Weak Consumer Confidence and Nigeria’s Quest for Economic Recovery

0

Restoring consumer confidence remains the key to Nigeria’s economic recovery, writes Obinna Chima

The Nigerian economy is mired in recession. Consumer spending is weak, just as purchasing power continues to dwindle. This is majorly because most of the states have been defaulting on payment of wages to workers. Firms are hesitant to hire unemployed workers, given the macroeconomic challenges.
Also, monetary policy appears to have reached its limit as consumers and businesses resist to borrow, even as banks continue to battle with rising non-performing loans (NPLs).

Clearly, the depressed consumer confidence in the economy is reflecting on economic activities. Consumer Confidence in Nigeria decreased to -28.20 in the third quarter of 2016 from -24.20 in the second quarter of 2016. Consumer Confidence in Nigeria averaged -8.57 from 2008 until 2016, reaching an all time high of 6.38 in the first quarter of 2011 and a record low of -28.20 in the third quarter of 2016. Consumer confidence is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending.

In Nigeria, the Consumer Expectations Survey provides consumers’ tendencies and expectations for general economic conditions, job opportunities, personal financial standing and market developments. The overall consumer confidence index is computed as an average of three measures: the outlook on macroeconomic conditions, family financial situation and family income.

In addition, the third quarter real gross domestic product (GDP) growth data released by the National Bureau of Statistics (NBS) had shown that the country sank deeper into recession, contracting by 2.26 per cent from -2.06 per cent in the second quarter of this year, and -0.36 per cent in the first quarter. This represented a 0.18 per cent drop from the growth recorded in the preceding quarter and lower by 5.08 per cent relative to the corresponding quarter in 2015.

The latest GDP growth data further confirmed the level of weakness in consumer confidence as well as the economy, which has been hobbled by rising unemployment and job losses, declining capacity utilisation, and acute foreign exchange shortage.
Inflation, which climbed to 18.48 per cent in November, has maintained an 11-year high, as prices of goods and serves escalate.

But in response to the unpleasant situation in the country, the federal government has proposed an expansionary budget for 2017, through which it plans to increase spending and pull the economy out of recession.
The appropriation bill contained proposed aggregate expenditure of N7.298 trillion for the 2017 fiscal year. Part of the proposed budget estimates showed aggregate expenditure of N7.298 trillion. A significant portion of the recurrent expenditure was provisioned for the payment of salaries and overheads in institutions that provide critical public service.

Beyond these, the federal government also unveiled a 10-point fiscal roadmap, designed to place the economy on the path of recovery and growth.
Minister of Finance, Mrs. Kemi Adeosun said a major component of the roadmap is to replace administrative measures on the list of 41 items with fiscal measures to reduce demand pressure on FX at the parallel market.
Adeosun said, “The federal government’s Fiscal Roadmap is addressing barriers to growth that will drive productivity, generate jobs and broaden wealth creating opportunities to achieve inclusive growth.”

She stated that the president was determined to transform Nigeria to a productive economy from the one that is consumption driven. To do so, she pointed out, the federal government would tackle the infrastructure deficit to unlock productivity, improve business competitiveness and create employment. The minister stated that the government would actively partner the private sector to achieve this by use of a number of new funding platforms. These, according to her, include the Road Trust Fund, which will develop potentially tollable roads, and the Family Homes Fund, which is an on-going PPP initiative for funding of affordable housing.

Need to restore consumer confidence
To Johannesburg-based sub-Saharan Africa Economist at Renaissance Capital (RenCap), Yvonne Mhango, a recovery in oil output would help lift consumption. This, she however stressed may not be in the near term as government’s talks with the Niger Delta militants remains protracted.
She pointed out that the consumer sentiment of the majority of Nigeria’s households has been negative for five years. This was based on the consumer confidence index (CCI), which has been negative since third quarter 2011.
“We found Nigeria’s consumer confidence to be correlated with the petrol price, foreign exchange (FX) rate, interest rates, and oil output (in order of strength). Our outlook on the consumer is premised on our view of the aforementioned variables.

“In import-dependent Nigeria, where all fuel and one-quarter of the food consumed are imported, it comes as no surprise to us that consumer confidence and the more market-driven parallel FX rate are negatively correlated. This correlation tells us that a weaker (stronger) naira dampens (ameliorates) consumption, as consumer goods become expensive (cheaper).
“As we see the naira weakening further in the short term, consumer confidence is likely to worsen and consumption fall. The downside for the consumer may be mitigated by the fact that most imports are being transacted at the parallel FX rate,” she added.

She stressed the importance of fuel to Nigeria’s economy, saying it cannot be understated. Not only is it necessary for vehicles that transport passengers and distribute goods, it also powers houses and factories. So, when fuel prices increase, the share of disposable income leftover for other goods and services falls.
“We believe this explains the negative correlation between petrol prices and consumer confidence. A weakening naira implies that petrol prices are set to increase in the short term. As incomes in Nigeria are flat or falling, higher energy prices mean less disposable income available to consume other goods and services.

“When the lending rate is increasing (decreasing), consumer confidence falls (improves). This is what the negative correlation between the two variables tells us. This may surprise those that know Nigerian households to be underleveraged, in part due to low credit penetration, compared with, say, Kenya”, she added.

Fiscal stimulus
Also, some economists harped on the need for the federal government to resort to fiscal stimulus to revive growth and reset the economy.

The Head of Africa Research, Standard Chartered Bank, Razia Khan, said the situation in Nigeria did not come as a surprise largely because of the extent of the downturn in oil sector GDP.
According to Khan, the resumption of payments to Niger Delta militants was not sufficient to trigger a meaningful improvement in production, saying that further attacks, reported in recent weeks, pose new risks to the outlook, as does the very real risk that there may not be any resolution to Niger Delta issues soon.
“However, flat growth does not in itself hold enough promise. The urgent adoption of reforms is now required in order to de-bottleneck Nigerian growth.

“Not least, real attention needs to be given to the problems of FX liquidity which continue to hold back growth in manufacturing. It is clear that the measures instituted so far are not sufficient to bring about a real improvement in FX inflows. New and different thinking is required,” Khan said.
The Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, said: “Some things are definitely not working right,” in the country.

“The stimulus package has to be increased and intensified and the interest rate has to come down and they have to make forex available. The forex market arrangement now is not working and something has to be done and very quickly. There is no easy answer to it, but we must face the reality and find our way out of this situation,” the FDC boss stated.

Similarly, the Director General of the West African Institute for Financial and Economic Management, Prof. Akpan Ekpo, said the proposed $30 billion borrowing plan would go a long way in resetting the economy.
“To be honest, the government needs resources to spend and the delay in approving the borrowing is a problem. The lawmakers need to approve it for government to borrow quickly and put the money into capital project. That is very important.

“Secondly, a lot of the states are still not paying salaries. The federal government has to find a way of supporting the states to pay salaries,” the former vice-chancellor of the University of Uyo said.
Also, the Chief Consultant Biodun Adedipe Associate Limited, Dr. Biodun Adedipe advised the federal government to develop policies that would help tackle all firms of unemployment in the country.
The economist stressed that major challenge facing the nation presently are unemployment and underemployment, which is also referred to as disguised unemployment.

“Among 24 to 45 youths in the labour force, about 45 per cent of them are unemployed, and that is where the real issue is in dealing with recession. Unemployment has to be tackled to lead the economy out of recession. The challenge is that we have a weak production base in this country and that is also a challenge to this economy.
” In Nigeria, we consume what we don’t produce and produce what we don’t consume. For instance, most of the agric produce, we generate from the farms and then export without adding any value. The value of the cocoa we sell to the rest of the world is by far so little compared with what we spend on chocolate and other derivatives of cocoa that we import. In this case, we send the raw materials out, but we import finished goods,” he said.
According to Adedipe, if Nigeria is to get out of recession, it must not follow all the World Bank and IMF template, adding you have to sit back and look at what would work for the economy.

“It is not just to take whatever the World Bank and IMF tells us. I warned the government sometime not to listen to World Bank and IMF that says it is only when the growth rate is negative, that is when you fall into recession. What we learnt about business cycle is that it is in four phases.

“You have boom, recession, which means the economy is going down, it doesn’t talk about negative growth, which means we should have been more worried and concerned in dealing with the downslide rather than wait until we enter negative growth. Of course, if you don’t deal with that, you enter a slump. But a recession is not all bleak. If it has a message that eludes most people, it is that after recession, recovery would definitely follow. What matters is what you do, rather than what you are going through in recession,” he added.

Furthermore, the economist expressed optimism that the economy was already on the path of recovery, just as he urged government to show leadership by ensuring that it increases spending.

Adedipe, described the proposed budget for 2017 as “good direction in terms of volume, good direction in terms of structure and of course, good direction in terms of emphasis. So, the important thing is to encourage the government to continue in that direction in terms of sectors to focus on, and then putting emphasis on capital expenditure.”
On his part, the Chief Executive Officer, TGI Group of Companies, Christian Wessel, advised the federal government to increase its focus on the education sector in its bid to drive local production. According to Wessel, if Nigeria actually believes that supporting local production is the way to go, governments at all levels must promote and support quality education at all levels. Wessel further pointed that encouraging the local manufacturers all over the world goes along with renewed efforts to develop the education sectors.

“Nigeria has over the last years collapsed actually in the ‘Ease of Doing Business.’ But i was pleased that the Minister of Trade and Investment recently said improving the ‘Ease of Doing Business’ is one of his priorities. I don’t believe that foreign exchange scarcity is Nigeria’s major problem.
“I also believe the cost and time that it takes to establish and run a business has negative impacts on domestic production. There are smaller countries in Africa that have improved Ease of Doing Business. In Nigeria, both public and private sectors also need to increase efficiency. Everything here seems to be difficult, things are time are time consuming and resource allocation is so inconsistent,” Wessel added.

In his contribution, the Chief Executive Officer and Regional Head, West Africa, RMB, Mr. Michael Larbie, urged government to develop a roadmap that would help address infrastructure challenges across all sectors in the country.
“We need structural changes in our institutions and ministries. It is important that performance scorecard is established for various ministries. It is also important that feedback or monitoring mechanism is implemented.
“For instance, the works department is responsible for registering companies, and there should be a target or quota like how many companies they are supposed to register within a period of time.

“If somebody submits documentation for registration, how long should you turn it around? We need to give ourselves standard. We need to set targets and ensure we meet up to the target. If it’s two weeks and if after two weeks, it has not being done, there should be a good explanation,” Larbie added.

Also, the Managing Director, Grame Blaque Advisory, Zeal Akaraiwe called for a long-term economic plan to help address Nigeria’s challenges, even as he cited the challenges posed by foreign exchange scarcity in the country.
Similarly, a research analyst with FXTM, Lukman Otunuga, believes that diversification is the way out.
“Nigeria must look towards agriculture, tourism and manufacturing to get out of these shackles. You know where this country used to be. It can still get there. However, in the meantime, CBN should allow the naira to flow freely so it can finally find equilibrium. I am not talking of devaluation, because that is a very delicate one.

“This administration could have done that when it just came in. Right now, President Muhammadu Buhari might not want to do it because the common man will suffer more, Nigeria being import-dependent. It is a very tough position. Nigerians should brace up”, he said.

Clearly, there is need for the federal government to restore confidence in the economy, to gain the trust of both Nigerians and foreigners as well as to attract the desired investments needed to stimulate economic activities. Consumer confidence is almost always determined by national economic conditions, rather than by global events, or events in one or more other countries. Confidence is the lens through which consumers see their economic environment and what we see influences how we respond.

Indeed, when consumers know what to expect, and are not feeling uncertain, they can tolerate a lot. Inflation, high or low, matters more or less depending on how far those affected anticipate it and can consequently incorporate it into their expectations about coming price changes, but consumers often react strongly when inflation is unexpected. They don’t like economic surprises.