How Nigeria’s economy lost N4.7trn in one year …As OPS, businesses count losses

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The nation’s economy may have lost about N5 trillion over the last one year due to the present economic recession. According to experts, the economy suffered a cumulative contraction of 4.66 per cent in the first three quarters of the year, which translates to an estimated N4.7 trillion contraction in Gross Domestic Product (GDP).  Developments in the economy and the business environment were influenced largely by global and domestic factors during the year.

Nigeria’s economy experienced stagnation due principally to the persistent sluggish recovery of crude oil prices in the international market, which led to low inflow of forex in the economy.

The price of Nigerian Bonny Light averaged $43.02 per barrel for January to November 2016 as against $54.29 per barrel average over the same period in 2015 indicating $11.27 per barrel or 26.2 per cent decline over the period. The production volume averaged 1.79mbpd against the projected volume of 2.2mbpd.

The economy however, slipped into recession, having suffered contraction for three consecutive quarters. There were negative 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.

Nigeria’s economy was reported in August  to have slumped into recession after it suffered the second negative contraction, while inflation then hit an 11-year high of 17.1 per cent. By this period, 45 companies were reported to have closed down, over 220 Medium and Small Scale Enterprises shut down and over five million jobs lost.

Inflation rate now averaged 18.47 per cent in November 2016 as against 9.37 per cent in the corresponding month in 2015 thereby indicating 9.1 percentage point increase over the period.

No sector of the economy was spared from the pangs of the recession as there has been terrible contractions in the manufacturing, construction, maritime, transport sectors, among others.

The Director General of the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, in an interview with Daily Sun noted that the features of a declining economy had long manifested in the horizon before the declaration of technical recession.

“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 18.4 per cent in November, from 9.6 per cent in January, the highest in recent years,” he said.

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, which also impacted revenue and foreign exchange earnings.

There were fiscal and monetary policy responses to the prevailing economic conditions during the year. Flexible exchange rate policy was adopted, petroleum product subsidy was discontinued, fiscal leakages were blocked, Treasury Single Account (TSA) was introduced and tax revenue optimisation was scaled up.

Yusuf said some of these major policy milestones were painful but inevitable, noting “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.

“On the fiscal side, a number of commendable steps were taken; the petroleum subsidy, which was exerting tremendous pressure on the nation’s finances was discontinued. The present administration took steps to curb corruption and recover looted funds. The impunity with which public funds were looted has reduced considerably. Tax administration efficiency level also improved.”

State of manufacturing sector  

Manufacturing, which is the productive sector, did not fare any better in the year under review. The President of the Manufacturers Association of Nigeria (MAN), Frank Jacobs, said the sector faced several daunting challenges.

According him, the negative crude oil price effect on the economy resulted to the depreciation of the naira in the year due to the disparity created by increased demand of foreign exchange over the inflow.

“Naira exchange rate averaged N305.18/US$ (inter-bank rate) in November 2016 as against N196.99/US$ recorded in the same month in 2015, thereby indicating N108.19 or 54.9 per cent depreciation over the period. The implication of the trend was increase in import bills of raw materials, which fed into commodity prices.

“The aftermath of the inflationary pressures was the erosion in the real value of household income and the consequent decline in its consumption, which has implication on inventory of unsold goods of manufacturers and other reactionary effects.

Dearth and high cost of funds have also been one of the major impediments to manufacturing investments in the year. Cost of borrowing has remained at double digit as maximum lending rate averaged 26.99 per cent in September 2015 and 27.69 per cent in the same month of 2016. The high interest rate has been attributed to the high benchmark interest rate, which stood at 14 per cent.”

The MAN President said productivity in the sector was grossly undermined as manufacturers were not able to optimise their production capacity following  their inability to import requisite raw materials that are not locally available due to the scarcity of forex and the continued restriction by CBN of the list of 41 items from the official forex market. This can be attested to by statistics released by MAN including capacity utilisation in the sector which fell to 44.3 per cent in 2016 from 50.17 per cent recorded in 2015; the value of manufacturing production grew by -3.5 per cent in 2016 down from 41.8 per cent growth recorded in 2015; local sourcing of raw materials in the manufacturing sector fell to 46.3 per cent in 2016 from 48.77 per cent recorded in 2015 and the growth of unsold inventory of manufactured goods in the sector stood at 16.14 per cent in 2016 from 13.7 per cent recorded in 2015.

The association in September alerted that about 45 of its members had closed down, but the figure has now reduced to 22, as MAN President said some have commenced skeletal operation. Though some may have resumed skeletal operation, big companies like Dangote threatened to stop production due to lack of patronage and scarcity of forex.

The MAN President said another major challenge experienced by the sector in relation to forex was the treatment of the outstanding confirmed letters of credit, which had been established before the new Flexible Exchange Rate System was introduced on June 20, 2016.

He said, “these letters of credit and approved Form Ms were documented at the CBN intervention rate at around N197/US$ but affected manufacturers are now expected to redeem them at the flexible exchange rate market, which is presently at about N320 to the US dollar. Unfortunately, this situation posed a great burden on manufacturers since the pricing of the related manufactured goods was made at N197-N198/US dollar at the time the Form Ms were approved and letters of credit established.”

The sector also identified poor patronage of home-manufactured products by the public sector as well as poor infrastructure.

“Apart from the acute shortage of electricity supply to the sector, the dollarisation of domestic gas consumption made it extremely difficult for the companies to generate energy by themselves to power their factories. Also, the roads remained bad making movement of goods difficult and expensive,” Jacobs stated.

The LCCI Director General had stated that the currency depreciation, which escalated the cost of imported raw materials and other inputs had a profound effect on production and operating costs, adding that the weak purchasing power of the consumers affected sales and consequently the profit margins of the business.

”The high tariff on automobiles also had a severe impact on transportation costs because of the twin issues of currency depreciation and high import duty. Dealers of the leading brands of automobile had a major challenge of marketing their products because of the prohibitive costs. New cars attracted 35 per cent import duty and 35 per cent levy, making a combined tax of 70 per cent.  This development pushed the cost of new cars beyond the reach of many middle class families and small and medium sized corporate entities,” he said.

On the positive side, MAN however, said total number of 179 new companies were admitted as members in 2016, a total number of 16 new product lines were installed and a total number of 17,688 manufacturing jobs were created in 2016.

The body equally believed that  the CBN policy of 60 per cent allocation of all available forex to the manufacturing sector for importation of raw materials and machinery was commendable, but called for its effective enforcement and monitoring.

Way forward

In order to resolve the problem of the sector in the new year, both MAN President and LCCI Director General maintained that there is urgent need to review the list of 41 items excluded from official forex window with a view to delisting  raw materials component used in the manufacturing/industrial sector from the list.

The Organised Private Sector (OPS) also wants the apex bank to review downward the benchmark interest rate to a single digit rate of 5 per cent to encourage reduction in other rates so as to encourage and sustain investment in the sector.

The MAN President said government’s procurement policy, just like in other economies, should be designed as a tool for economic growth and development. As such, government agencies must patronise made-in-Nigeria products and support enlightenment for the general consumer public on the need to embrace home-made products.

He said, “in order to develop the infrastructural base, there is need for a Public Private Partnership (PPP) arrangement that will focus on Built-Operate-Transfer (BOT) rather than expending scarce resources on infrastructure development.

“We appeal that price of gas should be domiciled in naira rather than the current practice of dollarisation. Moreover, manufacturers utilising gas for energy generation should be treated equally with the independent power producers.”

The LCCI Director General also submitted that a framework to ensure the liquidity of the foreign exchange market should be urgently put in place in order to restore investors’ confidence, enhance forex inflows, boost FDIs and FPIs, and reduce the level of uncertainty in the economy.

He said, “the tight monetary policy regime should be relaxed to spur domestic investment and consumer spending. Import tariffs should be reduced across board to moderate the current high cost of goods and services, boost investment spending and enhance disposal income of citizens.

Import duty on vehicles (trucks and cars) should be reviewed to bring down distribution and transportation costs in the economy. The automotive policy should be urgently reviewed and reworked.

In order to tackle the problem of hunger, the current commitment to agriculture should be sustained but this should go beyond crop production. It should cover the entire value chain of production, storage, processing, transportation and marketing.

“Engagement with the Niger Delta stakeholders should be intensified to reduce the disruptions to oil production and consequently stabilise the fiscal position of government. The policy of issuance of visa on arrival should be accelerated and expanded in scope to boost the inflow of foreign investment and grow the hospitality and tourism sector.”

Yusuf explained that there was a sharp drop in investors’ confidence last year following the weak growth numbers and the fact that the economy slipped into recession.