Beyond Oil Talking Business


Beyond Oil

Lerato Mbele hears from an oil magnate, investor and entrepreneur in Lagos about the country's challenge to look beyond oil to a more sustainable pattern for economic growth.


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These are the bustling streets of Lagos, Nigeria, the heartbeat of

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West Africa and a strategic financial hub.

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But Nigeria is in the throes of a recession and young

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On this week's Talking Business, we ask

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what does Nigeria need to do to resuscitate its economy?

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Nigeria is one of Africa's top two economies,

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the largest producer of oil in Africa.

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It has a huge consumer market of 117 million people. But it seems as

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though right now none of that really matters because Nigeria find itself

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in the throes of an economic recession. It is not the first time

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Nigeria is in crisis. The question is, why does this African giant,

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that has the potential to rise and lead, find itself tripping and

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falling? And what is it going to take to make Nigeria thrive? Here to

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answer some of these questions, the chief executive officer of the

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Nigerian sovereign investment agency, effectively the country's

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sovereign wealth fund, and next to him, the chief executive of the West

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Africa vocational education and then we also have the chairman of the

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Nigeria mortgage refinance company. Thank you for joining us. It started

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with the ball in the international oil price and quickly thereafter,

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Nigeria found itself in recession. Why did those two things reinforce

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each other? Sure, first of all, I think the oil price recession came

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at the end of what was a stretch of eight years of oil price rally. It

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is a cyclical product. The last 30 years, we have seen nine major

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recessions, cyclical downturn in oil price. We were due for one because

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along the line of the rising oil price, the rising oil price, it

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brought in new suppliers, so fracking, you know, the United

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States went from an importer to an exporter. We also had alternative

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energy, electric cars. Quite a few things came together at the same

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time to lead to what was a significant decline. Also, if you

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looked at the important economies of China and Brazil, these economies

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also went through their own downturn at the same time. All of this came

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to a head and the oil price came from $100 down to as low as $27 at

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one point and so that lead to that and it also happened at a time in a

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new government was coming in. All of that put together was what led to

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the situation we find ourselves in. But oil is 13% of GDP and my sense

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is that it is important to the extent in that it is 70% of the

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government's overall revenue but there's enough resilience in the

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economy that we have start to come out of it and the oil price has

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picked up. Is the economy resilient? Ordeal being a small proportion of

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GDP but almost everything in Nigeria depends on it. Yes, it is to the

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extent that Nigerians are the resilient ones that make Nigeria

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resilient. We survive despite and in despite of government and in spite

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and despite of the economy. So Nigerians will keep going until they

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can't any more. I think that is what we need to put our bets on, what are

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Nigerians doing and how do we best in their productivity because that

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is the only asset we have and it's not going anywhere any time soon.

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How has Nigerian business responded to this? It is not just the

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recession. It is also the currency. Yes, we need to sort out the

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exchange rate. There is a problem there. We need to supply

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infrastructure and find a way to improve basic infrastructure, to

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enhance productivity. Those are the two key problems facing business in

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Nigeria right now. Explain the relationship between the economy and

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the currency right now. Most of the international investors are buckling

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under the pressure of this, should the currency be devalued or not? I

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think the problem with the currency is that it has been fixed and

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because it is not gloating, then people are uncomfortable about the

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ability to invest and then get their money is out because it is at a

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fixed price. That is a real concern. That relates them to the real

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economy because if it is fixed, then it is very difficult, unless you are

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able to get your dollars at the fixed price, to be able to

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repatriate your profits if you have any. And if there is a differential,

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if there is a difference between the official rate and the market rate of

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40%, you would have to make a return, an equity return in excess

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of 40% to enable yourself to be sure that you are making a positive gain

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on your investment. OK, so it opens the system up to what they call

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arbitrageur but this also impacts the ordinary man of woman. Almost

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70% of everything Nigerians use and consume, from food to petrol, is

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imported, so how are people really affected by what is going on? We

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work with a lot of small and growing businesses and they are affected

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because the cost of all the input has gone up but what is really

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disheartening and worrying is that the only thing that they can sit on

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his wages. So all my employer partners tell me they can't increase

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salaries because everything else has gone up. But remember, for the

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common man, coming to work every day, is transportation went up in

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March, doubled overnight and so people are really struggling because

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wages over the last three years have stayed the same if not the Clyde.

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The minimum wage is not a living wage. It never has been. -- is not

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declined. It is a challenge for the everyday man and for the small and

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growing businesses which are the backbone of the economy. I knew you

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don't represent the government body led up a government agency. What do

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you say to people who say there is too many inefficiencies in the

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Nigerian system and nobody is seriously trying to tackle them? I

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have seen significant efforts to make changes recently, also from the

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agency that I'm part. I will give you an example. Yesterday, we signed

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an agreement to invest in a exchange. Now, it may sound not very

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interesting to the ordinary person but the effect eventually, when we

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are up and running and we want to be up and running in six months' time,

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is we will bring transferrin to commodity pricing because there is

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so much inefficiency on commodity pricing. Others are able to price is

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much cheaper than small people can. We don't have enough transparency

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there. We are also investing in logistics, so ER looking to improve

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the movement of goods and agricultural commodities. We have an

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agriculture fund. There's a lot being done there. We have also made

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investment in creating an agency to help ease the cost of credit and

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bring in funds. We could go on and on, there are so many things going

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on which I think will eventually come to the surface. Let me symbol

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fight, simple question, here is Africa's largest oil exporter and

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it's probably Africa's largest importer of petrol. We should be

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refining it, not importing it. That is an inefficiency. I agree and that

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strikes and because I'm a chemical engineer by training and I worked on

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some of those refineries many years ago. It's unfortunate, the state of

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those refineries. What you may also have not noticed is that there was

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an announcement made last year and a request that went out for refineries

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and we are looking at some of these projects. It is not impossible to

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build a refinery, for goodness sake. We used to have four functioning

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refineries in Nigeria that could refine up to 2000 barrels a day. We

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can bring those things back. I think it goes to the heart of what you

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were talking about. 30% of African exchange usage is in finished

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products. You need to solve that very quickly by refining domestic E

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and that solves two things at the same time. What incentive is there

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to solve some of these inefficiencies because those who

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just look at the situation said, for as long as there is corruption, and

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as long as people thrive in the face of corruption, there is no incentive

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to address the problem for Nigeria? Absolutely right and there is a lot

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of corruption but I think this administration is working on that.

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On the corruption aspect, that is not where I think the biggest

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challenge for Nigeria is right now. The big challenge for Nigeria is to

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create market systems and transparency that would reduce the

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ability to hide corruption. This is a process which needs to be done and

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can only be done if you free up the market and you have an appropriate

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management system. Everywhere I get interviewed, the first and second

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question is about corruption. It is real. It is not unique to Nigeria,

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by the way, and I say that because I've done business in places that it

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is more sophisticated. But I think one way to solve corruption, number

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one, is to minimise intervention by government that creates arbitrage.

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That is number one. And to see that happen. Obviously there are still

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issues with the exchange rate which was talked about but there are

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things being done to solve that. But I can also speak to this from the

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perspective of the organisation I run. You know, I hear of the

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transparency index which is interesting but there's also another

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index that measures the transparency and governance of sovereign wealth

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funds and the Nigerian sovereign wealth authority is in the first

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quarter, the top quarter, as of 82 sovereign wealth funds in the world.

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There are three ways we go about that. The first way is

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accountability. Accounts are published every quarter. The second

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wave governance will stop there is a process which drives to the heart of

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the organisation. The third way is the reinvestment, bringing

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foreigners into investments. The point I'm making is that, and that's

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just one, there are many other aspects to how this will be solved.

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It can only be solved through minimally dimension, do not create

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arbitrageurs and processes to solve it. Hold that thought because I'd

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like us to talk about solutions in a second. We will continue discussing

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what Nigeria needs to do to improve on its economic situation and get

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itself out of crisis. Right now, let's get a thought from Colm O

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Regan on this week's talking point. How difficult is it to rebalance the

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nation's economic model, to shift from being in thrall to or oil, to

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something more sustainable? Too much dependence on one area in an economy

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can leave the whole model skewed in that direction and vulnerable if

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something goes wrong. The Nigerian economy last year, in 2016, in the

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second and third quarters, we were seeing double-digit contractions in

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the oil sector, meaning that now, it only contributes around 8% of GDP.

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It is what happens in the rest of the Nigerian economy that is much

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more important. The difficulty, of course, is that oil still plays a

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disproportionately important role in terms of generating foreign exchange

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receipts for Nigeria. Roughly 95% of its foreign exchange income comes

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from oil. So while it may not be the big driver of GDP, that foreign

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exchange, that oil generates is still quite crucial for allowing for

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activity in the rest of the economy. Bit of rebalancing or moving on is

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required. To vaguely reinforce the metaphor, I'm going to move on from

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this wonderful example of brutalist architecture... To this brand-new,

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swanky, 21st-century building. Central-bank aficionados among you

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will have spotted that the previous location was the old headquarters of

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Ireland's Central bank. They are moving to the soon-to-be opened

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building behind me. I like to see the move of Ireland's Central bank

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down to their brand-new headquarters as sort of a metaphor for the way

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Ireland's economy has tried to move on from it over dependence on the

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property bubble of the previous decade. But rebalancing an entire

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economy is not as simple as that. It's a bit more than a few grains

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and some energy efficient glazing. As a small, open economy, you are

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always vulnerable to market swings. Small, open economies tend to well

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when the business cycle is growing, on the upside but they are also much

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more vulnerable on the downside. Small, open economies like Ireland,

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heavily reliant on the inflow of capital in finance, particularly

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vulnerable. If your growth model is dependent on evangelisation, then by

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definition, to a certain extent, you're much more vulnerable to

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changes in capital flows. So if that is the outlook for small traders

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like Ireland, what about a big oil like Nigeria? Governments always get

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used to easy revenue and with the recent Opec agreement on production

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cuts that has created some support to the oil price, the fear is that

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this might weaken the reform process in Nigeria. If there were no choice,

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if governments had to move quickly, try to mobilise revenue from the

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rest of the economy, we would probably see a whole slew of

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enabling reforms taking place very rapidly. But for as long as there is

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the promise of perhaps more sizeable fiscal receipts from that

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conventional source, from oil, it slows the reform process. It slows

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the diversification process. There's always the temptation to borrow big

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because you'll be able to pay it off with future oil receipts. So as I

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suspected, rebalancing an economy easier said than done.

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That is, Regan and for more of his videos, log onto the website. --

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Colm O Regan. What is it that Nigeria should do to find solutions,

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not just for the economy but for entrepreneurs and also for the

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business community? You have got us talking about some of those

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solutions, better financial reporting standards, more

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transparency. What else can be done that will have an impact on ordinary

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people? Quite a few other things. I think the one area that I think we

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haven't truly addressed in the country is what it takes to

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strengthen the manufacturing, so we can actually produce what we

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consume. A country of this size and scale does not have a fairly

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functional fizzy chemical sector, for example, or metals sector, that

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is really functional. For the size of infrastructure needs that we

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have, we need to be manufacturing ourselves. There has to be a way to

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encourage entrepreneurs in this area so we can start to produce what we

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need. The other thing that I think needs to happen in the economy also

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is that while the economy itself, in my opinion, is diversify from oil

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gets all the attention but it's less than 15% of GDP, government revenue

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is not diversify. Tax as a ratio of GDP is under 5%. Most other

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countries in the world is between 10%, or 14 or 15% in some cases.

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There has to be accountability by the citizenship. People need to pay

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their taxes when they have to do. 90% of Nigerian adults surveyed

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believe that they have what it takes to run the red business. It

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reinforces this idea that Nigerians are self-starters, enterprising

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people. How can the country tap into that? That is always an interesting

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statistic. We are very entrepreneurial but at the heart of

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a lot of that is a lack of trust. Nigerians don't want to place their

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future in someone else's hands. So they work for themselves, as soon as

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they get in any classroom I walk -- Robidoux, and any of you want to be

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owning your own business in five years? 99 of ?100 will go up. To

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that end, productivity is going to be so important in this economy and

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getting us out of the recession. There's a lot of talk in investing

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in hard infrastructure. With a soft infrastructure, the education

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system, it's going to be critical. As small business struggles to get

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financing, but the only thing that gets harder across the world for any

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business as you progress is people. Its talent. You can raise your

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financing in year three or four but if you can't find good stuff, you

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will be running your own business by yourself or the rest of your life.

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Until we start to invest in people, increase our productivity, small

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businesses will continue to struggle. Lead's talk about

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solutions here. What could be done to incentivise the Nigerian private

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sector and indeed small and medium enterprise to take more of a leading

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role, to be part of the growth and the strategic direction of the

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country? They are trying but when all the inputs are, you know, import

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lead, it is hard for them. But I think what can be done, at least

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after government level, is looking at what people need right now. You

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are investing in hard infrastructure but in parallel, not waiting for

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another ten years to fix the education problem or the health care

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issues. A healthy populace and an educated populace is a productive

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populace. I think one thing that sometimes gets left out as well is

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if in the major megacities like Lagos and Abuja, people are spending

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four hours on average per day in traffic, you will be even less

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productive. There is some very low hanging fruit that we can put into

:17:55.:17:58.

place to start to help people become more productive and that is really

:17:59.:18:02.

what small businesses need. It is, give me access to the people, the

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capital and the markets so I can do my thing. Sort out infrastructure is

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what she is saying and it is not just the roads. It's the electricity

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supply, for instance. On the infrastructure side, yes,

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electricity wants to be realistic, we privatised it and it has not

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worked. The collections are very poor, the companies are not well

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capitalised, which I think major issue, to be honest. They need to be

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recapitalised. A lot needs to be done on the electricity front. In my

:18:29.:18:32.

opinion, I think it is the single biggest challenge we have in the

:18:33.:18:36.

country today. Small businesses, you look at a typical small business,

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the cost of production will be 20% higher than its peers just because

:18:41.:18:44.

of electricity costs. We need to solve that. There are programmes in

:18:45.:18:47.

place and this is not the forum to outline on this programme but I'm

:18:48.:18:50.

hoping that in the next couple of years, there should be some

:18:51.:18:54.

solutions there. Nigeria aspires to be edgy 20 economy. Yes. In the near

:18:55.:19:02.

future. Nigeria says it is a natural leader in Africa. Economically and

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on the peace and security front. For Nigeria to assume what it believes

:19:09.:19:10.

is its rightful place in Africa and in the world, what does it need to

:19:11.:19:20.

do? I think it is quite simplistic approach, to say so, but if we

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improve the productivity the average Nigerian to $5,000 per head, for

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example, that is when you get a dividend in this large country that

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we have and we will catapult us into a G20 country. Does that mean the

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life of the average individual is higher? Maybe not. A lot needs to be

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done, health care, education and all that needs to be dealt with. But at

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the moment, I think the most important thing we need to do in the

:19:44.:19:48.

country today, and if I can add maybe one or two things, the

:19:49.:19:50.

electricity infrastructure needs to be solved. The production and the

:19:51.:19:55.

manufacturing sector needs to be fixed. You cannot build a strong,

:19:56.:20:00.

sustainable economy if you don't manufacture enough to be

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self-sustaining. What do you think? Whilst we still have this position,

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which crowds out, really keeps out investment, whilst business is

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unsure about whether the currency will be 500 this week or a thousand

:20:17.:20:20.

at the end of the, I'll give you an example, if you invested in Nigeria

:20:21.:20:28.

in 2008, the Nyro was 120 to the dollar at that time. If you had made

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an investment then, even if you had made a 10% return every year, you

:20:35.:20:38.

have still made a loss in dollar terms. It is against this backdrop

:20:39.:20:45.

that they needs to be clarity. The differentiation of the currency is

:20:46.:20:49.

not necessarily a bad thing if it is going to lead to an improvement in

:20:50.:20:52.

the terms of trade. If it is going to lead to an improvement in the

:20:53.:20:56.

level of growth if it means that domestic business is going to

:20:57.:21:02.

actually benefit from that differentiation. But the absence of

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good and construction, electricity done a proper education system, all

:21:07.:21:09.

of these make the current position that we have and the monetary policy

:21:10.:21:16.

framework ineffective. No nation can rise above the education level. I

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was working with a 25-year-old yesterday, trying to assess his

:21:22.:21:24.

basic arithmetic skills. This is someone who says he wants to earn

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50,000. It could not do 696 divided by 12. We worked on it together and

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he still couldn't do it and this is a 25-year-old who had been

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short-changed by the education system. If you don't have the

:21:39.:21:42.

competencies, you will not get the productivity. You can build all the

:21:43.:21:46.

roads in the world and fix all the electricity, but if we show up at

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the office and we don't know how to divide 696 by 12. So, you know,

:21:50.:21:55.

everyone, all of us, not just the president, everyone needs to get

:21:56.:21:59.

back to the basics which is skills. I'd like to thank you all for taking

:22:00.:22:02.

time to help us understand the complexity of Nigerian economy. The

:22:03.:22:06.

chairman of the Nigerian mortgage refinance company, the CEO of the

:22:07.:22:16.

West Africa location and education and the chief executive of the

:22:17.:22:21.

Nigerian sovereign wealth authority, or sovereign investment authority in

:22:22.:22:25.

the country. Some of the problems we have discussed here are not unique

:22:26.:22:29.

to Nigeria. They are African problems. They are problems that

:22:30.:22:34.

affect oil producing nations. But the solutions need decisive

:22:35.:22:37.

leadership on the part of the Nigerian government, innovation on

:22:38.:22:40.

the part of business, and consideration for the potential of

:22:41.:22:43.

the youth. You have been watching this edition of Talking Business

:22:44.:22:48.

from Lagos, Nigeria. Tune in next week when the programme will come to

:22:49.:22:52.

you from Washington, DC, brought to you by Michelle Fleury, as she

:22:53.:22:56.

discusses the industry of fake news. From myself and the team, thank you

:22:57.:22:58.

for watching and goodbye. I have got some hit and miss showers

:22:59.:23:18.

out there

:23:19.:23:19.