LCCI urges incoming govt to address lingering economic issues
President of the Lagos Chamber Of Commerce and Industry (LCCI), Michael Olawale-Cole, has urged the incoming government to focus on tackling the many salient economic issues the country is grappling with presently and make the most of the opportunity given to it by the Nigerian people to serve.
Speaking on the state of the economy in the first quarter of the year, at the Commerce House in Lagos, Olawale-Cole said the global economy has shown some positive signs in the first quarter of this year, as inflation and energy prices eased from their peak levels, especially as China ended its zero-COVID policy, which is expected to provide some growth impulses.
He added that the escalation of the war in Ukraine remains a major source of vulnerability, particularly for lower-income countries like Nigeria, and another range of triggers could spark further deterioration in risk sentiment with adverse growth implications, especially given high levels of public and private debts. “These triggers include geopolitical fragmentation, sudden financial market repricing, inflation persisting and China’s recovery stalling. The International Monetary Fund (IMF), in its world economic outlook update for January 2023, projects that global growth will slow to 2.9 per cent in 2023 from 3.4 per cent in 2022. In most economies, amid the cost of living crisis, priorities remain achieving sustained disinflation and reasonable real growth with tighter monetary conditions and lower growth, potentially affecting financial and debt stability. Also, sentiment indicators, such as Purchasing Managers’ Indices (PMIs) have been signaling a sharp slowdown for months and an array of consumer and business confidence indicators have given similar signals.
Olawale-Cole added that Nigeria’s Gross Domestic Product (GDP) grew by 3.52 per cent (year-on-year) in real terms in the fourth quarter of 2022, compared to 2.25 per cent recorded in the previous quarter and 3.98 per cent in the corresponding period in 2021.
“On a yearly basis, the real Gross Domestic Product (GDP) grew by 3.10 per cent in 2022 compared to 3.40 per cent in 2021. The quarterly growth indicates that the economy has recorded ninth consecutive positive growth despite contractionary monetary policies.”
He revealed that the growth in the fourth quarter was primarily driven by the services, manufacturing and agriculture sectors, which contributed 5.69 per cent, 2.83 per cent and 2.05 per cent respectively. “The growth recorded in the service sector was lower compared to 7.01 per cent in the previous quarter, while manufacturing recovered from -1.91 per cent in the third quarter. Agriculture sector recorded higher growth compared to 1.34 per cent achieved in the third quarter. Contraction in the oil and gas sector moderated to –13.38 per cent in the fourth quarter from –22.67 per cent in the previous quarter. The slight improvement in oil and gas sector was attributed to the improved daily oil production, estimated at 1.34 million barrels per day (mbpd) in the fourth quarter from 1.20 mbpd in the previous quarter, due to reduced oil theft and improved security.”
He added that the recovery experienced in the manufacturing sector may be attributed to strong consumer demand due to the Yuletide season and improvement in electricity supply, but growth in manufacturing remained subdued, due to high inflation, continuous rise in interest rate, forex scarcity, high energy cost, and weakening purchasing power, which could weigh further on the outlook of the sector.
Suggesting recommendations, he said the Federal Government needs to sustain targeted interventions in selected sectors like agriculture, manufacturing, export infrastructure while tackling insecurity; keep track of plans to tackle the menace of oil theft, boost oil exports and earn more foreign exchange.
“Removal of fuel subsidies is, amongst others, expected to spur investments in domestic refining and petrochemicals and create a significant value chain for the various stakeholders. It will also release over N3 trillion per year for social spending as well as create domestic high valued jobs rather than subsidising jobs in other countries.”
“Though the planned removal of fuel subsidies may cause further northward movement of inflation in the short term, it is arguably one of the best economic decisions to reduce our unsustainable debts and widespread corruption in that sector. The government must however take cognisance of its socio-economic implications especially with unemployment at the unwholesome rate of about 40 percent.”
He also suggested improved electricity supply, better roads network and increased connectivity amongst farms, factories, and markets. “Manufacturers should be assisted with subsidised input and more allocation of forex for importation of critical inputs, while the Central Bank provides targeted concessionary credit to the private sector. “While all eyes are fixed on inflation and exchange rates, the authorities must not lose sight of our unhealthy unemployment figure,” he said.
Olawale-Cole said Nigeria’s monetary policy was influenced by external actions and domestic macroeconomic factors in the first quarter of the year, including the Russia–Ukraine war, declining oil prices, heightened geopolitical tension, global inflationary pressures and monetary policy tightening in major economies as well as global capital flight. He added: “On the other hand, the developments on the domestic front included slow economic recovery, persistent inflationary pressure, general election and declining external reserves. Generally, interest rates experienced some increase while the Naira weakened, and inflation consistently witnessed some upward trend during the quarter under review.”
“During the period under review, the interest rates movement in the money market reflected developments in the banking system credit and liquidity conditions. In furtherance of the Central Bank’s monetary policy stance, the Monetary Policy Rate (MPR) was raised to 18.0 per cent in March 2023 from 17.5 per cent in January 2023, while the cash reserve ratio (CRR) and liquidity ratio (LR) remained at 32.5 per cent per cent and 30.0 per cent respectively in March 2023. In addition, the asymmetric corridor around the MPR was retained at +100/-700 basis points. Naira exchange rate continued to record disturbing volatility in the first quarter of 2023. Our position is that monetary authorities need to liberalise the foreign exchange market by unifying the multiple Fx rates and ensuring the rates are market-driven.”
“The headline inflation in March 2023 inched upwards to 22.04 per cent compared to 21.91 per cent recorded in February 2023, 0.13 per cent points higher. The inflationary pressures were primarily attributable to high food and energy prices, clothing and footwears, transport and insecurity and imported inflation. Others include high governmental spending on the just-concluded general elections and forthcoming census; we foresee a further rise in the inflation rate in the near term.”
He added that hiking the MPR has, thus far, proven to be ineffective and insufficient in taming inflation and there is a need for the government to strengthen its support to critical sectors like agriculture, power and energy. “It should also look at ways to improve supply chains as well as cushioning the cost of production. The recent data released by the Debt Management Office (DMO) puts Nigeria’s public debt at N46.25 trillion ($103.11billion) as at end-December 2022 compared to N39.56 trillion ($95.77 billion) in 2021.
“The external debt stock increased to N18.70 trillion ($441.69 billion) in 2022 from N15.86 trillion ($38.39 billion), while domestic debt stock went up to N27.55 trillion ($61.42 billion) in 2022 from N23.70 trillion ($57.39 billion). With N10.8 trillion budget deficit projected in the 2023 budget, the country’s debt stock is expected to inch up to N77 trillion by the end of this current administration in May, if the CBN’s ways and means of N23.7 trillion is securitised and if the current level of borrowing is sustained.”
According to the World Bank, debt service cost of the Federal Government will be in the region of 123.4 per cent in excess of revenue. This is coming after the Federal Government spent a total of N5.24 trillion on debt servicing between January and November 2022, out of its N6.5 trillion retained revenue for the same period, according to the finance ministry. The amount puts the country’s debt service-to-revenue ratio at 80.6 per cent for the period under review, far above World Bank’s recommended 22.5 percent for low-income countries like Nigeria.
“The LCCI is of the view that the government’s fixation on debt accumulation is unhealthy. Hence it should explore other avenues, including opening equity opprotunities and offloading/ sales of its real estate holdings. The government should also make the problem of oil theft, with the removal of oil subsidy regime, a thing of the past to help create room for fiscal manipulation,” Olawale-Cole said.
He went on to add that the chamber has placed a responsibility on itself to share the concerns about the 2022 finance bill as approved by the National Assembly as it awaits the assent of Mr. President. He said that after reviewing the bill, statistics reveal that Nigeria struggles to attract investments into the oil and gas industry and investments in that sector have declined significantly in the last seven years. “The operational overheads of oil and gas companies remain above 40 per cent. This is above the global benchmark. In line with FGN priorities and ongoing initiatives to give incentives for gas production, several sections of the Petroleum Industry Act (PIA) clearly show the determined efforts by the government to limit gas flaring and contain steep penalties. Also, gas flare fees/costs are treated as a penalty and as such a non-tax-deductible item. Oil and gas companies in Nigeria have reduced flaring by 70 per cent since 2000 while nearly doubling overall production and commercialised volumes in four-folds.
“With the plan to exit some large enterprises from the pioneer status incentives, the government can save about N6 trillion (waivers, exemptions, incentives granted by the government), according to the Minister of Finance, Budget and National Planning in her 2023 budget presentation. We urge the government to tread measuredly in raising tax rates, since there are new ways of rescuing tax expenditures to add up to government revenue in 2023. Leaving rates at their levels will not lead to a loss of revenue. The oil sector’s contribution to GDP in 2022 was just around 5 per cent but this sector accounts for over 85 per cent of foreign exchange earnings and about 50 per cent of total government revenue. This suggests that this sector requires a sensitive regulatory environment to avoid disruptions to investments,” Olawale-Cole said.
He went on to add that based on feedback from operators in the oil and gas sector and the wider business community, the chamber recommends the retention of the tertiary education tax (TET) rate at 2.5 per cent retaining the 30 per cent per cent Companies Income Tax (CIT) for all oil and gas companies, amending the Petroleum Profit Tax Act with the same provision in the Petroleum Industry Act (PIA) section 104, gas flare-out projects should be supported with the right incentives and finance bills be presented for extensive stakeholders’ consultations before the National Assembly passes them into law.
On achieving revenue targets, he said Ministries, Departments and Agencies (MDAs) and Government Owned Enterprises (GOEs) could intensify their revenue mobilisation efforts in an enabling environment where the private sector thrives. “We commend the Federal Government’s planned policy that all payments from the public treasury beyond the threshold approved for daily cash limit by the Central Bank of Nigeria must be done electronically with effect from March 1, 2023. The implementation of this policy and the strict monitoring of it can be very effective in deepening a cashless economy,” he said.