‘A framework to ensure liquidity of the Foreign Exchange Market is imperative’
As Nigerians look forward to the coming year, 2017 with hopes and expectations, and bid bye to 2016, with all its unending monetary and fiscal policies that refused to heal the wounds of the economy, the masses in particular will not forget so quickly as the outgoing year will be remembered for what it is, lamentations and tales of hardship occasioned by the prevailing wind of recession that still bites hard across the country.
Developments in the economy and the business environment during the year were influenced largely by global and domestic factors. The economy slipped into recession, suffered contraction for three consecutive quarters.
Analysing the economic performance of year 2016, the Director-General, Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, said 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, he noted, had long manifested in the horizon before the declaration of technical recession. He said, “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 18.5 per cent in November, from 9.6 per cent in January, the highest in recent years,” he added.
According to him, the economic challenges were further complicated by persistent attacks on oil installations in the Niger Delta, which led to considerable loss in oil production and exports, impacting negatively, revenue and foreign exchange earnings.
He states: “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.”
Other factors that contributed to the weak investors’ confidence, he said, 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, as remittances was a major problem for many foreign investors and airlines during the year; high interest rate regime; multiple exchange rates; policy uncertainty, and security concerns in parts of the country were some of the issues that impacted on the investors’ confidence during the year.
In the area of monetary policy, the LCCI chief said the Central Bank of Nigeria (CBN) maintained a tight monetary policy stance for most parts of the year to tame inflation and reduce pressure on reserves, adding that key monetary policy variables like Cash Reserve Requirements, Liquidity Ratio, Monetary Policy rate were kept high.
Looking at the trade policy, Yusuf stated that 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 impacts of these tariffs were more profound because of the currency depreciation, which led to a phenomenal increase in the naira equivalent of the value of imports. This had a corresponding impact on import duty paid by importers. 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.’’
Despite these negative effects, Yusuf said there were major policy milestones, some of which were painful but inevitable. Among these policy milestones were fiscal and monetary policy responses to the prevailing economic conditions during the year, which he said are prospects for good returns in Nigerian equities over medium to long terms as most stocks are currently trading far below their book values.
“Flexible exchange rate policy was adopted, petroleum product subsidy was discontinued, fiscal leakages were blocked, treasury single account (TSA) was introduced and tax revenue optimization was scaled up. 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,” he explained.
On the way forward for the economy in 2017, the LCCI DG said, a framework to ensure the liquidity of the foreign exchange market should be urgently put in place, saying that this is critical to restore investors’ confidence, enhance forex inflows, boost FDIs and FPIs, and reduce the level of uncertainty in the economy. Also, the tight monetary policy regime should be relaxed to spur domestic investment and consumer spending.