Nigeria’s Economy Sinks Deeper

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With capacity utilisation in the manufacturing sector crashing below 20 per cent, Crusoe Osagie reviews the challenges of the ailing economy and the government’s strategy to restore stability
Hopefully, the President Muhammadu Buhari-led government might have realised that it will no longer cut it to simply dismiss the outcry of Nigerians over grinding poverty caused by a contracting economy by simply blaming its predecessor of corruption and looting.
Analysts say the punch line is spent and is no longer acceptable.

The hungry man just wants food, he is not interested in any blame game; the unemployed person needs a job; the homeless needs shelter; people challenged in their health need adequate medical care and so on.

To underscore the depth of the economic crisis in which the country currently finds itself, manufacturers last week announced that the continued decline of capacity utilisation in the country posed a major threat to the already ailing real sector of the economy, resulting in massive job losses.

For an economy whose managers have repeatedly touted the term economic diversification from hydrocarbon to the real sector as the salvation plan, an announcement that capacity utilisation has dropped to an abysmal level is a severe emergency.

Production Decline
The Chairman, Manufacturers Association of Nigeria (MAN), Apapa Branch, Mr. Babatunde Odunayo, last week explained that the manufacturing sector recorded a 20-per-cent drop in capacity utilisation at the end of the second quarter of 2016, stressing that the sector currently operates under 20 per cent of its capacity.

He blamed the decline‎ primarily on the scarcity of foreign exchange for raw materials replenishme‎nt and the declining purchasing power of consumers in the country.

Managing Director of Cradle Peak, a small scale packaging materials manufacturing company in Ogun State, Mr. Ikponmwosa Obano, corroborated the declaration made by the MAN executive, saying that his company has faced tremendous challenges sourcing raw materials to keep his machines running.
Meanwhile, Odunayo said apart from the scarcity of forex and declining disposable income, the manufacturing sector was also challenged by long-standing negative factors that are yet to be addressed, including inadequate municipal power supply and poor access road networks.

‎Odunayo said the theme of the forum: “Nigerian manufacturing sector in a time of economic crises; survival strategies” was apt, considering the current ‘tsunami’ blowing across the country, adding that it was the most challenging economic storm the nation had ever experienced.

He added that the reason behind this economic downturn began with the mismanagement of the windfall that was gained from exceptionally high oil prices between 2010 and 2014, saying that the government at that time did not cultivate the culture of savings.

“As soon as oil prices came crashing down, the country became exposed. The challenge now remains how to manage the aftermath of the oil price drop and its resultant 70 per cent drop in revenue earnings for the country. The Buhari-led administration is faced with this challenge,” he said.
He noted the efforts by the current administration aimed at revamping the economy, saying that the federal government’s plan for a $1 billion Euro bond for capital projects was a welcome idea.
‎According to him, the most critical of objectives of the present administration was premised on policy, governance and security, including ensuring a stable and predictable currency exchange rate.
Furthermore he said the exchange rate must be supported from two sources such as flexibility and support from direct foreign investment and inflows into the country.

He also called ‎for external borrowing to shore up the naira in order to support poorly funded government businesses through funds injection into the forex market.
According to him, this would stabilise employment, drive infrastructure development, develop, and prepare grounds for non-oil export development through appropriate investments.

He added that many companies now declare huge exchange rate losses, pointing out that these losses already run into hundreds of billions of naira with many manufacturing outfits closing down.
Odunayo said Nigeria’s gross domestic product (GDP) had declined from a robust $568.5 billion in 2014 to $481.07 billion in 2015, stressing that for the first time since 2010, Nigeria has suffered a drop in its GDP with a year-on-year decline of -15.3 per cent in 2015.
“This decline‎ may continue unless dollar funds can be injected to support private and public sector needs,” he said.

He added: “The greatest challenge facing Nigeria at the moment is low productivity. According to a recent CBN report for the second quarter of 2016, industrial production stood at near zero. It reduced to as low as 6.4 per cent in the second quarter of 2016.
“Whereas revitalised industrial production seems to be the single most potent solution to the current economic recession in Nigeria.”

FG’s Effort
In the midst of all the challenges, the federal government is proposing varied remedies, which do not seem to have yielded much benefit at the moment although there is still some time to test the effectiveness of the interventions.
Recently, the Vice President, Professor Yemi Osinbajo, unveiled the plan of the government to stimulate the nation’s economy, which was officially announced to have slid into recession about a month ago.

Osinbajo said part to the plan to get the economy back on the path of growth would involve steps to immediately reduce fiscal imbalances and forex volatility, as well as lower interest rates and increase lending to the real sector.
He noted that the government expects that the new initiative to jump start the economy and return it to rapid growth.

He explained that other tasks to be given immediate priority included boosting dollar liquidity, curbing inflation and increasing Foreign Direct Investments (FDIs) by sustaining enabling policies aimed at boosting Public Private Partnerships (PPPs).

According to him, another urgent step to be taken by government was a structured collaborative engagements with the private sector to deepen the nation’s diversification efforts to create jobs directly and indirectly and alleviate poverty in the country.

The Vice President who spoke during a presidential dialogue session organised by the Lagos Chamber of Commerce and Industry (LCCI), added: “‎These challenges are significant, but the opportunities to get it right are even more significant. For us, the focus is steadfastness and consistency to achieve economic growth. ‎The government is committed to engaging the private sector in line with what is considered best practices.”

He said the nation’s Gross Domestic Product ( GDP) declined from 6.3 per cent in 2014 to 2.15 per cent ‎in 2015, saying that as at first quarter in 2016, GDP stood at -0.36 per cent.
According to him, the FDI as at first quarter in 2015 stood at ‎$395 million, declined to $175 million in the first quarter of 2016, maintaining that values of equities also declined.
The vice president pointed out that as at May 2016, market capitalisation stood to about $48 billion, down from ‎$84 billion recorded in 2014, while inflation is now about 16.5 per cent.
He said to tackle these challenges, the federal government undertook some specific interventions reflected in the 2016 budget, noting that to safeguard jobs and prevent further increases in unemployment, the present administration priortised attention to assisting states and local governments in paying of salaries of workers.

He added that the deregulation of the downstream petroleum ‎sector was also an important policy decision, stressing that the immediate impact led to the increased availability of Premium Motor Spirit (PMS) throughout the country which he said has been achieved at the price of N145 per litre as against the N200 per litre being paid in most parts of the country prior ro deregulation.
He stressed that the deregulation also led to the reduction of daily demand for PMS ‎from 1600 trucks to 850 trucks per day, saving about N1.4 trillion on subsidy payments thereby conserving budget resources and reducing demand for foreign exchange.

Osinbajo said apart from waiting for the Dangote refinery with a capacity of 650,000 barrels per day, the government is also working on fixing the existing refineries.
“Hopefully, we expect that by the end of 2017, most of the refineries will be functioning to some reasonable capacity,” he said.

‎He also commended the new flexible exchange rate policy of the Central Bank of Nigeria ( CBN), expressing hopes that the foreign exchange will stabilise, confidence will be restored and increase in the supply of foreign exchange.

Osinbajo noted that the present administration pledged to keep capital spending in the budget at a minimum of 30 per cent, saying that it is a target ‎the federal government is determined to keep because capital spending encourages FDIs.
“We have already made capital releases of N332 billion which is more than the entire amount of capital released last year with another N100 billion set to be released in the next few days,” he said.

The Vice President pointed out that the main sectors for which the funds have been released include power, works and housing, defence, transportation and agriculture.
He added that one of the areas the present administration has brought change is in public financial management which has consequential effect of saving jobs, stressing that the ongoing implementation of the Integrated Payroll Personal Information System (IPPIS) is bringing about a monthly savings of N8 billion, while the creation of the efficiency unit in the ministry of finance is projected to save N14 billion in the 2016 fiscal year alone

LCCI Comments

The president, LCCI, Dr. Nike Akande, ‎in her contribution, stated that the short-term outlook of the economic indicators for Nigeria were not looking bright, saying the major trigger of the economic downturn was the collapse of oil price.
She said the situation calls for adjustments by all stakeholders in the economy, expressing confidence that Nigeria will get over the current recession sooner than later.
She explained that the Nigerian economy had strong fundamentals, stating that “resources are enormous, the domestic market is large and the people are resourceful and enterprising.

Akande however noted that Nigeria needs the right mix of policies to achieve the desired outcomes. She added: “We acknowledge some policy choices the present administration has adopted to promote economic diversification, stabilise the foreign exchange market and ensure sustainable supply of petroleum products.”