out the parameters for the new budgeting system.  By Tuesday the guidelines will be sent to them but I can’t say now when the budget will be ready.  It’s a new process, it’s a lot of work and we are trying to work round the clock and we are holding meetings day by day and the last meeting we had was Wednesday, we have another on Tuesday, and the agencies are meeting.  It’s a rigorous process; I don’t want to commit to any timelines or dates. Very soon, hopefully, we are going to have our ministers in place and they are also going to join.

Zero-Budgeting and cutting down the ministries. Going by the number of ministers which the president has already mentioned, are we looking at a situation where some ministries will be merged very soon, where parastatals will be merged?

Definitely we are not going to have as many ministries as we have right now. There is no question at all about that.  The president has made it quite clear that he intends to work with fewer ministries and of course you may not have fewer ministers because the constitution says that you must have a  minister from every state.  But surely you must have fewer ministries and that is definitely what the president has said not once, not twice.