FRI, DECEMBER 28 2018-theG&BJournal- The LAGOS CHAMBER OF COMMERCE AND INDUSTRY (LCCI) has warned that the Nigerian economy remained fragile and suggested key economic reforms that could help lift the cloud over the gloomy predictions by economists in the coming year.
The Chamber suggested reforms include a foreign exchange management framework that reflects the market fundamentals, the acceleration of the economic diversification agenda, normalization of Lagos ports environment, the oil and gas sector reform, especially the petroleum industry bill; reduction in the cost of governance at all levels; improvements in the domestic revenue (particularly independent revenue) to reduce volatilities of government revenues, among others.
It added that with the limited progress in the ongoing effort to diversify government revenue sources, the performance of the oil and gas sector would remain a critical factor that would shape the outlook for the economy in 2019.
According to estimates by Capital Economics analysts, every $10-per-barrel fall in oil prices will cause a 3-5% decline of GDP in most of the Gulf economies, and a slowdown of 1.5-2% of GDP in Russia and Nigeria on an annualized basis. The outlook will therefore depend to a large extent on developments in the oil and gas sector and the political will to undertake far reaching reforms, beginning with the oil and gas sector.
The Chamber also noted the continued high dependence on oil sector for revenue and foreign exchange earnings and its diminishing impact on the performance of the economy.
It said in its report; ‘’although oil revenues increased with recovering oil prices in 2018, the impact on the economy was subdued by the huge foreign exchange commitments to petroleum product importations and the inherent subsidy.’’
The high debt service obligations were also major constraints to the growth of the economy.
The economy maintained a positive growth trajectory driven by the recovery of oil price for most part of 2018. This gave a boost to the macroeconomic fundamentals. However, at the close of the year, there was a sharp decline in oil price to $54 per barrel, from a peak of $86 in early October this year, posing a risk to the stability of the macro-economy, LCCI in its review of performance in 2018 which was ridden with unfulfilled expectations.
The Gross Domestic Product (GDP) statistics released by the National Bureau of Statistics (NBS) shows that the Nigerian economy grew by 1.81% year-on-year in the third quarter of 2018. This figure indicates an expansion in the economy for Q3 2018, compared to the 1.17% GDP growth rate of the corresponding quarter in the previous year. There was also an improvement in the quarter-on-quarter GDP growth rates from 1.50% in Q2-2018 On the other hand, the year-on-year nominal growth rate was 13.58%.
LCCI noted that this performance is lower than the IMF and Economic Recovery and Growth Plan (ERGP) growth forecasts of 2.1% and 4.1% respectively for 2018. GDP growth of 1.81%, which is far below 3% annual population growth remain a cause for concern due to its wider implications for welfare and poverty conditions in the country.
Beyond the GDP numbers, what is paramount to investors are the cost of doing business, productivity of the investments, competitiveness of firms and the sustainability of investments. And to the average Nigerian, what matters is welfare and quality of life, especially food prices, cost of healthcare, improved transportation system, power supply, access to quality education and security of lives and property.
Oil Price
Data from the Organisation of Petroleum Exporting Countries (OPEC) shows that oil prices are trending down at $54 p/bl on 22ndDecember 2018 from its peak of $88p/bl in the month of September and October 2018.
‘’This is already below 2019-2021 Medium-Term Expenditure Framework (MTEF) and 2019 budget benchmark of $60p/bl. The declining global oil price will likely distort FG’s economic projections for 2019 as well as impact adversely on its MTEF if the trend is not reversed,’’ LCCI warned.
There are fears that the sharp fall in oil prices if sustained could lead to a new pressures on the naira exchange rate, LCCI said.
As capital flow reversals intensify, oil price weakens, and foreign reserves come under pressure, there are worries about the sustainability of current frequency of interventions by the Central Bank of Nigeria [CBN] to stabilise the market.
‘’Some measure of rate adjustment may become inevitable. The improvement in liquidity and relative stability in forex market witnessed by businesses in 2018 may be threatened if oil price declines continues. This will have profound impact on the prices of imported goods and services leading to arise in the level of inflation. The fiscal operations of government would be adversely affected. This may further escalate the deficit in the budget.’’
On interest rates LCCI said access to and cost of funds remain a big issue for many domestic investors. With commercial bank lending rate at between 20-35%, the private sector especially the SMEs could not successfully access funds capital for their businesses.
‘’We note the efforts of government through CBN and Bank of Industry (BOI) to extend intervention funds to business owners particularly SMEs. However there are still pockets of issues with access to funds.’’
The Chambers view on inflation is that it is likely to trend upward in the early part of 2019 Following the diminished high base effect in August 2018. After 18 consecutive months of decline, inflation rate began to rise in August 2018 with headline inflation of 11.26% in October 2018 compared to 15.13% in January 2018 and 18.7% in January 2017.
Debt Profile
The Debt Management Office (DMO) put the nation’s total debt stock (federal, FCT and states) at N22.38 trillion ($73.21 billion) as at June 30, 2018. We are concerned about the fast-growing public debt profile and the country’s fiscal sustainability in the medium term. Debt service to revenue ratio of31%; and debt service to capital expenditure ratio of 75% in the 2019 budget proposal are on the high side with implication on the country’s ability to deliver infrastructure investments.
Capital Market
Year to Date (YtD) loss of the Nigerian Stock Exchange (NSE) All Share Index stood at -20.37% as at December 20, 2018. The market decline was due largely to factors such as the increasing U.S treasury yields, andin anticipation of more rate hikes by the U.S Fed as well as investors’ skepticism around the country’s 2019 general election.
Market realities fell short of LCCI’s projections expectation for 2018. For instance, the implementation of policy reforms such as the Investors & Exporters FX window, increased dollar liquidity and moderated rate of inflation failed to keepthe equity market in green.
Notwithstanding, Nigeria’s macroeconomic fundamentals remain stable and supportive of market recovery over medium to long term. Thus, the equity market holds a decent entry opportunity for investors with a medium to longer term horizon.
The business and economic space was characterized by several challenges and accomplishments in 2018. However, investors had to contend with the typical constraints of the business environment – high interest rate, weak GDP Growth, weak consumer demand, deficient infrastructure, energy issues, traffic gridlock on Lagos port roads and insecurity in some parts of the country, among others.
The Chamber’s report reflected on investment climate issues in 2018, Ease of Doing Business Ranking in 2018, power situation, Traffic Gridlock on Lagos Port Roads, Regulatory Environment and Arbitrary Bank Charges, all of which were riddled with concerns.
The 2018 World Bank Ease of Doing Business report, ranked Nigeria 146 out of 190 countries. The report showed that the country took a step backwards from the 145th position it ranked in 2017. The ranking takes to account, trading regulations, property rights, contract enforcement, investment laws and availability of credit.
‘’We acknowledge the efforts of the present administration through the Presidential Ease of Doing Business Council (PEBEC) and series of Presidential Executive Orders targeted at improving the business environment.’’
Nigeria’s ranking did jump in 2017 24 steps in the ease of doing business ranking from 169 to 145.
‘’ However, the Government still has enormous task of ensuring much better performance to enhance the productivity of businesses in 2019. This calls for a sound and result oriented business regulations and innovative implementation in 2019,’’ the Chamber said.
On power, The Chamber noted the serial complaints it received all through 2018 about high energy costs especially high expenditure on diesel, higher cost of and scarcity of gas, and payment demand by Discos for power that were not supplied.
The provision of power remains at the heart of ease of doing business in Nigeria.
‘’We note the efforts of the Government in addressing the perennial power supply shortage and deeper commitment to alternative sources of power including off-grid initiatives.’’
SMEs and some real sector companies reported that they spend as much as 20-25% of their total operating cost on provision of alternative power supply and payment to Discos, the Chamber said in the report.
Nigerian ports were classified among the worst ports in the world in 2018 due to challenges bordering on delay of import/export processes, heavy human and vehicular congestion to and within the ports, difficulty in gaining access to the ports due to bad roads and security concerns.
The LCCI recent maritime port feedback research finds that approximately 40% of businesses located around the Lagos ports’ have either relocated to other areas, scaled down operations or completely shut down due to vehicle traffic congestion crises. This development has very huge adverse implication for non-oil export, job creation, tax revenue and real economic activities.
In 2018, businesses experienced frequent incidence of overbearing regulatory disposition, leading to increased burden on businesses, higher cost of operation, waste of executive time and reputational consequences, LCCI said.
‘’These manifested in form of fines & charges that are sometimes difficult to justify, sanctions, regular summons of corporate executives. These summons were serious distractions and had implications for travel/logistics costs, loss of executive time, disruptive effects on businesses and sometimes reputational downsides.’’
According to LCCI, concerns were also expressed by stakeholders on the multiplicity of fees charged by the banks which includes COT, card maintenance, transfer fees and other charges in the outgoing year. As part of efforts to ease the burden of doing business in the new year, we urge CBN to strengthen its oversight on issues relating to bank charges in order to protect customers of banks.
The Chamber and Industry also noted and listed key sectoral challenges in 2018, many of which were carry-overs from 2017 as our analysts noted.
Security crisis affecting farmers and farming communities across the country topped concern in this sector in 2018. There were also the challenges of land documentation and perfection of titles to enable farmers prepare bankable loan requests. These were challenges at the state government level. The rigorous process involved in accessing intervention funds from Bank of Industry, Bank of Agriculture also inhibited progress in the sector while cost of funds in the commercial banks cannot support farming activities was an added burden.
There were also the issues of variations in the price of fertilizer.Tthe Federal Government had announced a price of N5,500 per bag, but the prevailing cost in the market was no less than N7,500.
Weak irrigation infrastructure to enable farmers engage in all year round farming, especially in the southern part of the country, high cost of agrochemicals – pesticides and herbicides, high cost of land clearing especially in the southern part of the country because of the peculiar vegetation and weak agricultural insurance support didn’t help issues in the Agriculture sector all through 2018.
Automobile Sector also suffered major hiccups including arbitrary charges and tariffs on vehicles by the Nigeria Customs Service. LCCI said transparent, consistent and uniform tariff is imperative. High import duty and levy on importation of new vehicles also created severe distortions in the automobile market.
‘’The Automotive Policy continues to be a major source of distortions and worry to majority of the stakeholders in the sector. An urgent review of the policy is imperative to correct distortions in the automobile market, ensure a level playing field, reduce cost of vehicles to citizens and businesses and ultimately bring down transportation cost.’’
Construction and Engineering
‘’Weak indigenous participation in the government projects thus limiting the inclusiveness of the Nigerian construction industry. The multiplier effects of government capital expenditure is also adversely affected by the weak patronage of indigenous contractors,’’ LCCI said.
In this sector the dearth of vocational competency, skill gaps among Nigerian graduates who lack practical knowledge of the industry, high interest rate and difficult access to cheap fund to finance projects and huge outstanding indebtedness to local contractors at all levels of government, created growth gaps. There is a weak commitment to payment of these debts.
On exports, exporters were suffocated by huge losses as a result of the Apapa gridlock. Many contractual obligations could not be met; export products went bad because of the long waiting period to access the ports. There were also reports of flagrant extortions by security agencies managing the traffic on the Apapa corridor.
Financial Services
Petroleum subsidy debts and non-payment of interest rate and exchange rate differentials to oil marketers affected the ability of the oil marketers to meet up with their financial obligations with the banks.
‘’This is also having a multiplier effect on the revenue of the banks/lenders. It also has implications for the stability of the banking system and the growth of non-performing loans in the financial system.’’ Multiplicity of exchange rates resonated frequently too to the detriment of the sector.
Cargo Clearing Challenges at the Ports
Operation of many check-points across the country by officers of the Nigeria Customs Service in contravention of the ease of doing business directive by the presidency took the shine off the sectors potentials to be the biggest contributor to the economy besides oil.
There were reports of extortions at the check points, non-functional Scanners in the Ports and Poor Physical Examination of Containers and incessant attacks on ships at berth within the Lagos Ports Complex, and this had exposed the level of non-compliance with the International Ships and Port Facility Security (ISPS) code convention by Nigerian seaports.
Infractions by Shipping companies over non-compliance, and the attendant delay on transmitting manifests 5-days prior ships arrival for Customs rotation number also played devastating role in stunting the sector. The spate of downtime in APM Terminal’s operation, which often results in payment of undeserved demurrages, delays in issuance of necessary export reports and certificates causing unnecessary delays and increasing cost and deplorable access roads to, from and within the Lagos ports as well as the difficulty in granting Access Port Permit, customs license and Form C-30 continues to affect freight forwarders were in the list of irritating issues pointed by the LCCI report.
Regulation on hotel and tourism in Lagos was also flayed as negative. Lagos State Government directives to all Hotels to buy an electronic device which would capture all transactions carried out is viewed as a breach in client’s privacy, which could negatively affect patronage and demand.
Industrial Sector Issues include;
-Poor patronage of Made-in-Nigeria products, high inventory build up thereby forcing manufacturers to reduce volume of production.
-FG plan to expand excise duty rates to essential products like soap and detergent; toilet papers, cleansing or facial tissue, and Spaghetti/Noodles should not happen. It would hurt the economy, lead to escalation of inflation and invariably hurt the consumers.
-Overlap and Harassment of manufacturing companies by the regulatory/monitoring agencies at FG & State levels with overlapping functions.
-Rising wave of fake and substandard products in the market.
-Challenges of electricity and high cost of Gas.
-Gas suppliers in Ota forcing manufacturers to pay in dollars, this is translating in high cost of input for the manufacturing companies.
Information Communication Technology and Telecommunications
Theft and vandalization of Telecoms facilities across the country was prominent throughout the yea as in previous years. The excessive levies paid on radio and TV licenses to local governments across the country, the huge levies and taxes imposed on telecommunication companies by the state governments across the country and prohibitive cost of securing right of way for telecoms cables, affecting deployment of internet services across the country topped the list of issues in the telecom sector.
LPG
LCCI say there is need to remove the discriminatory VAT imposed on the locally sourced LPG, while imported LPG does not attract VAT. Weak incentive regime to facilitate the penetration of the use of LPG in the country will need to be addressed. It noted the high cost of the LG equipment which is as result of high import tariff and the Need for government to commit to ensuring the availability, affordability, acceptability and accessibility of LPG across the country.
The Medical, Pharmaceutical and Allied Services contented with prohibitive tariffs on medical equipment creating problem of access to health care by majority of the citizens. The sector has limited access to intervention funds, multiplicity of regulatory agencies in the sector and challenges posed by many fake and substandard drugs in the market.
Mining and Solid Mineral sector suffered from its inability to access the N500billion NEXIM Fund, BOI fund and N30b Natural Resource Fund because the modalities and requirements for accessing the funds was not available at owner Ministries Departments and Agencies (MDAs).
It also suffered the difficulty in assessing the N5billion MINDIVER fund. The fund provided for Artisanal Miners but no local company had been shortlisted since it was announced.
Among its other headaches were poor infrastructure which increased the cost of moving products from the mine sites to the end user consumers and inadequate funding of public Research institutions in the Solid Minerals sector in Nigeria.
In the Petroleum Downstream, LCCI noted the delays in passage of the Petroleum Industry Bill (PIB), the downstream sector as currently constituted is unstructured and largely uncompetitive, the administrative bottlenecks hindering productivity of the sector, petroleum subsidy management and subsidy debts owed by the Federal Government to oil marketers, partial deregulation of the downstream sector affecting investment and what it says is the incessant harassment and invitation of operators by committees of the National Assembly.
Power
The high charges imposed on repairs of Pre-payment meters at almost 200% the value of the meter as well as the excessive charges on the metering system across the Country hugged the headline all through 2018. The LCCI pointed to the increasing wave of renewable energy around the world and need for Nigeria to align its laws to the new global reality with regulation covering renewable energy. It said the huge debt (about N800 billion owed to of Discos and Gencos) is affecting their cashflow and operations.
Real Estate
On real estate, the inadequate technical skills development programme for Artisans and Craftsmen in the industry and the Multiple charges by agencies of Lagos State Government including the imposition of charges on water (21kobo/litre), bore-hole charges, Lagos State Building Control Agency charges, were listed as issues to be addressed in the 2019.
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