Analysts Seek Reforms to Attract Investment in Infrastructure

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By Dike Onwuamaeze

Analysts at Afrinvest West Africa Limited have stressed the need for policymakers to implement reforms to boost the federal government’s finances, enable a conducive business environment and attract investment into human capital development and infrastructure.

The Lagos-based investment and research firm, in a report on the first half 2020 economic review and the outlook for the year noted that the outbreak of the COVID-19 caused severe damage to the Nigerian economy through the transmission of external shocks and local containment measures.

The report, titled: ‘Opportunity in a Crisis?,’ which THISDAY obtained yesterday, stated that the ensuing risks to the health systems and the economy have been unprecedented, with the downside economic risks worse than the 2008/9 global financial recession while the health risks have been described as the worst since the Spanish Flu of 1918.

It stated: “In Nigeria, COVID-19 has only further exposed the country’s structural weakness given economic and health system vulnerabilities prior to the pandemic. The sharp fall in oil prices to a 20-year low of $17.70/bbl in April 2020, following the contraction in global oil demand led to weaker prospects for government revenues and export earnings.

“Accordingly, there was a downward revision of 37.2 per cent to the federal government’s 2020 revenue target to N5.3 trillion while the currency was devalued to enable the economy cope with external account pressures.

“In our opinion, even though we admit that there is no escaping the devastating impact of COVID-19, decades of poor policy choices have elevated risks in Nigeria. The continued reliance on oil for forex receipts and government revenues, together with poor investment in the healthcare sector weakened the resilience of the economy.

“We believe the impact of this pandemic would reverse the marginal gains recorded since the 2016 economic recession, thereby hurting businesses and households. Beyond the initial response of removing fuel subsidies to support revenues, the upside is new priorities for the federal government in the areas we have highlighted in the medium-term.

“We believe the economic crisis brought by COVID-19 presents an opportunity for policymakers to propose and implement reforms that would boost the federal government’s finances, enable a conducive business environment and attract investment into human capital development and infrastructure.”

Commenting on the country’s rising debt profile, Afrinvest stated that while it was cheaper for the federal government to borrow locally at current yields, it did not rule out the possibility of ‘Ways and Means’ funding by the Central Bank of Nigeria, especially when fiscal deficit overshoots the target.

Already, N510.9 billion has been borrowed in the market in the first half of 2020, with N1.7 trillion outstanding in the second half of 2020, which it stated may be raised in the fixed income market or borrowed from the CBN through ‘Ways & Means.’

On the demand side, it anticipated inflows of maturities worth N8.1 trillion from treasury bills, open market operations (OMO) and bonds in the second half of 2020.

“Although this is lower compared with the maturities of N11.3 trillion in the first half, it remains sufficient to push yields lower. We believe that if the CBN decides to tighten liquidity significantly by issuing OMO bills to prevent sharp portfolio outflows as forex demand backlogs are met, there could be significant improvement in yields.

“The expansion in recurrent expenditure drove higher fiscal deficits which had to be financed with expensive debt. The consequences have been huge amid COVID-19, with debt servicing costs at 72.2 per cent of revenues between January and May 2020. Going forward, it becomes urgent for fiscal policymakers to implement strategies that create the space for government spending to prevent deep recessions and support quicker recoveries,” it added.

It also projected that Nigeria’s exports would remain weak largely due to lower oil production and oil prices.

Besides, it anticipated a sustained downtrend in capital flows, saying, foreign investors could be reluctant to hold naira assets following global risk-off sentiments driven mainly by the pandemic as well as the CBN’s capital controls.

Remittances, which have consistently supported Nigeria’s external balance, would slow given economic shocks in source countries such as the United States, United Kingdom and the Euro Area, it added.

“Consequently, we foresee sustained pressure in the current account for the rest of the year given the persistent deficit in the goods, services and income accounts. Prior to the pandemic, the country was already a hotbed of several health diseases that have stretched health systems thin. The lockdown implemented to combat the virus in the major commercial cities of Lagos, Abuja, Port-Harcourt and Kano dealt a blow to economic activities.

“In a survey conducted by NBS to measure the impact of the pandemic on the local economy, about 43 per cent of respondents reported losing jobs, over 50 per cent found it difficult to support household consumption and social protection has been inadequate.

“In our opinion, even though we admit that there is no escaping the devastating impact of COVID-19, decades of poor policy choices have elevated risks in Nigeria. The continued reliance on oil for FX receipts and government revenues, together with poor investment in the healthcare sector weakened the resilience of the economy.

“We believe the impact of this pandemic would reverse the marginal gains recorded since the 2016 economic recession, thereby hurting businesses and households. Beyond the initial response of removing fuel subsidies to support revenues, the upside is new priorities for the federal government in the areas we have highlighted in the medium-term.

“The anti-trade disposition of the federal government should also be reviewed to benefit from regional synergies as the diversification of supply chains from Asia creates opportunities,” it stated.