2016 economic outlook positive, says LCCI

‘Exchange rate adjustment likely in first quarter’
WITH the right mix of fiscal and monetary policies to stimulate the economy and attract investments in 2016, Nigeria’s Gross Domestic Product (GDP) may rebound to about 3.5, despite a potential high inflation of about 11 per cent due to exchange rate volatility, the Lagos Chamber of Commerce and Industry (LCCI) has projected.

In its 2015 economic review and outlook for 2016, the chamber stated that while recovery from a slow-paced growth is expected to be driven by increase in government expenditure, the growth in oil sector may be constrained still by low price and investment drive.

Despite an expected high inflationary trend in 2016, the LCCI noted that correction towards Real Effective Exchange Rate (REER) in the form of exchange rate adjustment is likely in the first quarter of 2016 in order to reduce the pressure on external reserves. The LCCI also noted that in 2015, unfriendly business environment continued to undermine the capacity of investors to maximise abundant business opportunities in Nigeria, Africa’s largest economy.

The chamber expressed concerns that with the drastic fall in oil price (currently at $35 per barrel), heavy fuel subsidy bill nearing N1 trillion in 2015, wide spread insolvency among state governments across the country, increasing sovereign debt (about $60 billion, including debt provisions in 2016 MTEF) and debt service obligation of N1.3 trillion in 2016, the financial crisis may linger in the new year. The chamber, however, said subsidy arrears payment and removal of subsidy may result in improved market efficiency and profitability as downstream sector players explore pricing dynamics to boost investment.

Director-General of LCCI, Muda Yusuf, explained that the macro-economic environment in 2016 would be characterised by clearer policy space, expansionary fiscal stance, huge debt profile, improved power supply and infrastructure, PIB acceleration and downstream deregulation and blocking of leakages through the Treasury Single Account (TSA).
In its sectoral outlook, LCCI noted that the targeted N300 billion by Nigerian banks to boost lending to Small and Medium Scale Enterprises (SMEs) and the agriculture sector in 2016 would boost development of small businesses and employment generation as well as increase non-oil export.

“The insurance industry will remain largely under-penetrated with insurance density at about 0.225 per cent. Therefore, significant change in this industry with respect to growth and penetration remains bleak even as the sector is still highly fragmented. The declining GDP is also expected to strain, to a large extent, the performance of the industry.

The expected deregulation in the downstream sub-sector will be a game changer. With the declining trend of global oil price and its attendant impact on government revenue and foreign reserves, general business outlook will remain tense. Implications on cost of and access to credit will be undesirable. Businesses, especially those with high forex exposure, will continue to face challenges of meeting foreign obligations to suppliers and partners. This will also impact contractual trust and integrity.

Risk of default in financial obligations in both public and private sectors will be high as macro-economic conditions and cash flow remains tight”, the chamber added.
Yusuf noted that 2015 was challenging as the difficulties in the business environment persisted, especially in relation to insecurity in parts of the country, infrastructural conditions, foreign exchange crisis, funding issues, consistency of policy and the quality of institutions.