Assessing Nigeria's Economy

Ngozi Okonjo-Iweala, Nigeria's minister of finance and coordinating minister for the economy, joins Princeton N. Lyman of the United States of Institute of Peace to discuss her country's economy in the context of recent regional and global trends. In her introductory remarks, Okonjo-Iweala emphasizes the diversity of Nigeria's economy, calling on the audience to consider opportunities in the country "beyond oil." She describes Nigeria's success with weathering international volatility, financing innovative projects, and maintaining growth. Okonjo-Iweala goes on to discuss challenges for the Nigerian economy and the consequences of the 2015 presidential elections.

LYMAN: Good afternoon, good afternoon, and thank you all for coming. We have a particularly very interesting and important program today, a conversation with Ngozi Okonjo-Iweala, one of the most distinguished economic leaders both at the World Bank and in Nigeria. I will say a little bit more about her in a moment, but let me just set the administrative side of things.

Today this program is on the record, so we don't have to go through all those rituals at the Council about what is off the record, and we are very pleased that Madame Ngozi has agreed to come in and speak. We are going to proceed with Madame Ngozi speaking for a little bit, then she and I will have a conversation. Then we will open it up for questions and will end promptly at 1:30, which is an iron rule of the Council on Foreign Relations.

You have a bio on Madame Ngozi, but I will just say this is someone who has held very high positions at the World Bank—vice president, the managing director—but left those opportunities and those responsibilities twice to become finance minister in Nigeria, first with President Obansanjo and then with President Goodluck Jonathan, and a fierce reformer.

I remember in particular that marvelous campaign for the debt relief, removing $30 billion of debt off the shoulders of Nigeria. Great achievement. Opened the door to many possibilities.

So we just had this extraordinary election in Nigeria, and I think everybody feels that it came out remarkably well. The opposition won. The president graciously, quickly offered concession so the country can now move on to what are not a few major issues and responsibilities.

So, if we can ask you to start and say some—give us 10, 15 minutes of your thoughts about the future and then we will go on from there.

OKONJO-IWEALA: Is it OK if I use the podium?

LYMAN: Sure, sure.

OKONJO-IWEALA: You know I am short so it is easier to speak standing up. It's easier to speak standing up. Well, thank you, Princeton, and thank you to the Council on Foreign Relations for this opportunity to share some thoughts on Nigeria. I have some of my colleagues here with me, the chief of budget, the chief economic adviser, but also some members from the new team—(inaudible) and there colleagues are scattered here.. So I think this is a very good sign, because it means that we want to see the country you know, really move smoothly, at least on the economic front.

Thank you, Princeton. What I thought I'd do today, share a few thoughts on what I've called "beyond oil." That's the title of my intervention: Nigeria: Beyond oil. And I want to start by echoing what Princeton said, that for me, this is a proud moment, a moment in which, you know, the expectations for the transition in Nigeria, or for the elections in Nigeria, I should say, were very pessimistic.

You could see it from the stance of the international media and all those new (ph) in Nigeria. What has happened, is something that makes me proud to be a Nigerian because Nigeria, the right thing happened. We had a keenly contested election, and when President-elect General Buhari was winning before the results were declared, the President Goodluck Ebele Jonathan conceded, as Princeton said, graciously.

And I think both of them deserve congratulations for what has been done, and for the manner in which they have carried on. So congratulations to both President and President-elect, because they have given the country a violence-free election. Yes, there were a few skirmishes and some mishaps during the gubernatorial and local, but largely the elections have gone on peacefully. The world was expecting violence and Nigeria did differently. That's what we are very, very proud of.

So, I'm stressing this, because this has given us the platform on which to now talk about the issues that need to be focused on in this transition, what we hope will be a peaceful, continued Democratic and economic transition. With what we have, Nigeria has joined the ranks of countries that have has (ph) Democracy and setting an example, not only in Africa but even for other developing countries.

So, this is the time to now look at the economic side and say where do we go from here. But before doing that, I'm talking on my topic beyond oil. Because of what is happened now, I want to also take a few minutes to dwell on the past, before we talk about the present and the future. As you know, the Nigerian economy has been hit hard by the recent oil price crash, with 50 percent drop in the price of Bonny Light, which is our own crude, which commands a premium closer to Brent (ph), from $116 a barrel to $57, a near 50 percent drop.

Of course this sets downward pressures on the economy. As you know, oil, even though the Nigerian economy is quite diversified in many ways—I will come back to that—but our source of revenues is not. And our revenues depend 70 percent on oil, and oil is our biggest export, 90 percent of the total value of exports.

But in recent years, oil—the oil sector has actually been contracting and it is the non-oil sector that has been pushing the growth of the economy. Given that, this is going to be a difficult year. What I said to people, the Nigerian people, is this year is going to be tough. There is no country in which has experienced a 50 percent drop in income that you don't have a tough time.

So even if all the fundamentals are right, you still are going to have a tough time. But I believe because of those fundamentals, that Nigeria will come out of this in 2016 and so on, with a stronger base. Actually, just reading the world economic outlook and what the IMF and the World Bank say, this mirrors exactly what I'm saying.

So, you know, we need to go back about this issue of beyond oil, and why I feel that, even though we are now focused to grow by the IMF at 4.8 percent this year, down from about 6.3 percent last year, why I feel that we should look at this country and how it's going to come out, is because we need to go back to the country in the '60s and the early '70s, when it was not dependent on oil, but as a matter of fact, was a major exporter of agricultural products, which made up about 75 percent of export earnings at the time, in the '60s, and employed the bulk of the labor force.

To think that at that time oil was now a very small factor, and the fact that we need to go back to look at the lessons of what happened then, when we were not dependent on oil, and how can we build on that again? The dependency on oil that started in the 1970s brought a lot of factors that were worrying.

Throughout our history, oil revenues were not deployed as much as we should have to really push the true diversification of the economy the way that Mexico and Indonesia and others have. In fact, at various times with the oil money coming in, in the 1970s and 1980s, we even went to borrow, ostensibly to build the country, and we built up a lot of debt.

So, the history with the use of the oil revenues had not been as good as we would have wanted. We did build quite a lot of infrastructure. We have built a new city, Abuja, which was from these oil resources. We mustn't forget all that. But we could have done much better over time from the '70s, '80s, and '90s.

The other thing that happened with the arrival of oil, was the way that our macroeconomic management happened, it was very pro cyclical. What do I mean by that? When oil prices were high—hi, ambassador. When oil prices were high, we spent everything, and when they were low, we had nothing to spend. This has been the history of the country. This pro-cyclicality with the management of our oil wealth and also with the way the macroeconomic, macro-fiscal situation was managed.

And this was the situation we found actually, when I was finance minister the first time under the second Obasanjo administration, for 2003 to 2006. We found an economy that had been growing in the 1980s less than the rate of population growth, maybe at an average 2.5 percent. We found in the '90s stagnation, and then into the 2000s. And we found this space where we were not managing macro very well, because of this issue of pro-cyclicality.

So one of the first things, challenges we sought to meet, and I'm talking about it, because it is still very relevant today, one of the challenges was how to control this volatility. Do you know that we were losing about 3 percentage points of growth, of our GDP according to a World Bank study, because we did not have a handle on this volatility.

So we set out to put something in place with the help of the international institutions, called an "oil price-based fiscal rule," which is that the economic team at the time, and Dr. Brite Okogo Ize (ph) was part of it, devised a rule in which we de-linked the price of oil from our budgeting. And we set a benchmark price based on a 10-year running average. We set up a model, which we still use today, to help us set a benchmark that would be different from the price of oil on the market.

So that if the price of oil was higher than the benchmark, which was the idea, we would save the excess. And if it was lower, we would then have a pool of savings to draw on in order to manage our situation.

This succeeded spectacularly in the 2003 to 2006 period, and actually there is a graph. Those of you who have seen my book on "Reforming the Unreformable," will see a graph there that mirrors this volatility and shows that period, we actually were able to conquer this problem and make savings. We devised something called the "Excess Crude Account," into which the difference between the benchmark price and the spot price went.

Those savings helped during the 2008 and 2009 economic—world economic and financial crisis, which hit Nigeria as well. Because price of oil fell from $147 to $40, just like this, precipitously. And our banking sector was hit. So some of these things we are seeing now are not new. But we are—the difference was our ability to draw on the Excess Crude Account, which had around $22 billion in savings at the time. And this was used quite rightly, you know, to stimulate, to offer fiscal stimulus to the economy and cushioned the impact, exactly the way we designed it.

And that was why Nigeria was one of the few countries that didn't have to go to the Fund or the Bank at the time, the Fund, mainly, to get resources.

So, you know, we have fashioned back to this—let's get back now to this time. The problem we face now with the present drop in oil prices, is that those savings are very minimal. And why is that? At the time in 2011 when I came back as the finance minister, and left the World Bank, I found that we had about $4 billion in the Excess Crude Account. This was about August 2011.

The money had been spent during the 2008, 2009 crisis in order to plug the gap and help manage the economy and offer fiscal stimulus. But sharing, even after the crisis finished, continued, and that's the part that was not proper. You know, at the time, the 2009—the crisis was over, this sharing of the money in the Excess Crude Account should have stopped so that the rest could be preserved as savings, but it didn't. It continued, and we are down to about $4 billion.

One of the first things we did with the new economic team was to sound the alarm, and all these things are on record. Each—there were about seven times we found out from newspapers and televisions, when we came out and said "this is not right." Now we need to say because oil prices are high, because this cyclicality might come back again and we might find ourselves with oil prices dropping precipitously.

But the political will, the environment had changed. Under the second Obasanjo regime, I think we—I would say that from my own surmise, is that there was a lot more political will, because there was a dominant opposition. There wasn't too much. Even though the governors at the time, who, due to our fiscal decentralization, are entitled to a set share of the revenues, even though they objected, but it was able to overcome this objection and we were able to save.

The same issue occurred when we tried to save. There was very strong dissent from the states about this. I can tell you that, even as we speak, today there is a case in court against the federal government—it's there in federal court—for daring to say we should save.

So, it's very interesting when I hear people, you know, sort of talk about the lack of savings. There's a very clear reason. The political will from the decentralized units, the states, to save this money was completely absent. I mean every time we had the National Economic Council, chaired by the vice president, the issue was let us divide the money, because the constitution, section 162, they used to cite, says that all monies that come to the federation account must be shared. Some of them were lawyers, some were other professions, and they were very clear.

But section 16 of our constitution says that the federal government shall manage the economy to the benefit of the country. So, under section 16 we tried to say the benefit of the country is to save this money so we can use it, but under 162 it said all the monies—so this is something that Nigeria needs to resolve, this seeming contradiction of which section overrides the other.

But we did manage against all odds to save up to $9 billion by the end of 2013. But because of this pressure, most of the monies were shared and the balance was used to pay for the oil subsidies. We had—you know, sort of rolled back 50 percent but we still had to pay 50 percent. So most of the monies went in that way.

Now the last point I want to make on this, because people need to understand why is it that oil prices were high and Nigeria did not save? Was this a mark of irresponsibility? What happened? This is the true story of what happened. So that is why we do not have savings now.

And, going forward, it's very important for the new government to build up political will, that if oil prices even climb slightly higher, the country has to save. We made that point six, seven, eight, nine times. In fact, it got so bad I stopped going to the meetings of the National Economic Council, because each time I appeared, the first thing is, what is the statement of the Excess Crude Account? Why haven't—what are you doing with the money? Let's share it. You understand? So I stopped going, so they wouldn't even see me. The vice president used to joke that this is not is a strategy that is sustainable.

(LAUGHTER)

So, this is what happened. We need to learn that lesson, that we cannot do things the way we used to do them. And some consensus has to emerge. In fact, the most important thing now, is not even to had the Excess Crude Account but to use the Sovereign Wealth Fund. This is why the Sovereign Wealth Fund was created, so that the Excess Crude Account would disappear and all the savings would be merged.

But we were not mentioning savings and the Sovereign Wealth Fund was also an issue. It was not—we were not allowed to put more money in there. So that's one of the things that happened and that's why we find ourselves.

A third part of that was a quantity shock. At the same time that we were having this trouble with what we were able to save, we also found dramatic drops in quantity of oil, largely due to oil—theft and vandalization. We were losing about 150,000 barrels a day, but in total about 400,000 due to shut-ins. Anytime a pipe was vandalized, a whole pipeline carrying about 4—200,000 barrels was shut down. The net effect was a fiscal shock on the budget. And we also used some of the resources to take care that. So those of the main things.

So we also need to look at the issue of how to deal with this particular problem in order for buffers to be rebuilt.

Now, let me just then say, that looking at these issues, we were able to stabilize under the government of President Goodluck Ebele Jonathan, we did achieve successful macroeconomic stabilization. We did manage for the economy to continue to grow at about 6 percent per annum, but there were two or three things that underpin this, which is my beyond oil point.

The growth of the economy did not deliver—it was not as inclusive as we would have wanted it to be. We saw inequality over time, over the past decade has been rising in the country with the growth, not just now but starting from about 2004, 2005 to now. Our Gini was about 42.9; it's now about 48.9. So inequality with has increased. The Gini coefficient measures the degree of inequality and 100 is—you know, means perfect inequality. So we were moving in the wrong direction.

Even though Nigeria is not as—you know, the Gini is not as bad as in some countries we think are doing well—Brazil is 55, South Africa is 63—but still you don't want the trend to be in the wrong direction.

Secondly, the growth was not delivering as many jobs. Unemployment was high, at about 24 percent, and in some cases we didn't even have the numbers, and the numbers of jobs that we should be creating.

So looking at this—excuse me, let me just...

LYMAN: I forgot to tell people to turn off such devices.

OKONJO-IWEALA: Their phones. Yeah, turn it off, give this to Constance.

So let me now get to the crux. So looking at this during the Goodluck Ebele Jonathan administration, we knew that we had to change some fundamental things. And those things were to take the country really into the diversification agenda. We've been talking about it in Nigeria for so long, but doing it was not a crucial part of the job we had to deliver. And that's what we really focused on during that administration.

So macro-stability, yes, we achieved that, but beyond that, what we were not able to do so well under the Obasanjo regime, because we were really struggling with macro issues, and even under Yar'Adua there was a focus on diversification, we were not able to go into the real sectors and begin to diversify.

So that diversification, let me just say, needed two things to be done. In order for us to truly diversify, we needed to, one, build infrastructure, and then institutions. The infrastructure was necessary because we had problems with the power sector, and without power you can't really, you know, diversify your base. The private sector, manufacturing, SMEs cannot thrive.

Without railroad, all of which had been moribund, you couldn't move. So a lot of attention was spent toward how to rebuild infrastructure, and there was some success there. The railroads which had been moribund for more than 20 years were revived. The Lagos-Canno (ph) line became operative once more, hauling goods. A couple of other lines were being worked on. A new rail standard gauge was also put in motion.

Roads—some new roads, bridges, and so on, that could connect the country were built. The Lagos—Lagos-Benin railroad, for instance, that was in very poor shape, and is an artery, east-west, was rehabilitated, cutting down travel times, et cetera. And inland waterways were dredged. And so—the aviation sector so experienced a start of the rebuilding of our airports. Five new international terminals were being built and 22 altogether, both local and international. So a lot of focus on infrastructure.

The power sector is the most known, because for a decade we have been trying to privatize this. The government had not been successful in providing power. Under this administration, the privatization was finally completed. The sector was liberalized so that you could have investments. We have one or two very good ones now. The Azura, a billion dollar investment that was made in Nigeria by a consortium of 15 class-A lenders. So quite a lot was achieved.

But Nigerians have not felt the impact of the power yet, because we ran into other problems. Gas supplies not being adequate, the gas infrastructure not being in place. These are some of the things that have to be solved in the next administration. One set of issues on infrastructure, a lot of good work begun and done that needs to be continued.

The next set is institutions. And this brings us to the issue of corruption, transparency, and those issues that, you know, have become so prominent that sometimes you mention the name Nigeria, the next thing is people say "corruption."

The country must get away from this image. Must. And the way we need to do it, is observe two things. Yes, first, impunity must be dealt with. All those who perpetrate acts, they should be found, punished, whatever needs to be done, done. But the second part that is not so sexy, and which people don't talk about—excuse my French—is that you cannot fight corruption if you don't have the institutions, processes, and systems in place.

You can punish everyone you like. If you don't build those institutions, the next set of people finding loopholes will do what? The same. So you need to couple both. And that was one of the things—actually one of the things that attracted me back when I went back the second time, was sitting where I was and seeing that so many institutions that Nigeria should have are missing. And if we don't build these, we cannot achieve the results of moving on to be a true middle-income country.

What am I talking about? Some very basic things I want to tell you. We can start with our financial management system. Still on the old model. We needed to build electronic platforms if we want to fight corruption. You need to get away from physical and manual planning, and interaction between the ministries, agencies, and the treasury, into electronic platforms. Given the technology we have now.

You need biometrics to defeat those who are trying to infiltrate the system and take away money corruptly. What do I mean? People putting ghost workers into the system and collect their pay. With biometrics they can't do it. And we set up a system that started even when I was finance minister the first time and continued to today. With that, we weeded out thousands of ghost workers, more than 53,000, and saved about $1.1 billion from money that was being collected.

With technology we have been able to put the government integrated financial management platform, at least the ministries. We don't have to transfer money you know, sort of manually anymore from one department to the other, but all transactions are done electronically. And it has locked out a lot of misuse of money.

That's just to give you an example. That pension system, biometrics. Putting these things together block the opportunity for people. But when you talk of government integrated financial management systems, people's eyes glaze over. They don't understand it, they don't want to know about it. This is not what they want to hear with corruption. But we have to. These are the systems that other countries have, that are more developed, that we just don't have either Nigeria or many African countries and we need to build if we are to be successful.

Another thing, a country in which people, even the working—the lower-middle class, do not have access to a robust mortgage system. There is a human desire, everybody wants a roof over their heads. But if you don't have a system that allows you to access a mortgage, if you have a decent job, what do you do? You have people fiddling. I am convinced that even that lack is one of the things that underpins 30—corruption and so people look for ways to find money to build their houses.

We did not have a mortgage—robust mortgage system in place. The number of mortgages in the country, for a country the size of 170 million, did not exceed 50,000 per year. How do people acquire their houses? One of the things we did in the administration was say no, this should not be. We built the Nigeria Mortgage Refinance Corporation with the help of the IFC, the World Bank and other organizations, to make mortgages available to Nigerians who have jobs, particularly the young. To have them good hope, to have them buy into the dream of Nigeria.

Have you wondered how here in America, you track housing and the progress because of what it does? It's a dream, but it's also a job creator. We didn't have that in Nigeria. And we have done so that Cantor Fitzgerald of the U.S. has now bought into this system, and said it is a very good one, they are going to support it.

Last point on institutions. You could not get—there is no small and medium enterprise in Nigeria that can get a loan for five to seven years. Loans are for one year; if you're lucky, two, or three. How then do you establish an SME? No working capital, no long-term loan, and be able to build the country? We realized that if we are to stimulate the economy and build, we need to put in place an institution that can offer these.

The Development Bank of Nigeria is a new institution that we just started which will offer the ability for SMEs to get loans for five years, seven years, 10 years, with a period of grace of one and a half years, something they have never seen before.

So, if you do not create these institutions, you cannot hope. ICT, the platform, building fiber-optic cable, doing things like providing a means for SMEs in order to thrive. So those are the institutions.

Now based on this, we now looked at the real sector, and I will summarize quickly because I want to get the last part. We now said as we are building these institutions and as we are building infrastructure, we now need to look at the real sector. Agriculture, which are the ones susceptible to creating jobs. Agriculture, housing. As we said, every house you build creates at least 5.63 jobs directly and a lot more indirectly.

The communications technology world, even entertainment industry, this Nollywood—so-called Nollywood in Nigeria, which is now 1.26 percent of GDP. We looked at all the sectors, the real sectors where we could stimulate, making policies that could favor the private sector, and that's what the administration focused on with quite a bit of success.

In agriculture, there has been a revolution in the way we are thinking about agriculture in production. In manufacturing, we also have begun to exploit the big market we have in the country. In knowledge and information technology, I've told you what we've been able to do there. We even started specific schemes to create employment for younger people. Many of these schemes, both for the entrepreneurs, the wind program for the unskilled, the shopee (ph), for the graduates, the government internship—the graduate internship program, all of these designed to help create jobs, stimulate the economy, and move Nigeria's economy to diversify.

I can tell you that when we now re-based the economy last year, Nigeria became the largest economy in Africa. We found that this push for diversification was real, that the fundamentals of the country were strong because the services sector, manufacturing, communications technology, telecoms, all of these things were strong as drivers of economic growth.

The growth that Nigeria experiences today, even the 4.8, is not based on the oil sector, which is actually contracting, but on non-oil. And that's the thesis, that now we know what type of economy we have, we can base our diversification agenda much more on this to really drive the economy to be beyond oil. We have what it takes to do that.

We should see the drop in oil prices not as a difficulty—and it is. It is. It's difficult. The cash situation is tight, because we have had a 50 percent drop in revenue and the resources are much more limited, but it's also an opportunity for the country to really pursue this agenda of diversification.

So given that, and this is the last part of my remarks, what should—what's the agenda for the future? What should our incoming administration look at? I think, first and foremost, they need to—let me mention three or four things that they need to do. The first is to diversify the sources of revenue. We have already begun a good—a good, what do you—drive on this. We started even before—as soon as we saw the results of the rebasing of the economy—and we realize that we have a base from which we can actually collect more taxes.

The idea is to now drive this process. And we hired to help our federal and land revenue service an international company, McKinsey, to help us push—do a diagnosis and then push this. We have been successful. Last year, we got half a billion dollars more than we would have out of this drive, just by strengthening tax administration, and there is still a ways to go. I believe we can get at least $3 billion over the medium-term from that alone.

We can look at other taxes, like increasing the VAT in the budget of 2015. We have proposed that the VAT be looked at, so we have the lowest VAT in the world, 5 percent. We can double it. This will bring another $3 billion, in which will help the state. The VAT is mostly—goes mostly to the states, 86 percent of it, and we have suggested that.

 So we need to diversify the sources of revenues and look toward a 30-70—or should we put it the other way? Right now, it's 70-30, 70 percent oil revenues, 30 percent in non-oil. We want to reverse that and be much more like Mexico in a decade from now, where we are looking at 30 percent from oil and 70 percent from non-oil. This is one of the agenda.

The second thing we need to do, is rebuild the buffer. I already talked about it so I won't harp on it, but we need to focus on the rebuilding that buffer. We need a consensus for the country, an economic consensus, a political consensus going forward. We didn't have it, and we were not able to do that. We need it now moving forward.

I think the third thing the administration, the incoming must do, is to continue to strengthen and build institutions, if it truly hopes to fight corruption and enhance transparency. The work started to really put in place processes that block leakages, that use technology to move us forward. That must be continued. Other institutions, such as NMPC and so on that need to be strengthened and restructured, we must focus on doing that with the passage of the PIB.

And then let me just say that fifth, the diversification agenda is already on, we must continue to strengthen and deepen it in all the areas that I have mentioned. I think that this is the way to get Nigeria beyond oil. And if we are steady on this agenda, I think we will be able to get there.

So this is the thesis of what I want to say. I want to say that change has come to Nigeria. And there's nothing wrong with change if it is in the right direction. That's what Winston Churchill said. We must make sure that the new Nigeria focuses on this economic agenda that I've put forward and adds more. If there are more things that can be done to strengthen the economy, but we need a consensus to continue to move the country to beyond the oil sector. Thank you very much.

(APPLAUSE)

LYMAN: Thank you very, very much, Madam Ngozi. You know, and you have touched on this in your book, "Reforming the Unreformable." You wrote, "In economics, reform is politics. And the idea that they can remain separate is untenable. Thus, it is important that reformers have a plan or a strategy for engaging politicians and lawmakers in the rationale for reforms and getting them to buy in early."

Now looking ahead to the agenda you've laid out, and you have touched on some of the political problems that stood in the way, like the Excess Crude Account, two issues it seems to me are very important. One is the disparities—even though there are general problems as you discussed, there are real disparities between regions, and one of the underlying problems perhaps contributing to Boko Haram, is that if you look at the north, in every category—education, income, unemployment—it is well behind the rest of the country. In the delta, you have the problem you mentioned and the unrest there.

If you were to talk to the politicians and say, now we need a political consensus, we need political buy-ins, how would you deal with that inequality issue? How do you deal with a strategy that gets at some of those issues and is politically acceptable and supportable?

OKONJO-IWEALA: Well, thank you very much. I mean, I don't—I'm not a security person, so I can't comment too much on the Boko Haram issue. But I think we should also look at ideology. You know, not—yes, we have to look at the inequality as being part of it, but really ideology. I'm not sure that all the people in there were poor, or the people driving it, but certainly poverty leads you to converts, you know, people who are willing to join when they see this.

And it is true. If you look at the poverty map, you see that many sections of the north are well behind. But I think that there is a missing link here that people are not getting. The state governments are responsible for primary health care, for basic education and all that, and not enough questions are asked of states, as to how do you spend the money that you have?

In Nigeria it's unfortunate, but virtually everybody's attention is focused on the federal government. And we used—we started to publish the amounts going to states. Even under the Obasanjo administration, this made us very unpopular. But if you read the newspapers every month, you'd find what went to states and local governments, because of this frustration that states would even tell their people that, "oh, they didn't give us any money from the federation account in Abuja this month." That's why we have not paid teachers, that's why we haven't done what we are supposed to do.

So, to answer that question, the fundamental thing is that we must find ways and means to either incentivize states, or hold them accountable, because they get 48 percent of the resources. So, that you can now couple with action by the federal government to support. I think under the administration when there were strong plans for an initiative in the northeast, which is the region with poor indicators.

So I think a combination of holding states accountable for delivering the services they should, coupled with federal government action, you know to support this—not to usurp their role—I think that would help to answer the question. But we must target those areas.

The last thing I want to say on that, is that we started to build a social safety net at the federal level. Frustrated with the lack of progress of what we were seeing, we are with the World Bank now working on a social safety net across the board. We are experimented it in eight states. It works. So we are building a conditional-cash transfer system, that will target those at the bottom end of the ladder, a woman and her five children, and using the poverty map and the new IDs that are going to be printed, I think the targeting, which was an issue, can be solved.

LYMAN: There is one sector you didn't mention that is of concern. Some writers have been focused on, and that's education. The quality of science and other education in Nigeria. Kingsley Muhalu (ph) has emphasized this in his recent book. Nigerian students haven't been doing well compared to others. I realize that's not necessarily entirely a federal issue as well as a state and local government.

But I wonder if you see the education sector as one that, in terms of the transformation and the diversification, isn't going to have to also need a lot of reform.

OKONJO-IWEALA: Absolutely. I mean, I think it does. The education sector, even to some extent the health sector. We really need to transform the education sector, because what we are doing is we are perhaps having people come out with an education, but without the skills to even take advantage of whatever jobs are available. So we need thorough reform on that. We need the number of out-of-school children to be in school. We need to adapt the education system to the realities locally, so that we can attract people. Whether it is, in some cases you do school feeding in order to make sure you tackle that.

You know, the quality—not just the quality but access, both of them need to be dealt with. There is so much that one can say. I often say that in Nigeria, the education sector actually has a lot of resources, because there is a special government tax on companies, the education tax of 2 percent that yields a great deal of money. We first need to look at the efficiency of resource use as well before we even talk of increasing. But yes, I agree with that.

LYMAN: I'm going to turn it over to the audience. I have lots of questions, but we are at a point where I have to give up that privilege and open it up. And I know there'll be a number of questions.

So, if you do get called on, please state your name and affiliation, and ask a question, and be sure you wait for the microphone. I think we have a question right there. The gentlemen right there—over there.

QUESTION: Thank you. My name is Michael Gillette (ph), I am retired from the World Bank. It was, for me, a great privilege to work with our distinguished guests there.

Madam minister, the last time I had to pose a question to you in this forum, I asked you if there would ever be a rainy day fund in Nigeria. And your answer was, it rains all the time in Nigeria. Congratulations. You managed to get there, and I hope you are doing well in replenishing that fund, but it did what it was supposed to do.

The question I have for you now is, how much does Nigeria spend on its military and security needs, A. And B, are you getting any help from outsiders, since many of the issues that you are trying to confront, both at sea and in the north, are spilling over into other people's domains. Thank you.

OKONJO-IWEALA: Yes, do you—should we collect? Maybe...

LYMAN: Yes (inaudible). Connie (ph) right there.

QUESTION: Conne Freedman (ph), Syracuse University. Thank you so much for very enlightening remarks. You mentioned several times the relationships between the federation and the states, and the complexity of that. I think we know even in this country, anytime states get money from the center, there is controversy. I am wondering if any thought is being given now to having the states do more in the area of direct taxation, to take care of some of their social needs, particularly as fewer resources come from oil and more from other sectors in the economy.

LYMAN: I think one more here and then I'll take another round. Gentleman here, and then I will come back to the lady there, and we'll...

QUESTION: Madam minister, Dan Yuragin (ph) from IHS and the director of the council. You obviously said that you are not a security expert and don't want to directly talk about those questions. You did describe an oil shock and an oil quantity shock to the budget in the economy. Is there a Boko Haram shock to the federal budget and to the overall economy, economic prospects, or do you not see that? Thank you.

LYMAN: Three meaty questions.

OKONJO-IWEALA: OK. Very meaty. On the issue of expenditures, we can meet privately.

(LAUGHTER)

And I'll tell you how much, if you want to know. No, I'm not being - we have the numbers, but I have to be a bit cautious. I don't think that it's—there is nothing hidden, but I'm not sure it is proper for me to start announcing how much we are spent when, and over what period of time. I'm not quite sure. But I can tell you that the military expenditures are quite reasonable, and the president contingency most of it goes on helping to support the military.

You know, that time our military did not have all the equipment and ammunition it needed to be able to fight Boko Haram, because at some stage—I just want to make a note on this, because I think that is what is on the line, a lot of the question and about why did the military not confront.

At some stage I remember when I was finance minister the first time, you know, guns and butter decision, just as they did in Europe, was on the table. Do you, as you went into the new Democracy under President Obasanjo, spend more on rebuilding infrastructure after decades of military rule, on education, on health? Or did you spend on equipping the forces. And at some stage a lot more was put into the butter spectrum than I think in the guns' spectrum.

And I think over time that amount of spending to maintain the military, a bit more of the resources we had went into infrastructure and other things. I think—so they needed really to have, you know, rebuild in terms of arms, and ammunition, and so on. I think that that rebuilding has started and it is paying off because of the recent successes we been able to have. They were finally able to acquire some of the arms and ammunition they needed. But, you know, I think recent spending has been quite reasonable.

Any help from outsiders. Well, everybody pledged to help us with the Boko Haram. I think, what I know is that the U.S., China, France, everybody pitched in, or tried to pitch in at some stage, but really it took some time for the regional consensus from Chad, Niger, and Cameroon to take place in order for us to have an effective attack on this problem.

I mean, at some point the president reached out, saying this is a regional problem, it's even a global problem. But initially, it was seen as a Nigeria problem, you know, only, and one based on the fact that people did not have education and therefore they were increasingly being drawn into this. It was not seen as something linked to the international terror group. I think it became evident after that this was the case, and I think more help has been forthcoming from various countries, particularly the neighbors, and that has been quite effective in making some advances.

On the states, can they do—yes. Some states are—there is a lot of variation between states. Some states are actually quite successful in raising their own internal revenue. I think Lagos state is a good example, and what they are doing is here, was a former commissioner, you know, that they drove—they internally generated revenue, very high. And what they get from their tax sources is virtually equivalent to what they get from the federal government. So that is an example of a state that has done very well.

Of course, they have the largest economic base in the country with Lagos, you know, so they are exploiting that. But I think other states are trying, you know, and can also do better, and they should. But there is one problem in Nigeria that we do have—multiplicity of taxes. So we also need to, and saying they should do better, we need to look at what type of taxes they can levy. And, you know, that is clear, and what types of taxes the local governments can, and then harmonize them. Because right now, it is too unpredictable, too scattered. So we need to systematize.

Then the Boko Haram shock to the economy, absolutely. We estimated it at half a percentage point of GDP each year of the past three years.

LYMAN: We will take another round. The lady right back—oh, you've got the microphone already.

QUESTION: Thank you. Hi, I'm Austri Kimble (ph) from Google. Thank you for your remarks, and thank you also for mentioning how electronic platforms can improve government and make institutions work better. We were very pleased to play a role in the elections with local third parties, and we hope that Nigeria's Internet ecosystem can continue to support Democracy.

On that point, restrictions on data flows and data localization, Nigeria is one of the places that has state of localization laws that we think are a significant trade barrier, and I wonder if you could just comment on—your thoughts on that. Thank you.

LYMAN: And then Pauline (ph), can we get a microphone here to Pauline Baker.

QUESTION: Thank you. Pauline Baker from the Fund for Peace. I'd like to move you a little bit more toward the future and ask you about U.S.-Nigerian relations. We go back a long ways, two countries. Nigerians generally are very favorable to Americans, but the relations have been a little rocky in recent months. What is your view looking ahead of the relationship between the two countries, and what would you ask of the United States, now that the administration is changing and you have had a really successful election?

LYMAN: One more question, right back there. Gentleman.

QUESTION: David de Ferranti (ph), Results for Development. You talked about institutions, and in the same theme of looking down the road into the future, what would you like to see not only strengthening of public sector institutions, but the institutions outside the public sector that can move the country in a direction you have emphasized before, which is for better governance and more transparency?

LYMAN: OK. And we'll take one more, the lady right here.

QUESTION: Morianna (ph) Louis from Georgetown University. One of the things that has sort of come and gone as issue of subsidies. As the price of oil goes down, it's sort of a double-edged sword for Nigeria. We're telling a lot of countries, well, you know, it's been a really good idea to get rid of the subsidies now that the price—especially on oil subsidies obviously. But also sometimes for agriculture.

So is this an opportunity or a burden at this point for Nigeria? And how do you see that playing out?

LYMAN: And it is a very political issue with Nigeria.

(LAUGHTER)

LYMAN: OK. You want to take those on?

OKONJO-IWEALA: Yes, on the data restrictions and data localization laws, I'm really not familiar. I have to confess. I am not aware. I don't know if any member of my team knows about this, so I can't give you an answer. But I will find out and I will get back to you.

QUESTION: The idea that data would stay in Nigeria.

OKONJO-IWEALA: And not be used?

QUESTION: And not be used across borders...

OKONJO-IWEALA: I'm very surprised at that. My country is probably one of the most porous, where you can get hold of anything. You know, nothing is a secret in Nigeria.

(LAUGHTER)

I really find it strange to hear about these laws.

QUESTION: Sure, the U.S. government has talked about it as well and singled out Nigeria—I'm sure to follow up with your staff.

OKONJO-IWEALA: Please let us follow up, but whatever it is, I mean, knowledge is king these days. So any way we can share data that could also be beneficial to us, I would personally support that. And I think the minister of communications and technology, who is extremely good, would also be in favor. So let me find out why we have this.

On the—looking ahead, again, I'm an economist. So, this is asking me questions on diplomacy. I think Princeton should answer that.

(LAUGHTER)

But you are absolutely right that Nigeria values the relationship with the U.S. Always has. We patterned our Democracy on the U.S. model. We went and copied everything, lock, stock and barrel. I'm not sure, if—you know, looking at it now, and the problems you have between Congress, and the White House, and the problems that we saw with the budget process, which is the one thing I would have loved to dwell on more, because I believe the way our budget process works now, is broken and needs to be fixed. It's one of the things that the new administration—we—if we had stayed on, this is something we would have worked on.

QUESTION: Ours is broken too.

OKONJO-IWEALA: So I am just wondering, because in the legislature, you know, the way they relate to the budget, you know, hijacks it sometimes is problematic and needs to be solved. But we've—the point I was making is that we love the U.S., we admire the U.S. That will not change.

And I think what is missing, or was missing in the relationship is better communications. I just think that communications didn't work very well. And it can be—both sides are equally sort of culpable. Our ambassador is here. I didn't want to put them on the spot, but you say that he has worked extremely hard to make sure that the relation—but I know that, sometimes when I've communicated, it seems there is a gap in understanding what the administration was doing or was about. I don't think that should affect the relationship between Nigeria.

I would hope that for the future—that I know this will be the case, that the Nigeria-U.S. relations will be on a very smooth path. Actually, if you speak to people from the State Department, they will tell you that they don't really see—I mean, their reaction is that things are OK. But I do think that, you know, we need to open up better communications and rebuild.

And maybe the ambassador, you want to say a word on that?

LYMAN: I'm sorry, we're here—we're down to the last five minutes and I want to take full advantage of Madame Ngozi. I'm sorry.

OKONJO-IWEALA: For our institutions, I think rebuilding institutions there is one set, I'll be very fast, that I think really needs to be mentioned: regulatory institutions. The absence of good regulation within the economy is a problem. This is deliberate. I mean, vested interests have stopped the regulatory frameworks from being put in place.

Where we have had them, like in telecom, it has worked very well. But competition law has been on the books for 10 years. During the first administration and up until now had not been enacted, because it was blocked. So I believe that's one big bundle that needs to be built that would make the private sector work better and be more transparent. There are others, but to me that one is big on my framework.

Lastly, removal of subsidies. You see that in the reforms that I talked about, I carefully—I didn't go around that. As Princeton said, it is highly political, and this administration, the first thing that they tried to do when it started, was try to remove the subsidies because we had a situation in which we had $13 billion was disappearing in subsidies, and then we found a lot of fraud within those oil subsidies, which we subsequently cleaned out.

We were able to phase out 50 percent. This is a golden opportunity to do that. It is a highly political issue. You know, when you have a lot of—a strong Democracy, or strengthening Democracy, is not as easy. I think under the first time I was finance minister it would've been easier. The second time, it became a huge issue. So I do hope that the new government will tackle this head-on, because I think they've got the ambience or they can generate it with which to use—take advantage of this opportunity.

LYMAN: Let me take the privilege of asking the last question. Nigeria faces two big crises. One is the security problem with Boko Haram and all that does, and the other is adjusting to a drastically changed revenue situation. It ripples through every aspect of the economy.

What kind of transition process is underway? This is a new thing, to go from an incumbent administration to an opposition. Is there a transition process that's going to go on in which there's a lot of work together, and then a way to build forward that overcomes some of the partisan things and move together? This is a new thing, it seems to me, for Nigeria. And I just wondered if there is a transition process underway.

OKONJO-IWEALA: Yes, I am happy to say there is. I think the—both the sitting president and president-elect have already met, to talk about putting together a transition team. Actually, the president has named the team on his side, and I believe the president-elect will do so in the coming days. As I said, even on the economic side, we have got some members, who—people who will be important in the new administration on the economic side sitting here. And I think it is marvelous, because it shows that the country really, on the economic side at least, is willing to transit smoothly and, you know, take this issue on.

And I think it is important, because the economy this year, as I said, this year will be a very difficult year. I've said it again and again. You do not—no matter under what management—and I do believe, if I may say so, that we brought all the knowledge to bear in how to keep the economy going during this time on the macro-fiscal side—you need to have really good knowledge to make sure that the economy is held more smoothly when there is a cash crunch, what to do about it, what next to do.

Nigeria is a country that is rich in assets. That's why whenever people tell me the country is broke, I say no, at least in economic terms, you can realize those assets. And that's what we need to move in that direction. So, all that needs a very smooth transition, and I think that will take place.

On the security side you mentioned, I think there have been recent successes and gains. Before you used to see every day on international TV Boko Haram did this—virtually on a daily basis. I think that for the last three or four weeks this has improved. The problem has not gone away. I'm not saying that whatsoever.

LYMAN: Right.

OKONJO-IWEALA: But the kind of coalition we have now gives a chance, and I believe that based on that, again with a transition, the president-elect will be commander-in-chief of the armed forces, and I think that that will be something that I'm sure he will focus his attention on.

But on the economic side we really need very good understanding of what has gone on, and a good understanding of the agenda. If well-managed, the country from 2016, just like the Fund and the Bank said, should be on a better path. But it is a path that should look at oil. Oil prices for the foreseeable future do not look like they are going to go higher, and that is why this issue of beyond oil and building on what is already been put in place, is critical. We don't have to waste time. We just need to keep going and expand the opportunities that they are.

LYMAN: Well, thank you very, very much. I think we all feel there's an opportunity now to move forward through this very contentious election period. But coming out well and a lot to build on, a lot of challenges. We thank you very much for a very candid and very informative presentation. Thank you very much.

OKONJO-IWEALA: Thank you.

(APPLAUSE)

END