Economy in 2016: Same tricks, motion without movement
Optimism has never ceased to be part of Nigerian system. But in unfailing manner, it has never wished away realities. The outgoing 2016, came with promises from government, expectations from entrepreneurs, external shocks from a mix of international politics and economic development and outlook for domestic response through monetary and fiscal policies.
Presently, a “basket measure” of the dynamics above gave Nigeria a “unique” position among the league of nations; a poor human development index for the citizens; and confusion for the country’s leadership, which stock in trade during the period was more of “trial by error” rather than precision.
To Abuja-based development consultant, Jide Ojo, promises by government to improve the business climate, got stuck earlier in the year with challenges in sourcing foreign exchange, the floating of exchange rate, high-interest rate on loans, the lingering challenge of availability and affordability of electricity, the soaring incidences of crimes and criminality. “Coupled with the slipping of Nigeria’s economy into recession, these have all impacted negatively on the country’s business environment. This year, there are more businesses, which shut down than new ones created.”
The Managing Director of RMB Nigeria, Michael Larbie, said that 2016 is a challenging year for the country, as recession, rising inflation and foreign exchange shortage brought every economic activity to near standstill.
“These impacted our manufacturing clients as they shut in production because of shortage of raw materials. There is a negative real interest rate.
In fact, it has affected the broader economy. Clients have cut back long term investments due to uncertainty and correspondingly, these slow down also speaks more of our individual and industry performance- slowing growth. We will surely put 2016 behind and look ahead with optimism in 2017.
“Government is a big player in the economy and where it is failing, definitely it is going to affect overall performance,” he said.
Quarter By Quarter Outcomes
THE crude oil rout, which reduced the country’s foreign exchange earnings’ capacity and Federal Government’s revenue stream, reached as low as $28 pr barrel in the first quarter of the year.
With persistent pressure from huge forex demand amid declining inflow, the reserves fell far below $30 billion mark by the end of March, stoking speculations and widened the official-parallel market exchange rates. It was indeed, the height of calls to devalue the naira.
“This fall in oil prices also implies that the CBN’s monthly foreign earnings have fallen from as high as $3.2 billion to current levels as low as $1 billion. Yet, the demand for foreign exchange by mostly domestic importers has risen significantly.
“For example, the last time we had oil prices at about $50 per barrel for an extended period was in 2005. At that time, our average import bill was N148.3 billion per month. In stark contrast, our average import bill for the first nine months of 2015 was N917.6 billion per month, even though oil prices are now less than $35 per barrel.
“The net effect of these combined forces, unfortunately, is the depletion of our foreign exchange reserves. As of June 2014, the stock of Foreign Exchange Reserves stood at about $37.3 billion, but has declined to around $28 billion as of today,” CBN Governor, Godwin Emefiele, said in January this year.
As at the second quarter of the year, government’s revenue target has faltered significantly with over 40 per cent. This is because companies are no longer getting the required foreign exchange and are shutting down, with attendant disengagement of workers.
The exchange between the local currency and the rest of the major currencies was floated. Shortly after that, a Futures platform, where people could lock-in deals for future use at current prices were opened.
Known as FMDQ OTC FX Futures market, since then, the value of opened contract closed last week higher at $3.88 billion.
By third quarter, the implications of prolonged decisions in fiscal and monetary polices, as well as forex-induced snag in the overall economic activity in the past six months were confirmed as recession.
Already, financial analysts and economists are at it again, with projections of a negative outcome for the fourth quarter of the year. Of course, standard of living has degenerated so much that people would need the figures that are due by February 2017 to know that all has continued to be bad for the country throughout 2016.
Real Sector Operations
SOME manufacturers had alleged that since the forex restriction started in 2015, 272 firms had been forced out of business, 50 of these, were manufacturing companies.
In a report on the manufacturing sector by NOI Polls Limited and the Centre for the Studies of Economies of Africa in August this year, the Manufacturers Association of Nigeria (MAN) said majority of these companies have relocated to neighboring countries. It added that 222 small-scale businesses shut down, with 180,000 job losses.
As a response, the Central Bank of Nigeria (CBN) directed that 60 per cent of available foreign exchange should be allocated to the manufacturing sector.
The President of MAN, Frank Jacobs, who acknowledged the development, said: “This is an opportunity for the manufacturing sector to determine the exchange rate of the dollar. I will encourage our members not to bid too high, to also understand the power they have today to determine the exchange rate. With 60 per cent allocation, the banks will be willing to sell to manufacturers at a comfortable rate because they cannot keep their dollars.”
The Acting Director, Corporate Communications Department, CBN, Isaac Okorafor, said that in October, CBN kept its promises to the real sector operators to ensure that their forex demands were met.
To ease the pressure on manufacturers and other strategic actors in the Nigerian economy, it gave access to about 7,792 requests for foreign exchange valued at over $867 million through the inter-bank window to enable them source vital raw materials and spare parts for their respective industries.
A summary of the forex utilisation for the month of October 2016 indicated that the raw materials sector received the highest allotment, getting access to foreign exchange valued at $355.7 million or 40.99 per cent of the total value of Forex utilization for the month put at $867.8 million.
Statistics obtained from the Central Bank of Nigeria (CBN) in Abuja showed that the manufacturing and petroleum industries got access to $91.3 million and $151 million respectively.
Companies and other interests in the agricultural sector got access to $13.7 million for the period, while entities in the aviation sector received $10.3 million for the same period. Finished goods and others got allotments of $43.8 million and $10.8 million, respectively.
Invisibles, comprising of school fees, students’ upkeep and medicals, among others, received $191.3 million or 22.05 per cent of the figure.
Till now, real sector operators and stakeholders, including the Lagos Chamber of Commerce and Industry, are insisting that the forex policy must be reviewed.
Monetary and Fiscal Operations
SPECIFICALLY, on June 22, 2016, the Central Bank of Nigeria (CBN), opted for a floating exchange rate policy, as opposed the then subsisting peg policy.
It was a welcome development as analysts and investment banking companies said it would only take transparency in the operations of the new regime to reverse capital flight and stabilise the local currency.
In less than one month after the inauguration of the new policy option, as well as naira stability at both the official and parallel market, the local unit bowed to pressure from both legal and illegal demand for forex.
The exchange rate at both markets moved to N285/$ and now N306/$ at the interbank, while the parallel market slid from N365/$ and now at N485/$.
POOR budget implementation has remained an albatross for the country’s development. For instance, out of the 2016 capital vote of about N1.6trillion, only N753.6billion had been released at the end of October. The President was, however, silent on how much was cash backed as at that date. It is not, therefore, sufficient to make proposals, which may not be followed through at the end of the day. It is also imperative for the administration to ensure that the bulk of the capital expenditure is developmental rather than administrative. This is the only way it can have a direct impact on the majority of citizens.
In 2017 budget, the first issue is that capital expenditure is to take 30.69 per cent of the budget. While this looks good on paper, previous experience indicates that the capital vote is very poorly implemented.
In the proposal that was recently presented to the National Assembly, the deficit is in the sum of N2.36 trillion and it is to be financed mainly by borrowing the sum of N2.32 billion from external and domestic sources. This will further add to our already high debt profile. The deficit is 32.34 per cent of the overall expenditure of N7.298 trillion.
The first challenge of the revenue framework is on the expected revenue from oil. The lack of a clear path for the resolution of the insurgency in the Niger Delta region will affect the ealization of the projection for oil revenue. The President indicated that disruptions in crude oil production partly contributed to significant shortfalls in projected revenue.
Of course, if the country could not meet the 2016 projection, and without resolving the challenge, it is likely that the 2017 projection will not be met. Still, the $42.5 benchmark price seems realistic if only the oil cartel members and other oil producing nations stick to the current path of cutting down on production.
THE emergence of the Treasury Single Account operations came with a mix of optimism and anxiety based on its assessed benefits and costs. In about 15 months after the implementation of this policy, the government has a “story book” of the gains, but not without a record of non-compliance by some “dare-devil” agencies.
Banks were the first to get the hit from the emergence of TSA, as government’s hidden and idle funds were withdrawn to the new account domiciled at CBN.
Consequently, they began the jostle for liquidity. The implications so far, have been a scale down of operations, leading to mass sack in the industry. On the other hand, it has re-awakened them to their traditional role, leading to increased retail banking now.
The mass sack reduced government accrued personal income tax level and company income tax too, as profit level dropped, due to credit squeeze.
As at last check, 33 agencies were involved and the value was put at about N450 billion. These agencies, against all warnings to transfer these monies into the federal treasury, damned the consequences and were operating as “usual.”
Currently, a bottleneck in the operations has been identified, with respect to the activities of some government agencies and as usual, this policy would soon have some level of reversals in the form of exemptions.
Bureau De Change
THE money changers under the aegis of Association of Bureau de Change Operators of Nigeria (ABCON) were brought back to business in July 2016, after months of non transactions with the apex bank.
To many commentators, it was one of government’s policy inconsistencies, but the latest move, was part of strategies to quell the continued depreciation of the Naira in the parallel market, as well as reduce opportunity for round-tripping among banks.
However, the latest move was that instead of direct sale by the regulator, the operators would now buy from Diaspora remittances in banks at stipulated rate.
CBN, had on Monday, January 11, 2016, suspended dollar sales to BDCs due to decline in the country’s foreign exchange earnings, and sharp practices by the operators.
“In particular, we have noted with grave concern that Bureau de Change, BDC, operators have abandoned the original objective of their establishment, which was to serve retail end users, who need $5,000 or less. Instead, they have become wholesale dealers in foreign exchange to the tune of millions of dollars per transaction. Thereafter, they use fake documentations like passport,” Emefiele said.
NIGERIA’S inflation level continued upwards direction as it reached 18.48 per cent in November from 18.33 percent in October, the 10th consecutive rise.
The level now measured as 11-year record high, will keep standard of living under pressure, with general rise in prices, high costs of funds and extended negative rate at 4.48, which is a disincentive for investment.