Economic & Business Review In 2015 and Perspectives for 2016
Year 2015 was challenging even as the difficulties in the business environment persisted (especially in relation to insecurity in parts of the country, infrastructural conditions, foreign exchange crisis, funding issues, consistency of policy and the quality of institutions). There was also the challenge of uncertainties and risks created by the political transition and the elections. The daunting challenges notwithstanding, the economic and business outlook for 2016 looks hopeful!
ECONOMIC ENVIRONMENT IN 2015
Political and economic developments offered mix of extreme and yet interesting events which shaped business and economic environment in 2015. According to National Bureau of Statistics (NBS), Nigeria’s real Gross Domestic Product (GDP) falls to 2.84% in the third quarter of 2015, compared to 6.23% in the same period in 2014. In fact, sectors such as manufacturing and the services entered recession after recording successive decline over the last three quarters in 2015. On the positive note, the successful democratic transition that ushered in a new political administration, presented a new wave of optimism for economic stability and policy focus. However, business activities were largely slow for a better part of the year due to uncertainties created by delay in forming an economic team and appointing ministers to drive the change agenda.
The Central Bank of Nigeria (CBN) through its Monetary Policy Committee (MPC) on Tuesday 24th November, 2015 resolved, among other issues, to reduce the MPR from 13% to 11 % (which represents the lowest since 2009) as well as the CRR from 25% to 20%. The decision by the MPC to reduce monetary rates was informed primarily with a view to stimulate output growth and ease financial speculations induced by high arbitrage. This is against the backdrop of the economic realities as manifested in weak and fragile domestic macroeconomic environment, declining private and public expenditures, fall in the international oil price and inflationary pressure in 2015. Also, cost and access to fund remained a major challenge for businesses especially MSMEs. Through the year, lending rate of commercial banks including fees and charges ranged between 22% and 34% depending on the customer profile, tenor and collateral quality. The relaxation of monetary conditions is expected to improve the liquidity in the economy and spur growth in 2016.
On the global scene, the price of crude oil continued to experience a downward trend. The price of OPEC Reference Basket of Crudes (ORB) which stood at $62.16 as at May, 2015, further slipped to about $42.33 per barrel in November, 2015. The price was far below the budget benchmark of $53 per barrel for the year. The drastic decline consequently led to various fiscal and economic challenges such as the drop in foreign earnings, strained fiscal budget and huge financial bailout for some state governments and unstable business environment.
Deepening Monetary, Financial & Fiscal Crisis
Through the year, Nigeria has increasingly drifted into economic and financial crisis following series of adverse developments in the international and domestic oil market. In response to dwindling receipts from oil export, the Central Bank of Nigeria (CBN) adopted several measures such as the closure of Retail Dutch Auction System (rDAS) window, restriction of cash payment into domiciliary accounts and prohibition of 41 items from accessing the interbank foreign exchange market. CBN’s administrative management of forex market signposted much deeper challenges to business activities and the economy as a whole. As at 18th December, 2015, premium at the parallel market reached a record level of 41% against the official exchange rate even as the naira crashed further to 280/$. There were indications that the crash has not bottomed out yet as the exchange rate may reach 300/$ as a result of a continuous pressure on naira in the parallel market at the end of the year. The CBN, in an attempt to arrest the trend, blamed the development on the activities of speculators in the parallel forex market thus pushing for stricter restrictions.
2015 continued to experience more capital controls:
• Downward adjustment of maximum spending limit on offshore credit/debit card spending to $12,000 per annum.
• Reduction in the weekly allocation to $10,000 per BDC
• BDC operators to source for dollar from private sources for personal and business travels
• Complete cancellation of the weekly sale of foreign exchange to BDC dealers anytime from now (market anticipation).
Since the crisis was a supply-side issue occasioned by the moribund international oil price and weak productive capacity, the demand approach through capital control further reduced liquidity in the system (affecting business operations, credit worthiness and image, increased inflation rate, reduced profit margin). The CBN “subsidy approach” was not sustainable at the value of external reserves ($29.4 billion as at December 15) which could barely fund five months of import. Also, the strategy appeared to be giving a temporary sense of security especially against Nigeria’s troubling oil revenue profile. As a matter of fact, the demand-side approach forced CBN to be the only supplier of foreign exchange in the market putting further pressure on foreign reserve and defeating the very objective of the policy.
In addressing the issue, different policy trajectories were recommended for alternative courses of action through the year:
• Devaluation of naira to its near-market value as this will boost the economy and attract more foreign investment portfolio.
• Need to ease the restriction as both the official and parallel FX rates do not reflect the true picture (equilibrium value) of naira.
• Real sector development through economic diversification strategy.
The forex restrictions also prompted JPMorgan Chase & Co. to remove Nigeria from its local-currency emerging-market bond indexes, tracked by more than $200 billion of funds, in September 2015, triggering a sell-off in the nations’ assets. As a consequence, equity market lost over 30% making the Nigerian Stock Exchange (NSE) one of the worst performing equity markets in 2015. Depressed international oil market, exchange rate crisis and fears coming from slowing Chinese economy induced negative pressure on the Equity Market. Market outlook remained largely indifferent in the short-term. However, we see great prospects in Nigerian equities over medium to long terms as most stocks are currently trading far below their fair values.
Approximately 70% of total spending in the Nigerian economy is tied to the public sector, making it an indispensable business driver for private sector operators. This explains why government fiscal stability and sustainability is a key factor for gauging business confidence by domestic and foreign investors in the country. Thus, any fiscal shock sends disproportionate adverse impact to the private sector in Nigeria.
LCCI’s Q3-2015 business environment survey showed that forex restrictions by CBN is one of the costliest policy in Nigeria in recent years. Available data showed that Customs revenue contracted by 50% (about N600 billion) over July-November 2015 relative to 2014 figures. In the same vein, the private operators across several sectors (FMCGs, Steel, furniture, pharmaceuticals and manufacturing) lost about N1.46 trillion in stalled business activities resulting from paucity of forex over the last six months.
In 2015, unfriendly business environment continued to undermine the capacity of investors to maximise abundant business opportunities in Nigeria, Africa’s largest economy. With drastic fall in oil price (currently at $30-39 per barrel), heavy fuel subsidy bill nearing N1 trillion in 2015, wide spread insolvency among state government across the country, increasing sovereign debt (about $60 billion, including debt provisions in 2016 MTEF) and debt service obligation of N1.3trillion in 2016 the financial crisis may linger.
How much the new political administration (since May 29, 2015) led by President Muhammadu Buhari will turn the current tide remains to be seen. According to the World Bank in its 2016 Annual Ease of Doing Business Report, Nigeria is ranks 169 among 189 countries with Mauritius ranking 32 as the best in Africa. From the report indicators, Trading Across Boarders which is a measure of country’s ports effectiveness presents a more depressing ranking of 182 out of 185 countries. This underscores the need to urgently take steps towards reforming port operations in Nigeria.
Nigeria Ranking on the World Bank Ease of Doing Business
Topics DB 2016 Rank DB 2015 Rank Change in Rank
Ease of Doing Business 169 170 +1
Starting a Business 139 131 -8
Dealing with Construction Permits 175 175 No Change
Getting Electricity 182 181 -1
Registering Property 181 185 +4
*Getting Credit 59 52 -7
Protecting Minority Investors 20 33 +13
Paying Taxes 181 181 No Change
*Trading Across Boarders (Ports) 182 182 No Change
Enforcing Contracts 143 143 No Change
Resolving Insolvency 143 143 No Change
Distance to Frontier (%) 44.69 43.56 +1.13
Source: World Bank Ease of Doing Business Report – 2016
The Lagos Chamber of Commerce and Industry [LCCI] and the business community are very concerned about the current state of the economy and consequences of the CBN approach to the management of foreign exchange market over the last few months. We have previously engaged the CBN and other authorities through several fora (including dialogue sessions and memoranda) to draw attention to the implications of Forex policies on Businesses and the economy.
BUSINESS ENVIRONMENT IN 2015
Access Roads to Lagos Ports
We had consistently expressed our concern over the deplorable state of roads leading to the Lagos ports (Apapa and Tincan Island). These ports account for over 60% of the cargo into the country and an estimated 70% of customs revenue. The poor state of the roads has multifarious effects on the private sector, economy and the citizenry. Some of these effects are as follows:
i. Risk to the lives of citizens arising from containers falling off the trucks as a result of bad roads. Several lives have been lost in recent past as a result of this.
ii. Congestion at the ports resulting from the delay in the evacuation of cargo.
iii. High demurrage paid by importers to Terminal Operators and Shipping Companies as a result of delay in the clearance and evacuation of cargo in the ports.
iv. High cost of transportation for evacuating cargo because of the prolonged engagement of the trucks by importers arising from the delays.
v. Serious traffic congestion along the roads leading to the Ports, which often spill over into the Lagos Metropolis causing severe traffic jam and loss of man hours.
vi. Delays in getting raw materials and other inputs from the ports to the factory premises in Lagos and other parts of the country.
We shall continue to press for the Federal Government to fix these roads as a matter of utmost urgency, as these are Federal roads. It is also important that the Trailer Park under construction in the neighbourhood of the Tincan Island port be urgently completed to reduce the menace of trucks and tankers on Lagos roads.
Counterfeiting and Influx of Fake Products
We received heightened complaint from top brands operating in Nigeria, that about 50% of products branded and sold in the markets are counterfeit. This situation puts the companies in a big financial risk. While LCCI acknowledges efforts by the Nigerian government and the Standard Organization of Nigeria (SON) in putting an end to the scourge of counterfeiting in Nigeria, there is still more to be done in curbing this problem. This need for a framework to facilitate the enforcement of penalties as well as synergy between relevant security agencies and the companies whose products are being counterfeited.
Common External Tariff Policy
We raised our concerns to the authorities relating to the unintended implications of the Common External Tariff (CET) on the Nigerian economy and the business community. CET is one of the instruments for harmonising ECOWAS Member States and strengthening its Common Market. While the policy intention is laudable, we contend that there is need to take another look at the categorization of duties and description of goods under each category as defined in CET.
We note that some of the duty categories and description of goods are capable of wiping out local investors and exposing the country to all manner of unfair competition from developed countries including job losses. For instance, the policy places zero import tariffs on finished drugs and 5-20% import tariff on raw materials and packaging for the pharmaceutical industry. This policy is at variance with the country’s aspirations to develop the local industries.
SECTORAL PERSPECTIVES IN 2015
1. Real Estate:
• The sector is affected by oil price shock and naira depreciation
• Dwindling government revenue meant less contracts
• Landlords switched to dollar pricing as naira depreciation began to bite
• Residential vacancy factor went up to 63% from 35% in January 2015 and commercial vacancy factor increased to 58% from 47% in January 2015 in Lagos
• Airlines saw a decline in 2015 profits mainly due to forex restrictions as backlog of remittances persisted.
• Excess capacity and lower demand compelled airlines to introduce promos and discount fares to stimulate demand and this came at a huge cost.
ECONOMIC OUTLOOK FOR 2016: Time for Recovery?
Despite the tough economic and business realities, the Nigerian economy remains very resilient as the largest in Africa with flourishing informal sector. The large informal sector which accounts for about 40% of the economy assists in absolving lingering shocks. Innovative measures directed at attracting most informal sector players to formalise their businesses present huge opportunity. More than ever before, the Nigerian economy is positioned on the path of accelerated growth and stability in 2016.
Three major economic drivers are identified as the frontiers of the expected boom in 2016. First, the successful political transition in the country, has given Nigeria a global credence as a stable democracy and model for other African countries. Second, the curbing of fiscal leakages through the TSA is expected to increase the available revenue to the government and build up external reserves. Lastly, the diversification strategy adopted by the government through import substitution and export promotion which aims at increasing and broadening income stream of the economy. Therefore, despite the government’s rapidly deteriorating revenue, the 2016 budget plan is projected to be expansive (15% larger than last year’s budget) allocating 30% of the budget to capital expenditure. The government also plans to finance the budget gap by increasing non-oil revenues and improving tax collection.
In 2016, GDP growth is expected to rebound, though, slowly to about 3.5%. While the recovery is expected to be driven by increase in government expenditure, the growth in oil sector may be constrained still by low price and investment drive. The expected growth in the non-oil sector, to a large extent, will be driven by construction, agriculture and manufacturing sectors. Meanwhile, the exchange rate volatility is expected to persist fuelling high inflation of about 10-11%. However, adjustment towards Real Effective Exchange Rate (REER) in the form of currency devaluation is likely in Q12016. This will reduce the pressure on external reserves.
Other macroeconomic features for 2016 are highlighted as follows:
• Clearer macroeconomic policy space
• Expansionary fiscal stance
• Improved power supply and infrastructure
• PIB acceleration and downstream deregulation
• Blocking leakages by Treasury Single Account (TSA).
• Gradual slide in MPR and interest rates to improve liquidity
Sectoral Prospective Opportunities
• The targeted N300 billion by the Nigerian banks to boost lending to Small and Medium Scale Enterprises (SMEs) and the agriculture sector in 2016 will boost SMEs development and employment and thus increases non-oil export.
• With the total budget allocation of about 24% (N433.4 billion) power, works and housing subsector is expected to reduce unemployment rate, improve access to electricity, infrastructure and housing facility.
• Banking industry’s regulatory scrutiny is expected to intensify even as TSA/BVN brings sanity to the industry.
• The insurance industry also will remain largely underpenetrated with insurance density at about 0.225%.
• Subsidy arrears payment and end of subsidy regime likely to result in market inefficiency reduction, profitability surge as downstream sector players explore pricing dynamics to boost sales.