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Reviving the ailing economy

Reviving the ailing economy

1 October, 2020

By Dr. Muda Yusuf

 

Over the last six decades, the structure of the Nigerian economy has transformed from an agrarian-based economy to an economy heavily reliant on the oil and gas sector. Despite the non-oil sector contributing as much as 91 per cent to aggregate economic output and the oil sector controlling about nine percent, yet the latter accounts for over 60 percent of the country’s fiscal revenue, and over 80 percent of total export proceeds. This reflects the mounting imbalance in the country’s economic structure since attaining independence in 1960, and also underscores the weak productivity level of the non-oil sector over the past six decades. Sixty years after political independence, the country’s economic fate is still significantly shaped by trends in international oil prices and this has continued to make the economy vulnerable to shocks in the global energy market

The two decades of uninterrupted democracy in Nigeria has earned the country some goodwill as one of the few stable democracies in Africa. However, we note that the core values and ideals of democracy are yet to take firm root, particularly in the following areas:

 

  • Transparency and accountability in public financial management.
  • Rule of law.
  • Separation of powers and inherent      checks and balances,
  • Autonomy of democratic institutions      – Electoral Bodies, Law Enforcement         Agencies, Judiciary.
  • Citizen engagement in democratic       process.
  • Practice of federalism.

The LCCI recognises that Nigerian democracy is still work in progress.  However, as in many advanced democracies, it is crucial to recognise the importance of these democratic ideals in order to sustain our democracy and ensure the advancement of the common good for all citizens.

 

Economic performance

Economic growth trend, measured by the growth of the Gross Domestic Product (GDP), has not been too impressive in the last six decades. According to data by the World Bank, the Nigerian economy reported annual contraction 13 times (1966, 1967, 1968, 1975, 1978, 1981, 1982, 1983, 1984, 1993, 1994, 1995 and 2016) between 1960 and 2019. It remains a major worry that the economy is still structurally defective given its excessive dependence on the oil & gas sector, and this creates serious vulnerability risks. Regrettably, successive governments failed to utilise proceeds from oil exports during periods of high oil prices to develop and strengthen the capacity of the non-oil sector, especially in fixing infrastructure.

Even before the emergence of the Covid 19, the economy was confronted with myriad challenges including spiralling inflation, portfolio investment outflows with attendant impacts on external reserves and exchange rate depreciation, rising debt profile and sustainability concerns, poor domestic revenue mobilization, huge infrastructural deficit, tough operating environment, high unemployment and poverty rates, weak economic growth, contracting income per capita and lack of synergy between fiscal and monetary policies.

The impact of the covid-19 pandemic on the economy has been very profound, with the International Monetary Fund and the World Bank anticipating a contraction of 5.4% and 3.2% respectively by end-2020 which would be the fourteenth annual contraction since the country gained independence in 1960. The occurrence of the covid-19 crisis propelled the fiscal authorities to take bold steps on age-long policy reforms required for medium to long-term macroeconomic stability. Notable in this regard includes the economic liberalization in the downstream segment of Nigerian oil & gas industry, as well as the power sector. While these reforms might have led to some form hardship in the short-run in terms of rising price of goods and services, we believe these developments are for the good of every Nigerian as it would help free up resources for investment in critical sectors of the economy.

The transformation in the telecommunications sector stands out as the most successful reform story in the recent Nigerian economic history. Today, ICT is the fastest growing sector in the country. Many sectors leveraged the transformation in telecommunication sector to make significant progress through the use of ICT, especially in the services sector. The financial services sector has been significantly transformed since independence through the maximization of new technologies to improve quality of service delivery. The sophistication of the industry compares with its counterparts in developed African economies like South Africa and Egypt. However, the financial intermediation role of the Nigerian banking system is still unsatisfactory. Due to the risks in the macroeconomic and business environment, banks prefer investing their resources in risk-free government securities rather than extending credit to critical sectors of the economy. This has constrained the impact of the sector on the economy from a systemic perspective.

The quality of the business environment remains a source of concerns to investors, especially in the real sector. Since the global oil crash of 2014, investor confidence has been low in the economy, evidenced by the insignificant share of foreign direct investment in aggregate capital importation. Structural issues such weak infrastructure, high cost environment, poor regulatory quality and instability in the policy environment have had adverse effect on the efficiency, productivity and competitiveness of our local industries. These conditions pose a major risk to job creation and economic inclusion across sectors.

 

Areas of concerns for investors

 

Power Situation

Before September 1, 2020 when the service reflective tariff model kick-started, the power situation constituted a major burden on the economy and business community. Despite the privatization reforms in which private entities took control of the generation and distribution arm of the industry, the power situation in the country never saw any significant improvement even as the economy loses two percent of its annual GDP to inadequate grid supply. The situation also affected the productivity and profit performance of businesses, and manufacturers became less competitive in the international market as a result of high production costs.

We believe the implementation of the service reflective tariff regime is the most sustainable policy option needed to attract and sustain investment in the sector. While the tariff increment might have generated some form of economic hardship for the populace, we believe the development would stimulate private sector participation in the sector by encouraging investments in power infrastructure for improved service delivery while also ensuring equity between power consumption and cost. The Nigeria-Siemens Deal is also a right step towards resolving the inefficiencies and deficiencies in the power sector. The Solar Home Initiative is another development in the areas of expansion of energy access and rural electrification. We believe it is imperative for the Federal Government to address other frontline challenges plaguing the power sector, and this includes gas supply shortage, limited distribution networks, huge metering gap, limited transmission lines, outdated equipment and electricity theft.

 

Security Situation

The security situation in the country deteriorated in recent years. Activities of the Boko-Haram sect and Fulani Extremists have made the Northern region, particularly the North-eastern geopolitical zone unsafe for human habitation and business conduct. The rising spate of insecurity has impacted on investment risk and worsened the country’s perception and image by the global investment community. Access to markets in the troubled parts of the country has reduced for many enterprises with negative consequences for investor’s confidence.

Related to this are the many cases of ethnic and religious conflicts, herdsmen attacks on communities and kidnapping. The incessant oil theft and the vandalization of oil pipelines remain major concerns for investors in the oil and gas sector. Billions of dollars have been lost in revenue; many lives have been lost as well. The oil producing communities have suffered serious environmental degradation as a consequence of this problem.

 

Real Sector

Over the last few decades, the challenges of production in the economy had grown progressively largely because of the quality of infrastructure, which is why the risk of industrial investment is high and continues to increase. The various policy interventions have not had the desired impact on the sector. Unless there is an effective and sustained protection and support for the sector, and a dramatic improvement in infrastructure, the outlook for the sector will remain gloomy, particularly for the small-scale industries.

It is impossible to have a vibrant manufacturing sector in the face of cheap imports into the country, and high production and operating cost in the domestic economy. Some of these imports are landing at 50 percent of the cost of products produced locally.

Besides, manufacturers have to worry about high energy cost; they have to worry about high interest rates – 20 percent and above; they have to worry about a multitude of regulatory agencies making different demands on them; they have to worry about massive smuggling and under invoicing of imports, they worry about trade facilitation issues at the sea ports and many more. For most manufacturing SMEs, it is a nightmare.  Yet production is critical to an enduring economic and social stability. The way forward is to address the fundamental constraints to manufacturing competitiveness in the Nigerian economy. Perpetual protectionism cannot fix this problem.

The reality is that job losses in the sector have been on the increase over the decades as productivity declined on the back of the difficult operating environment. However, the multinationals and conglomerates have shown some positive trend in performance and resilience. Even then, they would do much better if the operating environment were better.

 

Way forward

 

  1. Urgent passage of the Petroleum Industry Bill (PIB) to consolidate the recent reforms in the downstream segment of the oil industry. This is critical in promoting efficiency, private sector’s interest, and healthy competition in the oil industry.

 

  1. Streamlining of the foreign exchange management to reduce the cost of stabilizing the exchange rate, boost supply of the foreign exchange into the economy, prioritize the unification of the multiple exchange rates, eliminate multiple windows in the forex market and broaden the scope for a market driven exchange rate. All of these are essential to reduce the systemic distortions and disruptions resulting from the current model of foreign exchange management. It is important as well to deemphasize demand management and scale up strategies to support the supply side of the currency market.

 

iii. Urgent need for strategic responses to the looming fiscal viability and solvency crisis at all levels of governments.  Acute revenue challenges are becoming an increasingly disturbing scenario at all levels of government.  We need to urgently deal with the escalating cost of governance, fiscal leakages and revenue optimization issues.

 

  1. Need to reduce the emphasis on attracting and retaining portfolio inflows with high interest rates to the detriment of domestic investment. We should prioritize attraction of foreign direct investments by addressing the key investment environment issues to inspire investors’ confidence. FDIs have much bigger potential impact on job creation, poverty reduction and economic inclusion.

 

  1. Infrastructure financing is a big issue that needs very deep reflection as we mark 60th independent anniversary. Without a sound infrastructure base, it will be difficult to achieve the various socio-economic objectives of government at all levels. Infrastructure investment is a key driver of economic growth and development.  Budgetary allocations have proved to be grossly inadequate for effective funding of infrastructure in Nigeria.  Neither can we continually depend on debt financing as debt profile is already at an unsustainable threshold.  It is thus imperative to seek innovative ways of effectively funding infrastructure in Nigeria.  We need to develop new strategies to attract private sector capital to the infrastructure space.  This should cover the broad spectrum of infrastructure provision – roads, railways, airports, water ways, electricity and other forms of energy.

 

  • Yusuf is the Director General, LAGOS Chamber of Commerce and Industry (LCCI)

 

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