MON, 25 JULY, 2022-theGBJournal| The Centre for the Promotion of Private Enterprise (CPPE) weekend published its half year Economic review, highlighting the headwinds that have had devastating effects on businesses in Nigeria during the period.
The think-tank noted the economy’s resilience amid all of the harsh investment environments which is underscored by major elements such as the exchange rate, inflation, GDP debt profile and fiscal operations of government.
The vulnerabilities highlighted include the unprecedented surge in energy prices which had a very huge adverse effect on economic players across all sectors, the unprecedented level of currency depreciation and currency volatility, increasingly weak fiscal space and the acute foreign exchange scarcity with very profound effects on investors across all sectors.
CPPE also counted the rising public debt and debt service burden among the deep-seated challenges as well as the worsening Security situation, elevated political risk as a result of political transition processes and activities, growing fuel subsidy burden, weak infrastructure, slump in investors’ confidence and the depressed purchasing power.
‘’All these headwinds have had devastating effects on businesses in the first half of the year,’’ CPPE said.
The Think-tank took a swipe at the Central Bank of Nigeria (CBN) on its exchange rate policy as it assessed the performance of the local currency against the dollar in recent months.
The exchange rate depreciated significantly in the parallel market to over N600/dollar. In the official window it remains relatively stable, however, the parallel market exchange rate has become the major reference rate in taking economic decision in the economy, amid acute liquidity crisis in the official forex window.
‘’It is therefore of concern that in spite of this reality the CBN has refused to recognize the fact that the parallel market rate continues to dictate the pace of international trade and international transactions in our economy,’’ the CPPE said.
Also, inflation rate rose to 18.6% in June with the key drivers being exchange rate depreciation, the high energy cost, the increasing financing of deficit by the Central Bank of Nigeria as well as the problem of insecurity which is affecting Agricultural production and the high cost of logistics.
According to the CPPE ‘’the high inflation level continues to take a toll on businesses, production costs have been increasing, operating costs across sectors have become elevated, profit margins are declining, there is a slump in turnover and sales and business sustainability is at risk in many segments of the Nigerian economy.’’
On the fiscal operation of the federal government CPPE writes: The figures released by the Finance Minister, Mrs. Zainab Ahmed, during the presentation of the 2023-2025 Medium Term Expenditure Framework, painted a gloomy and disturbing picture of the state of government finances, suggesting that the government is on the brink of bankruptcy.
Debt service to revenue ratio for the first four months of the current year is over 100% (one hundred percent). The implication of this is that the actual revenue of government over the period is not sufficient to service debt. Therefore, financing of the operations of government – personnel cost, overhead cost, capital expenditure and even part of the servicing of the debt will have to come from additional borrowing. These portends severe vulnerabilities for the Nigerian economy.
The fiscal outlook is clouded by elevated downside risks in the near term, driven largely by the huge burden of financing petrol subsidy, fiscal leakages, and unsustainable public debt trajectory. The outlook poses significant risks to macroeconomic stability amid heightened inflationary pressures, depreciating currency and increasing exchange rate volatility.
The GDP growth of 3.11% in the first quarter of 2022 marked the sixth consecutive quarters of GDP growth in the Nigerian economy and offered a momentary glimmer of hope. However, the increasing economic headwinds may dim the growth prospects for subsequent quarters.
The biggest concerns of economic players in the first six months of the year, it says include the following:
High and increasing energy cost:
Investors across sectors in the economy are concerned about the high and increasing energy costs especially the cost of diesel which has gone up by over 300%, the cost of aviation fuel which has gone up by another 300%, the cost of gas which has increased by over 100%. The cost of PMS is still moderately tolerable because of the subsidy regime that is still currently being provided by government.
The frequent collapse of the National Grid makes it even more difficult for many businesses to continue to sustain their operations, creating serious business sustainability concerns among investors. Costs have become elevated, profit margins are being eroded, purchasing power are weakened and business sustainability is at risk. The cost of transportation has reached unprecedented levels especially the cost of haulage because of the escalating cost of diesel.
Acute Scarcity Foreign Exchange and Currency Depreciation:
Many businesses have suffered serious dislocations as a consequence of foreign exchange liquidity challenges, volatility and the depreciation of the currency. These have severely affected businesses across all sectors of the economy. Costs of operation and production have gone up from between 30-100% as a result of the exchange rate crisis.
Output have declined significantly in many industries because of the challenges of accessing raw materials due to the scarcity of foreign exchange. Many players in the economy now resort to the patronage of the parallel market at very prohibitive cost, at very little access exist on the official window.
The sharp depreciation of the exchange rate and the parallel market which is over 300% has worsened the profitability of investments. The capacity to retain employment and the capacity to create new jobs have been greatly endangered because of the foreign exchange crisis.
The dysfunctional foreign exchange policy has negatively impacted Foreign Direct Investment, Foreign Portfolio Investment as well as other capital inflows into the country. The multiple exchange rates, and the huge parallel market premium in the forex market remain major downside risks to investment growth and attraction of foreign capital into the economy. This has continued to weaken the supply side of the foreign exchange market.
The inability of foreign investors to repatriate their profits and dividends as well as incomes have created considerable perception, reputational and country risk issues for the Nigerian economy.
All of these have been responsible for the sharp decline in the capital importation in recent years.
Implications of the Foreign Exchange Crisis for the Investors
-High cost of production because of the high import dependence of our manufacturing sector for imported raw materials.
-High operating costs across businesses in practically all sectors of the economy
-Low sales and turnover because of the increase in price and effect on demand.
-Erosion of profit margins because not all the additional cost can be passed on consumers.
-Increases business continuity risk for some segments of manufacturing and the severity of impact varies across sectors depending on the degree of business exposure to imports.
The acute foreign exchange scarcity has continued to impact businesses in the following ways:
-It makes planning difficult because of the uncertainty.
-Profits, income or dividend repatriation by foreign investors has become difficult, creating huge backlogs.
-It compels investors to patronise the parallel market at a more prohibitive exchange rate.
-Patronage of the parallel market creates compliance and regulatory issues for investors.
-Capacity utilisation is impacted when access to forex is constrained.
-Poses a risk to business continuity.
Security Situation
The worsening insecurity in Nigeria is a major problem for investors in the economy. Many Industrialists especially those who are in the agro-allied sector are grappling with challenges getting raw materials from the crop producing areas of our country. This has continued to negatively impact capacity utilization, turnover, cost of production and the value delivery to shareholders. Some now source raw materials from neighbouring West African countries.
Insecurity has also created a very serious country risk and reputational problem for our country.
The Oil and Gas Sector:
Investors in the oil and gas sector continued to lament the challenges posed by insecurity, oil theft, unstable policies and inappropriate fiscal regimes. The downstream sector continued to be weighed down by the pricing regimes and the regulatory environments which have continued to dim the growth prospects in the sector.
The subsidy regime continues to be a major burden on the oil and gas sector, especially the downstream sector. There are issues of transparency, absence of level playing field, weak corporate governance and poor competition framework.
We commend the decision to make the NNPC an independent, autonomous organization. This proposition would unlock the huge investment opportunities in the oil and gas sector for the benefit of all Nigerians. It is hoped that the models of Saudi Arabian Oil Company [Saudi Aramco] and the Petrobras of Brazil will be replicated with this transformation This is a good initiative which deserves the support of all Nigerians. The take-off may not be perfect, but we should see it as a work in progress. We should see the initiative as a major step in the transformation of our oil and gas sector.
We propose a business model that would dilute the ownership of the NNPC with the onboarding of institutional and individual investors and decoupling of the management from political interference and controls. The company should ultimately be listed on domestic and international stock markets. This is the vision that we should have and we should support the NNPC to achieve this goal.
KEY CHALLENGES OF NIGERIAN INDUSTRIALISTS
-Sugar and Resins. Sugar is used in many of the beverage Industries, bread and the likes. Raisins are used for purposes of packaging materials these are also critical inputs for practically all manufacturing sectors. Access to these products is becoming extremely difficult and we appeal to the fiscal authorities to intervene very quickly to remove whatever bottlenecks that exists in ensuring the availability of this critical inputs for the manufacturer.
-Manufacturers also continue to grapple with the problems of high cost of logistics, access to foreign exchange, access to raw materials and the impact of excise duty on alcoholic or non-alcoholic beverages which is impacting demand for their products. The high inflationary pressure is also constraining the capital expenditure of many of the manufacturing firms. Capacity to expand is being constrained because of the high inflationary situation. These are some of the challenges that are faced by the manufacturers.
-Most of the exports to ECOWAS countries are by road and most of these export or import go through Benin Republic, but Benin Republic has for a few years now been imposing prohibitive transit taxes and levies on transit goods passing through Benin Republic, it is making many of these cross-border businesses very unproductive and very unprofitable. It is a major cause of frustration to many cross-border investors.
-We appeal therefore to the authorities in Nigeria and Benin Republic to resolve whatever issues there is on this matter. This prohibitive fees and levies on transit goods are a clear violation of ECOWAS protocols. This does not portend a good omen for our economy integration and the larger issue of the African Continental Free Trade Area because over 80% of trade is by road and if a fellow African country continues to pose this kind of challenge and this kind of impunity to our transit cargo then it gives a great cause for concern.
On port reforms
Port users are still grappling with high cost of operations, the tedious procedures, documentation, weak application of technology and extortion. Scanners are yet to fully operational at the ports, the single window is yet to take off and weigh bridges are not in existence at our ports. This is not a good commentary for the ports in the largest economy on the African continent. These issues have become intractable and we appeal to the authorities to look urgently into the plight of port users. The port is a very critical part of this economy. The port is the gateway for import and export and therefore very critical to the prosperity of the Nigerian economy.
Trade Facilitation issues
Sealing of terminals by the Customs for alleged infractions
We acknowledge the need for all operators at the ports to abide by the terms and agreement of their operation including the financial obligations. We recognize the need to enforce compliance with such obligations. However, this should be done in a way that would not impact negatively on innocent stakeholders at the ports.
We therefore request that in imposing sanctions on terminal operators or other agencies at the ports, innovative ways should be adopted to avoid collateral negative effect on other stakeholders particularly the importers and the exporters. There are instances where consignments on which duties have been paid and cleared, have been trapped in terminals that have been sealed. The Nigerian Customs Service should therefore review its strategy on sanctions imposition to avoid disruptions of businesses of innocent economic players.
Working Hours by the Maritime Sector Operators
The activities in our maritime sector are 24-hour activities. Therefore, it is imperative for all agencies working at the ports to have operating hours that accommodates the nature and character of the port’s ecosystem. Therefore, both the shipping companies and the terminal operators should operate working hours that reflect the character of the industry in order not to impose unnecessary hardship on importers and other players in the sector.
The current practice for instance is that shipping companies open at 9 am and close at 4 pm, and in-between they observe a one-hour break. Some of the off-dock terminals do not open until 11 am. Some terminals don’t even work on weekends. This practice is inimical to the operations of business and the smooth processes of international trade.
Additionally, some of the major terminals do not issue Terminal Delivery Notes (TDO) after 4 pm. All of these operating hours are not compatible with an efficient value delivery to importers and exporters. They are not customer friendly. Many of the terminals and operators do not have electronic payment platforms that allow for efficient transactions with their institutions.
Working Hours at the Airport Cargo Terminals
The working hours at the cargo terminals of our international airports are completely at variance with the demands of the investors, who ought to be treated as customers. The airport operates twenty – four hours, some agencies of government like the immigration and Customs, Plant Quarantine operatives also operate twenty – four hours.
It is therefore inappropriate for the operatives of the airport cargo terminals to have operating hours that are business friendly. From information, the airport cargo terminals open at 10 am and close at 4 pm, and in-between they observe a one-hour break. This is essentially operating for just five hours a day. On Saturdays they operate between 10 am and 12:30 pm. Essentially, it is as though these very critical agencies of government work for only five-hour a day and only for about two-hours on Saturday.
For an agency that is supposed to support international trade which is a 24 hours business transaction, the operating hours should be reviewed.
Dispute Resolution System at the Ports
The dispute resolution system between importers and the agencies of Customs including the Customs, terminal operators and shipping companies is not effective and therefore hurting investors in the economy. In many cases what we have as a dispute resolution committee where the accuser is also the judge.
There is therefore a need for an independent appeal framework for resolution of disputes in the international trade ecosystem. This is to ensure fairness and equity in the way disputes are resolved. Current appeal committees are populated by operatives of the very agencies against which the appeals are being lodged. This cannot serve the end of justice and a credible outcome.
Disruption of movement of Cleared Cargo
In spite of the efforts of government over the years to put an end to the disruption of cargoes that have been duly cleared and released at the ports, the problem has persisted. We recall the Presidential Executive order on ease of doing business which stipulates that there should be no disruptions of movement of cleared cargoes within the vicinity of our ports. This has not been complied with. Importers still have to grapple with disruption of movement of their consignments by security agencies especially the FOU, the CG Strike Force and CG Border Drill.
We call on government to put an end to the disruptions of the movement of cargoes that have been duly cleared by government agencies within the ports. This is against the spirit of the Ease of Doing Business and it is negatively impacting the confidence of investors. The experience is that of overlapping examination of cargo, additional time and additional expenses, thus escalating the cost of doing business.
Trade Facilitation and Revenue Generation
The revenue generation objectives of the Customs have taken precedence over trade facilitation. This is certainly not good for the economy and not good for the commitment of government to create jobs. It is not investment friendly and we urge the relevant authorities to accord the proper priority to issues of trade facilitation for the benefit of the economy, investment growth and employment generation.
Container Deposit
Many importers have been encountering serious challenges with recovery of container deposits from the shipping companies. This is a matter that requires urgent intervention by the relevant authorities. Refunds takes between five to eight months and the cumulative container deposits outstanding are quite staggering. There is a need for the shipping companies to improve on the refund of container deposits.
They should also facilitate the delivery of empty containers to them. The current approach of demanding that containers be taken directly into the ports is creating a lot of challenges for importers. Therefore, we demand that the shipping companies should comply with earlier directives of government that they should have a holding bay outside the ports for the delivery of empty containers.
This will reduce the time it takes to return empty containers, reduce the demurrage that importers pay both for the containers and for the trucks that convey these empty containers. It will also reduce the problem of congestion at the ports because many of the trucks that are heading to the ports are carrying empty containers which creates a lot congestion and logistics problem within the ports.
Anti-Competitive Practices in the Maritime Industry
Monopoly powers tends to adversely affect the growth of the economy and undermines the objective of building an inclusive economy. It also increases opportunities for consumer exploitation. Therefore, there is a need for the relevant authorities especially the Shippers’ Council and the Federal Competition Commission to ensure that all the monopolistic tendencies in the maritime sector, particularly the shipping companies and the terminal operators should be contained.
Monopoly structures require strong regulatory oversight in order to protect all the stakeholders in the economy and particularly in the international trade ecosystem. We need a robust framework to prevent these monopolistic tendencies. These tendencies are inimical to competitive practices and also poses a major risk to the survival of small businesses in the maritime and port ecosystem. The Shippers ‘Council and the Federal Competition Commission should curb this growing trend and tendencies in order to ensure that there is an inclusive framework for all operators in the sector and to also reduce the vulnerability of the system to undue exploitation and crowding out of SMEs in the sector.
Legislative Framework for the Port Regulator
The port ecosystem requires an effective regulator with full legislative powers. Therefore, we request that in order to protect the interest of all the stakeholders in the international trade processes, particularly in the cargo clearing ecosystem, the port regulator needs to be adequately strengthened, empowered and given a commensurate authority backed by legislation that will match the enormity of the regulatory responsibilities.
We therefore request the National Assembly and the President of the country to expedite the process of giving the Shippers’ Council the enabling legislative powers to effectively oversight and regulate the operation at the ports. This will ensure that the interest of all the stakeholders in the ports are duly protected.
PLIGHT OF E-HAILING DRIVERS
One of the biggest employers of our youths today including Graduates are the E-hailing driving opportunities with such platforms as Uber, Bolt etc. These drivers have been complaining about the unfair practices of the owners of the e hailing technology platforms. Their margins are being massively eroded because of inflation and the cost of vehicle maintenance and yet the owners of this platforms have not yielded to the cries of these drivers.
We are appealing first to the owners and management of these platforms to be more sensitive to the plight of these drivers. They should have an engagement with them with a view to reviewing and making their operating conditions more humane. Many of them have are graduates, they have opted for this service because of the unemployment situation. It is unfair to take advantage of them.
The services should be mutually beneficial and the interest of all players, the owners of the platform, the drivers and passengers must be well taken care of. We appeal to the owners of the platform and the relevant government authorities to create a platform for dialogue between the E-hailing drivers
They have complained about the increasing cost of vehicle maintenance, high cost of spare parts and rising cost of fuel. All of these are affecting their margins and their welfare.
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