Perspective on the Nigerian Economy


The Lagos Chamber of Commerce and Industry recently reviewed the economic and investment opportunities in the country. Jonathan Eze writes on the challenges and recommendations made by the chamber

Nigeria’s real Gross Domestic Product (GDP) grew by 1.92% in Q4-2017 and averaged 0.78% in 2017. The economy returned to recovery path in Q2-2017 after five consecutive quarters of contractions. However, few sectors are currently contributing to the positive GDP numbers. These include agriculture, transportation, mining which includes crude petroleum, and trade.
Productivity and growth remain lower than desired and fragile; population growth is high at 3% per annum, raising concerns about prospects for sustainable poverty reduction.

Inflation Rate
Headline inflation rate trended downwards to 12.48% in April 2018 from 18.72% in January 2017, the lowest since 2016. It is noted that improvement in crude oil prices and oil output, better liquidity conditions in the forex market and rising foreign reserve are partly responsible for the sustained moderation of the price level.

Foreign Exchange Market
Exchange rate volatility has reduced over the last three quarters and businesses are witnessing improved liquidity and relative stability in the forex market. Confidence has returned to the market but remains somewhat fragile due to continued dependence on oil revenue. Thus, stable global oil prices and local production levels of crude oil remain the two key critical factors driving the current stability in the FX market.
Meanwhile, there are concerns over the following issues in the forex market:
• Multiplicity of FX rate: The CBN currently operates multiple rates and this continues to raise transparency issues and impact adversely on investors’ confidence.
The wide gap between CBN official rate of N305 rate and other rates at N360 and above continues to create undue arbitrage and transparency issues.

Foreign Reserves
At $47.5 billion in April 2018, foreign reserves recorded significant growth of 109% from a low of $23 billion in October 2016, the highest since 2014. Growing reserves would impact positively on investors’ sentiments, stability and liquidity of the foreign exchange market.

Interest Rate
Access to and cost of fund in Nigeria have been and remained a big issue for many domestic investors. With commercial bank lending rate at between 20-35%, depending on the borrower and other factors such as acceptability of collateral, it is very difficult to successfully access fund by the private sector especially the SMEs. The LCCI notes the efforts of government through CBN and the Bank of Industry (BOI) to extend intervention funds to operators. However, the range of beneficiaries and economic wide impact of government intervention funds remain very limited. Investors in many sectors cannot finance projects profitably at an interest rate above 10%. These sectors are majorly agriculture, real estate, solid minerals, etc.

Debt Profile
Nigeria’s total debt, both FG and states, was $71 billion and N14 trillion for external and domestic debt respectively as at year end 2017. Debt service cost was about 66% of government’s revenue in 2017. Nigeria’s external debt grew by 41% over the last three years from $10.7 trillion in 2015 to N15.1 trillion in 2017. Domestic debt seems to have grown even faster during the three-year period by 52%. The budget office recently reported that the federal government spent a total of N4.3 trillion to service the country’s debt obligations to local and foreign debtors between January 2015 and September 2017.

In addition, the Federal Ministry of Finance announced that the FG currently spends about N700 billion monthly on wages and debt servicing. This figure is higher than the average monthly FAAC shared between states and FG over the last 12 months.
At the current growth rate, it is projected that Nigerian debt stock will keep rising by more than 20% annually over the next decade. Mounting debts have the following implications:
• High debt service deprives the economy of revenues for infrastructure investments.
• There is a crowding out effect on the private sector credit.
• Exchange rate depreciation creates additional debt burden arising from foreign debt.

Equity Market
The Nigerian Stock Exchange (NSE) experienced a depressed trend over the last six weeks after an impressive performance in Q1-2018 when it was adjudged one of the world’s best performing stock markets. The All Share Index (ASI) gained 7% year to date in 2018 compared to 40% performance it recorded in 2017.
It was also noted that the equity market failed to respond to impressive full year 2017 financial results released by many of the quoted companies in Q1-2018. This is likely the outcome of some recent policies such as the directive by the CBN that restricted dividend payments by banks with high Non-Performing Loans, (NPLs) and low Capital Adequacy Ratio from paying dividend to their shareholders.

Fake and Substandard Products
Standards Organisation of Nigeria (SON) and National Agency for Food and Drug Administration and Control (NAFDAC) are making efforts in ridding the economy of fake and substandard products. But, the reality is that the incidence of fake and substandard products as well as counterfeiting is on the increase. It is a major problem for many leading brands in the consumer and durable products sector. It erodes the market share of the leading brands, impacts adversely on their reputation, and erodes their profit margins. There are also implications for the health and safety of the citizens.

We, therefore, request for better investment in the capacity of the Standards Organisation of Nigeria (SON) and the National Agency for Food and Drug Administration and Control (NAFDAC). This is important to tackle the menacing and growing incidence of fake and substandard products. There are concerns about the overlapping responsibilities of SON and NAFDAC. Such overlaps also exist between SON and Weights and Measures unit of the Federal Ministry of Industry, Trade and Investment.

Cost of Logistics
The role of government in fixing roads and the enhanced capital budget in the 2018 budget was commended. However, the cost of logistics remains very high, arising largely from the poor state of the roads and the effects on transportation and logistics cost. We demand for a better funding framework for Nigerian roads. The current budget-dependent framework for funding of the roads cannot make the desired impact.
The proposal to set up a Road Fund needs to be quickly revisited and its implementation accelerated. This is the model that has worked in many other jurisdictions and we believe it will work here. The earlier we adopt this model for funding the roads, the better for the economy and the citizens.

Borehole Tax
The Lagos Water Regulatory Commission (LWRC), imposes tax on boreholes. These are in the form of borehole permit, Application fee, abstraction fee, and water treatment plant levy. We appreciate the need to worry about the impact of the indiscriminate drilling of boreholes on the water table. But, we do not believe that the solution to regulating the drilling of boreholes is the imposition of levies. Private sector players sink boreholes because of the acute water shortage in Lagos State. After all, the drilling of boreholes comes as an additional cost to business.
The Private Sector is ready to pay for public water supply if it is provided. In fact, it is cheaper to depend on public water supply than to be drilling and maintaining boreholes. The resort to borehole drilling is a product of necessity. We, therefore, urge the Lagos State Water Regulatory Commission (LSWRC) discontinue the imposition of borehole tax in the interest of equity, fairness, and morality.

High Cost of Gas
Users of gas are currently charged in dollars, this creates pressures and volatilities of exchange rate depreciation. This pricing policy has been imposing a lot of burden on the manufacturing sector. It is inappropriate to charge in dollars for a product that is produced in Nigeria and sold in naira. Energy cost is a major component of cost and a major factor in the competitiveness of firms in Nigeria. We need to address the issue of gas pricing to support the non-oil sector of the economy and promote the realisation of the objectives of Economic Recovery and Growth Plan [ERGP]. The government needs to support investment in gas infrastructure in order to bring down the price of gas to end users. This will enhance the competitiveness of our industrial sector as well as other sectors of the economy.

Palletisation Policy
Late last year, the government introduced the palletisation policy. We raised our concerns over its imposition, especially the implication for the cost of freights. Additional containers would be required by importers under a palletisation regime. Additionally, we expressed concerns based on the fact that not all cargoes can be palletised. We appreciate the response of the government and subsequent review of the policy. In particular, we appreciate the prompt and effective intervention of the Presidential Enabling Business Environment Council, (PEBEC).

Customs Checkpoint
We recall that the Presidential Executive Order which directed the dismantling of all customs checkpoints outside 40 kilometres of international borders and the Port Areas across the country. Regrettably, this order has not been complied with. We receive frequent complaints about the actions of the Federal Operating Unit (FOU) and the CG Task Force, stopping containers on the highways in violation of the Executive Order. We demand that this executive order be strictly complied with in line with the ease of doing business agenda of government.
However, in the event of strong and credible intelligence, containers can be intercepted. But, this should only be an exception, not the rule. We request that all containers that have been duly cleared from the ports should not be intercepted on the highways.