Muda Yusuf
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 economy nevertheless maintained a positive growth trajectory driven by the recovery of oil price for most part of the year. This gave a boost to the macroeconomic fundamentals. However, at the close of the year, we saw 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 macroeconomy. Nigeria remains a potentially robust economy with a large market, abundant natural resources and a productive population.
Economic Activities & GDP Growth
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%.
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
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 22nd December 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 $60p/bl. The declining global oil price will likely distort FG’s economic projections for 2019 as well as impact adversely on its MTEF if the trend is not reversed.
Foreign Exchange Market
Exchange rate was relatively stable in 2018 in different segments of the FX market. At the parallel market, the naira hovered within the band of N361/$ – N363/$; and at the I&E FX window, the naira traded within the tight band of N360.95/$-N363.32. Higher oil prices and stable local production levels of crude oil are the two key critical factors that restored calm in the forex market.
Policy rate normalization in the United States of America, which led to the US FED hike in policy rate triggered capital flow reversals. The contagion effect spread across emerging economies including Nigeria, with foreign investment outflows leading to pressures in the forex market. Consequently, in a bid to support the value of Naira, the CBN sustained its intervention in the forex market.
There are fears that the sharp fall in oil prices if sustained could lead to a new pressures on the naira exchange rate. 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 a rise in the level of inflation. The fiscal operations of government would be adversely affected. This may further escalate the deficit in the budget.
Interest Rate
The Monetary Policy Committee (MPC) of the CBN in its 2018 meetings consistently left the Monetary Policy Rate (MPR) and other parameters unchanged as follows:
o MPR was left unchanged at 14%;
o Cash Reserve Ratio (CRR) at 22.5%;
o Liquidity Ratio at 30.0%; and
The MPC cited factors such as slow recovery in the economy, rising inflation rate, late implementation of 2018 budget, rising level of non-performing loans in the banking system, weakening demand and consumer spending, and expected minimum wage increase as reasons for retaining a tightening monetary policy stand at this time.
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.
Foreign Reserve
The Central Bank of Nigeria (CBN) consistently intervened in the foreign exchange market in 2018, and this put pressure on the country’s external reserves which dropped from $47.5 billion in July 2018 to $43 billion as at 20thDecember 2018. The increasing pressures on the nation’s currency may not be unconnected with the sell-off in fixed income securities and equities by foreign investors resulting from the rising rates in advanced economies. However, the reserves are still robust enough to support the nations international trade transactions at this time.
Inflation
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. Following the diminished high base effect in August 2018, the country is likely to see headline inflation trending up in the early part of 2019.
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 of 31%; 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, and in 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 keep the 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.
INVESTMENT CLIMATE ISSUES IN 2018
The business environment issues are as critical to the progress of the economy as the macroeconomic conditions. These are issues of infrastructure, policy issues, tax issues, regulatory environment, institutional issues, security situation, policy consistency and many more. Some of the major business environment issues that impacted on businesses in 2018 include the following:
Ease of Doing Business Ranking in 2018
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. In 2017, there was record leap of 24 steps in the ease of doing business ranking for the country, 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.
Power Situation
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.
However, the power situation continues to pose severe challenges to the private sector operators, impacting adversely on productivity. Throughout the outgoing year, we received complaints across sectors 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. These continue to take its toll on the bottom line of investors. 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.
Traffic Gridlock on Lagos Port Roads
Traffic congestion to and within the Lagos ports is a popular and well-reported phenomenon. 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.
Regulatory Environment
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. 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.
Arbitrary Bank Charges
Concerns were 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.
Outlook For 2019
The Nigerian economy remained fragile with the high dependence on oil sector for revenue and foreign exchange earnings. 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.
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.
Given the challenging economic conditions, key policy reforms would be imperative to support and sustain macroeconomic stability. These include, among others, 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.
Yusuf is the Director General of the LCCI
