How economic managers can avoid mistakes of 2016
Muda Yusuf is the Director-General of the Lagos Chamber of Commerce and Industry (LCCI). In this interview with FEMI ADEKOYA, he gives an assessment of how the economy performed in 2016 and measures to take to avoid a repeat in the current year. Excerpts.
What is your assessment of the business and economic environment in 2016?
Developments in the economy and the business environment were influenced largely by global and domestic factors during the year. The economy slipped into recession, having suffered contraction for three consecutive quarters. There were negative gross domestic product, GDP growths of -0.36 per cent, -2.06 per cent and -2.24 per cent in the first, second and third quarters of the year respectively.
The features of a declining economy had long manifested in the horizon before the declaration of technical recession. We had weak and declining purchasing power, high unemployment, weak investors’ confidence, weak fiscal position of the government at all levels; drop in sales and private sector profitability, low and declining capacity utilisation, among others. High energy cost, escalating cost of transportation, high interest rate and weak exchange rate impacted on productivity and competitiveness across all sectors of the economy. Inflation reached a peak of 18.4% in November, from 9.6% in January, the highest in recent years.
The economic challenges were further complicated by persistent attacks on oil installations in the Niger Delta, which led to considerable losses in oil production and exports, this impacted revenue and foreign exchange earnings. The agricultural sector was negatively impacted by security challenges in the North East and North Central parts of the country. There were sporadic attacks by the insurgents and herdsmen on farming communities.
The Nigerian stock market was largely bearish in 2016. Depressed international oil market, exchange rate crisis and monetary policy effects induced negative pressure on the Equity Market. However, there are prospects for good returns in Nigerian equities over medium to long terms, as most stocks are currently trading far below their book values.
There were fiscal and monetary policy responses to the prevailing economic conditions during the year. Flexible exchange rate policy was adopted, petroleum product subsidy was discontinued, fiscal leakages were blocked, treasury single account (TSA) was introduced and tax revenue optimisation was scaled up. These were the major policy milestones some of which were painful but inevitable. The expectation is that confidence will be restored, but it will take some time. The issue about confidence is that it could be swiftly lost, but difficult to regain.
On the fiscal side, a number of commendable steps were taken; the petroleum subsidy which was exerting a tremendous pressure on the nation’s finances was discontinued. The present administration took steps to curb corruption and recover looted funds. The impunity with which public funds were looted has reduced considerably. Tax administration efficiency level also improved.
On the global scene, the decision of Britain to exit the European Union (BREXIT), and the election of Mr Donald Trump as President-elect of United States of America, would have an impact on the global growth trajectory in the short to medium term. These developments would have implications for commodity prices and remittances from Diaspora Nigerians.
How did all these events affect investors’ confidence in 2016?
There was a sharp drop in investors’ confidence during the year, following the weak growth numbers and the fact that the economy slipped into recession. There was consequently a slowdown in the tempo of economic activities with implications for job retention and job losses. Other factors that contributed to the weak investors’ confidence include but not limited to sharp currency depreciation of over 100 per cent, liquidity problems in the foreign exchange market, which manifested in the acute scarcity foreign exchange for most part of the year, high interest rate regime, multiple exchange rates, and policy uncertainty.
What about the monetary policies initiated during the year?
The Central Bank of Nigeria maintained a tight monetary policy stance for most part of the year. Key monetary policy variables were kept high – Cash Reserve Requirements, Liquidity Ration, and Monetary Policy rate. This policy stance impacted on interest rates during the year, keeping lending rate at well over 20% for most borrowers. The high yields on treasury bills and federal government bonds did not help matters, as they had a crowding-out effect on the private sector in the financial markets. Financial intermediation roles of the banks were also impaired, as banks and other financial institutions invested heavily in the government treasury instruments.
What impact did fiscal policies have on the economy during the year?
The trade policy regime in 2016 was understandably very protective because of the competitiveness issues faced by domestic manufacturers. However, the tariff regime on some critical components in production aggravated operating cost in some segments of the economy. The impact of tariffs was more profound because of the currency depreciation, which led to a phenomenal increase in the naira equivalent of the value of imports. The exclusion of 41 items from the interbank forex market had a profound negative effect on some segments of the manufacturing sector, especially in the pharmaceuticals, steel, chemical and plastics industries.
The high tariff on automobiles also had a severe impact on transportation costs because of the twin issues of currency depreciation and high import duty. Dealers of the leading brands of automobile had a major challenge of marketing their products because of the prohibitive costs. New cars attracted 35 per cent import duty and 35 per cent levy, making a combined tax of 70 per cent. This development pushed the cost of new cars beyond the reach of many middle class families and small and medium sized corporate entities. A new one litre engine capacity car now costs between N4million and N5million; 1.8 litre capacity engine car now costs between N10million and N15million. The 35% import duty on trucks and commercial buses was also a major source of burden for those in the haulage and transportation business.
The cost of energy remains a challenge yet to be addressed by the Federal Government. How did this impact on businesses during the year?
The year was characterised by high energy cost. There was acute scarcity of gas, and when available the cost was prohibitive. The story was the same for diesel and LPFO, which were used as sources of fuel by many manufacturers. The SMEs complained about the high electricity bills by the electricity distribution companies. The aviation sector also had its share of challenges with scarcity of aviation fuel, which caused frequent flight delays and cancellations. The high energy cost naturally impacted on production and operating cost during the year.
What sectors were mostly affected by these policies during the year?
The maritime sector was one sector where the impact of the economic recession was very evident. The combination of currency depreciation and high tariffs resulted in sharp decline in the volume of imports into the country. This led to a considerable lull in maritime sector activities. However, there was some improvement in the export activities at the ports, as the weak currency was a major incentive to exports.
The high tariffs on automobiles resulting from the automotive policy made prices of vehicles, especially new cars very prohibitive. The resultant decline in vehicle imports was very manifest at the vehicle imports terminals at the Lagos ports. Other factors that affected the tempo of activities in the ports include the exclusion of some items from the official forex window and the general liquidity problems in the foreign exchange market.
For the manufacturing sector, the major factors that affected manufacturing in the year were as follows:
• Currency depreciation, which escalated the cost of imported raw material and other inputs. This had a profound effect on production and operating costs.
• Liquidity challenges in the foreign exchange market resulting in severe scarcity of foreign exchange for the importation of raw materials and other inputs.
• High cost of fund, with interest rate well above 25% in many instances.
• Weak purchasing power which affected sales and consequently the profit margins of the business.
• High energy cost -gas, diesel, LPFO were for most part of the year either very scarce or costly or both.
What were the bright spots in the economy during the year?
Enterprises with high local content gained good competitive advantage in the current economic condition. Exporters got better returns on their investment because of the currency depreciation. The concept of backward integration gained greater acceptance because of the high cost of imports. Recycling of wastes also gained greater business interest and profitability. Services export became more profitable because of the currency depreciation.
How can these challenges be addressed in 2017?
A framework to ensure the liquidity of the foreign exchange market should be urgently put in place. This is critical to restore investors’ confidence, enhance forex inflows, boost foreign direct investment (FDIs) and Foreign Portfolio Investors (FPIs), and reduce the level of uncertainty in the economy. The tight monetary policy regime should be relaxed to spur domestic investment and consumer spending. Import tariffs should be reduced across board to moderate the current high cost of goods and services, boost investment spending and enhance disposal income of citizens.
Currency depreciation is inherently a very potent protective mechanism for local production; enhances the competitiveness of products with high local content. Sharp currency depreciation and high import tariffs put together pose a major burden of cost and inflation on investors and citizens. The shock of the simultaneous impact is profound.
Import duty on motor vehicles (trucks and cars) should be reviewed to bring down distribution and transportation costs in the economy. The automotive policy should be urgently reviewed and reworked. In order to tackle the problem of hunger, the current commitment to agriculture should be sustained. But this should go beyond crop production. It should cover the entire value chain of production, storage, processing, transportation and marketing. Food processing firms should be given special incentives (tariffs and taxes) to reduce the price of staple foods such as bread and noodles.
The exclusion of the 41 items from the official foreign exchange market should be reviewed to exempt the critical manufacturing inputs (as listed by the Manufacturers Association) that are currently on the list. Import exclusion policy should be managed within the context of the trade policy framework.
Engagement with the Niger Delta stakeholders should be intensified to reduce the disruptions to oil production and consequently stabilise the fiscal position of government. Liquidity in the power sector should be enhanced to ensure improvement in power supply. It is heart-warming that all arrears owed the power firms will be paid in 2017, according to President Buhari at the recent budget presentation to the national assembly. It is equally important to ensure adequate capitalisation of the Electricity Bulk Trader to provide liquidity to the GENCOs and the Gas suppliers. The private sector owners of the power firms should also inject greater equity finance into the investments. The policy of issuance of visa on arrival should be accelerated and expanded in scope to boost the inflow of foreign investment and grow the hospitality and tourism sector.