It Gets Worse: Nigeria’s GDP Shrinking Under Buhari, Records 40% Decline In Growth Rate (FULL DETAILS)

Nigeria’s economy may be in for more gloomy news as the Lagos State Chamber of Commerce and Industry (LCCI) on Wednesday, September 9, 2015 has revealed that the manufacturing and service sectors of the economy have entered a recession after a 40% decline in Nigeria’s growth rate for the second quarter.

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TV 360 Nigeria reports that the President of the LCCI, Remi Bello. who spoke at a media briefing said that the economy under President Muhammadu Buhari has continued to reel in the face of depleted government revenue as a result of the fall in global oil prices.

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He further availed that the biggest obstacle for investors in Nigeria at the moment is the CBN policy on foreign exchange.

According to Bello: “The impact on the economy and private sector are as follows:

1. Many ongoing transactions before the issuance of the CBN circular have been stalled. These were transactions under Bills for Collection for which credit facilities were given by foreign suppliers and for which funds could not be remitted.
2. The sovereign risk perception of Nigeria has worsened over the last two months. Several credit lines for Nigerian investors have been lost following the numerous cases of payment defaults to foreign suppliers. Even reputable blue chip companies have defaulted for the first time in the several years of business relationship with their foreign suppliers. Considerable damage has been done to the image of many companies and the country in the international trade and investment arena. A major confidence crisis has been created for investors.
3. Many companies are on the brink of collapse because of the failure to access foreign exchange for raw materials and other critical inputs. Even companies whose inputs are valid for foreign exchange also suffer the same fate.The CBN measures is taking a huge toll on investors in the free trade zones. The policies are also a violation of the laws setting up free trade zones. Investors in the zone are currently in a quandary.
4. The goodwill that Nigeria enjoyed at the advent of this Administration in the international Business arena is beginning to be eroded by the foreign exchange crises.
5. There is risk of international isolation of Nigeria if current policies are not reversed.

• The economy is now faced with a scenario where there is a much greater pressure to move funds out of the economy than bring funds into the economy. This can be likened to a run on a system. This is a typical scenario which a confidence crisis could create. Future international trade transactions, financial and investment relations are now at risk

• Round tripping of forex has continued to flourish because of the disparity in the exchange rate between the official and parallel market. Inflow of forex into the two autonomous sources has been adversely affected. It is worthy of note that Diaspora funds into the country was about $23billion n 2013. The current policy will discourage the inflow of such funds which normally help to strengthen the supply side of the foreign exchange.

6. Many small businesses have moved to neighboring countries to effect transfers to their suppliers abroad.

7. The banking system is being denied considerable revenue which typically accrues from trade finance and related services to importers and exporters.

8. There is the risk of a rapid growth in non-performing loans in the banking system as investors grapple with the problem of access to foreign exchange.

• Many parents are in a major dilemma on how to remit funds to their children schooling abroad for their upkeep. Current rules only allow for remittance through Form A for school fees and other direct payments to the schools abroad.

• Many hotels in the country are currently saddled with lots of cash [foreign currency] which they could not lodge in their domiciliary accounts, let alone doing business with it. It is a major issue for the hospitality industry in the country.”
• The foremost chamber of Commerce in Nigeria called on President Buhari to review the situation saying the CBN should allow market forces determine the exchange rate with some minimal intervention.

Below is the full text of the Press Conference addressed by the LCCI President;

THE LAGOS CHAMBER OF COMMERCE AND INDUSTRY

THE DEPUTY PRESIDENT OF THE LAGOS CHAMBER OF COMMERCE AND INDUSTRY,

1. KNUT ULMOVEN, MFR

VICE PRESIDENTS AND OTHER OFFICERS OF THE CHAMBER

HERE PRESENT,

HON LIFE VICE PRESIDENTS OF THE CHAMBER

THE DIRECTOR-GENERAL,

MUDA YUSUF

DISTINGUISHED GENTLEMEN OF THE PRESS

 I am pleased to welcome you to this Press briefing which we have called to share our thoughts and concerns about the Nigerian economy and the prevailing business climate. The focus of my address shall be on current business and economic issues.

As you know, these are certainly not the best of times for the economy and for investors. We are going through some turbulence which hopefully shall be momentary. It is important that at times like these, policy actions should not aggravate an already bad situation.

I will be focusing on developments in the foreign exchange market and implications for business; the general macroeconomic conditions and the inherent challenges for the economy and the private sector. I will also proffer some solutions.

Positive Developments in the economy

We are pleased to observe that first 100 days of the present administration, there has been a number of positive developments which I would like to acknowledge as follows:

1. The first is the improvement in power supply, which has been widely acknowledged across all sectors of the economy and households. In the last one month, the expenses on fuel either PMS or diesel has reduced either by businesses or households.

1. We note the more rigorous action in the war against terrorism. Although the challenges of insecurity and terrorism had persisted, it is evident that the present administration has committed considerable resources to the fight against terror. We also note and commend the regional and global alliances that the administration has been building to tackle the menace of insecurity.

• The anti-corruption war has gained a new momentum. The tolerance for corruption has reduced and the right signals have been projected to critical stakeholders. The impunity that characterized the management of public finance in the last couple of years is being contained. These are commendable developments.

1. The goodwill enjoyed by Nigeria in the International community improved markedly. Many countries are now willing to support our socio-economic efforts and advancing the progress of Nigeria. The recognition of Nigeria in the comity of nations and our leadership role in the African continent is being re-established. This is worthy of commendation. Gentlemen of the press, these are the positive developments for which we should give credit to the Buhari Administration. 

MACROECONOMIC ISSUES

National Output [GDP] Performance

According to National Bureau of Statistics (NBS), Nigeria’s real Gross Domestic Product (GDP) fall to 2.35% in the second quarter of 2015, compared to 6.54% in the same period last year. The country’s economic growth rate for the Q2 represents a 40% decline from the 3.96% recorded in the first quarter of this year. Manufacturing and the service sector have now entered recession after recording successive decline over the last two quarters. It is believed that manufacturing sector decline in the 1st half 2015 is partly because of tight forex policies by the CBN which made it difficult for manufacturers to acquire imported inputs, among other factors.

It is believed that manufacturing sector decline in 1st half 2015 is partly because of tight Forex policies which makes it difficult for manufacturers to acquire imported inputs. It is also likely that severe fuel shortages in 2Q15 undermined production and distribution.

Slower growth in Nigeria is a pointer that the economy is yet to come out of the lingering economic shocks. We are cautious and optimistic at the same time that the last quarter of 2015 will likely post a more positive economic outcome.It is believed that manufacturing sector decline in 1st half 2015 is partly because of tight Forex policies which makes it difficult for manufacturers to acquire imported inputs. It is also likely that severe fuel shortages in 2Q15 undermined production and distribution.

Slower growth in Nigeria is a pointer that the economy is yet to come out of the lingering economic shocks. We are cautious and optimistic at the same time that the last quarter of 2015 will likely post a more positive economic outcome.Slower growth in Nigeria is a pointer that the economy is yet to come out of the lingering economic shocks. We are cautious and optimistic at the same time that the last quarter of 2015 will likely post a more positive economic outcome.

REVIEW OF CURRENT FISCAL CHALLENGES

The international price of crude oil is currently trending at a six-year low of $40 per barrel. Prices may crash further when Iran begins to enjoy its international pardon by pumping more oil into the already saturated market. This may further heighten the fiscal challenges presently facing the country. With this development, we are expecting further downwards adjustments in the budgetary benchmark of oil price which is pegged at $53 per barrel in the 2015 budget. Further pressure on the value of Naira is expected as the development weakens the supply side of the foreign exchange market.

The vulnerability of the Nigerian economy to external shocks is beginning to manifest with the collapse of oil crude oil price. The naira exchange rate is under pressure so is the foreign reserve; fiscal stability of the federal and state governments is at risk, as reflected in the inability of many public sector institutions to meet their financial obligations to contractors and civil servants.

The incidence of abandoned projects is on the increase. Capital flow reversals have intensified, manifesting especially in steady declines in the stock market. The implications of this scenario for the macro economy are quite profound and unsettling. From a fiscal perspective, these are certainly not the best of times for the economy.

Way Forward

The solution has two main dimensions – Revenue and Cost dimensions.

Optimizing Revenue

• Review of the tax regime to make the tax system more progressive in character, especially with regard to consumption tax. VAT on luxury items and services should be reviewed.
• Tax administration needs to be strengthened for effectiveness and reduction of leakages in tax revenue. The issue here is not about increase tax rates, but making the system more efficient.
• The introduction of the Treasury Single Account [TSA] is a welcome development. Before now most revenue generating MDAs are not remitting the appropriate revenues to the federation account.
• Boosting revenue through the curbing of oil theft.
• Need to review some Trade Policy measures to boost customs revenue. Already the Nigeria Customs Service is experiencing sharp declines in revenue as a result of the new tariff on vehicles and the forex restriction measures by the CBN. These needs to be reviewed in the light of the revenue backlash.
• CBN foreign exchange policy needs to be urgently reviewed to encourage the inflow of autonomous funds into the foreign exchange market. The current tight exchange controls is a major disincentive to the inflow of diaspora funds, export proceeds and other autonomous funds into the economy, thus worsening the foreign exchange crisis. The CBN needs to be creative in its fight against money laundering in order to minimize disruptions to economic activities. Its current approach has caused considerable disruptions to economic activities in the country.

Managing Cost

• Need to reduce the cost of governance at the Executive, Legislature especially.
• Tackling corruption to stem the looting of the treasury.
• Regular value-for-money audit in the MDAs to reduce wastage.
• Greater vigilance on fiscal leakages from ghost workers, ghost pensioners, ghost institutions etc.
• Need to put a stop to the fuel subsidy regime to save the country an estimated N1 trillion annually. There is in fact no reason for the current administration to retain kerosene subsidy for one day.
• Acceleration of oil and gas sector reforms to optimize investment and revenue potentials from the sector.
• Public Private Partnership options for the funding of infrastructure projects should be urgently activated to bridge financing gaps.

Nigerian Equities Market

The stock market in 2015 remains largely bearish with average year-to-date return of -15.71% by end of August. Depressed international oil market, exchange rate crisis and fears coming from slowing Chinese economy continue to exert negative pressure on the Nigerian Equity Market.

At the end of August 2015, the aggregate market value of all quoted companies on the Nigerian Stock Exchange (NSE) almost dropped below its psychological N10 trillion position to close at N10.013 trillion as against its opening value of N11.42 trillion. The negative market position appeared to be increasing, leading to investors fear and lower demand. Market outlook remain largely negative in the short-term although we see great prospects in Nigerian equities in the medium to long terms as most stocks are currently trading below their book value.

Foreign Exchange Policy measures of the CBN

Gentlemen of the press, the biggest challenge facing investors currently is the disruptions and dislocations caused by the recent foreign exchange policies of the CBN.

Before I proceed, I will like to stress that the Lagos Chamber fully appreciates the context of the CBN’s decisions. These are very difficult times for the economy and choices are limited. We know that the inflow of foreign exchange into this economy has declined sharply following the collapse of crude oil prices.

We appreciate the challenge of scarcity of foreign exchange. Tough choices have to be made. But we have serious reservations over the policy choices of the CBN in managing the current crises. Significant disruptions, distortions and dislocations have been created in the business environment by the CBN as a consequence of the following policy measures:

1. Denial of access to foreign exchange market for imports of 41 broad categories of products, including critical inputs needed in manufacturing and service sectors.

1. Restrictions on the use of Export Proceeds.

• Prohibition of cash lodgments into domiciliary accounts

Tight exchange controls and administrative allocation of foreign exchange are typically characterized by lack of transparency, corruption and considerable abuse.

The impact on the economy and private sector are as follows:

1. The sovereign risk perception of Nigeria has worsened over the last two months. Several credit lines for Nigerian investors have been lost following the numerous cases of payment defaults to foreign suppliers. Even reputable blue chip companies have defaulted for the first time in the several years of business relationship with their foreign suppliers. Considerable damage has been done to the image of many companies and the country in the international trade and investment arena. A major confidence crisis has been created for investors.

• Many ongoing transactions before the issuance of the CBN circular have been stalled. These were transactions under Bills for Collection for which credit facilities were given by foreign suppliers and for which funds could not be remitted.
• Many companies are on the brink of collapse because of the failure to access foreign exchange for raw materials and other critical inputs. Even companies whose inputs are valid for foreign exchange also suffer the same fate.
• The CBN measures is taking a huge toll on investors in the free trade zones. The policies are also a violation of the laws setting up free trade zones. Investors in the zone are currently in a quandary.
• The goodwill that Nigeria enjoyed at the advent of this Administration in the international Business arena is beginning to be eroded by the foreign exchange crises. There is risk of international isolation of Nigeria if current policies are not reversed.

1. The economy is now faced with a scenario where there is a much greater pressure to move funds out of the economy than bring funds into the economy. This can be likened to a run on a system. This is a typical scenario which a confidence crisis could create. Future international trade transactions, financial and investment relations are now at risk

• Round tripping of forex has continued to flourish because of the disparity in the exchange rate between the official and parallel market. Inflow of forex into the two autonomous sources has been adversely affected. It is worthy of note that Diaspora funds into the country was about $23billion n 2013. The current policy will discourage the inflow of such funds which normally help to strengthen the supply side of the foreign exchange

• Many small businesses have moved to neighboring countries to effect transfers to their suppliers abroad.

• The banking system is being denied considerable revenue which typically accrues from trade finance and related services to importers and exporters.

• There is the risk of a rapid growth in non-performing loans in the banking system as investors grapple with the problem of access to foreign exchange.

• Many parents are in a major dilemma on how to remit funds to their children schooling abroad for their upkeep. Current rules only allow for remittance through Form A for school fees and other direct payments to the schools abroad.

• Many hotels in the country are currently saddled with lots of cash [foreign currency] which they could not lodge in their domiciliary accounts, let alone doing business with it. It is a major issue for the hospitality industry in the country.

Distinguished gentlemen of the press, a detailed impact assessment table will be circulated to support our position.

The Way Forward

1. We call on the President Muhammadu Buhari, GCFR to urgently intervene in this matter before further damage is done to the private sector and the economy at large.

1. Naira exchange rate should be allowed to reflect the fundamentals of the foreign exchange market. A rate that market fundamentals cannot support would not be sustainable. We suggest the adoption of a market approach with a periodic intervention by the CBN as the capacity permits. The CBN should allow the foreign exchange market to function without compromising its oversight to ensure that the market does not become a platform for money laundering.

• Exporters should be allowed to have unfettered access to their export proceeds. The current policy regarding export proceeds is a major disincentive to export. The policy that restricts the use of export proceeds to only the banks in which the proceeds are domiciled is unfair and should be reviewed. The owners of export proceeds should be allowed to have the flexibility to undertake transactions either within the bank where export proceed is domiciled or any other bank account of the exporter for purposes of doing their business.

1. If there are sectors that needs to either be penalized or incentivized, the instrumentality of fiscal policy of tariffs and taxes should be used, not exclusion from the foreign exchange market.

1. The CBN should be compelled to engage with relevant economic ministries in order to bring about coherence in the management of the Nigerian economy. These other key ministries and agencies include the Nigeria Customs Service, Federal Ministry of Finance, National Planning Commission and the Federal Ministry of Industry, Trade & Investment.
2. There has to be a proper coordination between the key ministries and the CBN to give a credible direction to the economy and ensure a better quality of economic management.

• The CBN should put in place policies that would encourage inflow of forex without necessarily creating a tolerance for money laundering. This we believe can only be done through intelligence. The fight against money laundering can be more effectively undertaken by intelligence and the right information rather than shutting the forex market.

• The decision to prohibit the lodgment of cash into domiciliary accounts should be reviewed. This is hurting the economy especially the Small & Medium Scale Enterprises (SMEs) and the informal sector. There are several small and urgent transactions that cannot wait for the bureaucracy of Form A and Form M which are needed to meet exigencies of business operations, such as some raw materials or spare part that need to be urgently procured. These are not transactions that can wait for the bureaucracy of form A and M. So there should be a window that allows for speedy transactions through cash lodgments into domiciliary accounts. A threshold of maximum lodgments par day may be allowed for individuals and a different limit for corporate bodies.

1. Some of the challenges we are facing in the economy today especially with regards to challenges of self-reliance has a lot to do with the poor productivity in the country. We therefore urge the government to accelerate investment in infrastructure and build quality institutions for better productivity and competitiveness in the economy. It is difficult to diversify an economy where there are no infrastructures, where institutions are very weak and where the cost of funds is prohibitive. These are the fundamental issues to address.
2. Some of the issues we are facing today with regards to import and export processes are manifestation of the weakness of the eco itself especially with regards to the harsh operating environment for businesses to produce.

MENACE OF TRUCKS AND TANKERS ON LAGOS ROADS

The menace of trucks and tankers on Lagos roads has assumed an intolerable dimension. They have become a major safety hazard on our roads. We commend the move by the Lagos State Governor to take decisive action on the matter. It is anomalous to be moving cargo and petroleum products by road with such intensity as we do in this country. The restoration of the rail system should be done as a matter of utmost urgency.

Too many lives have been lost as a result accidents and fire outbreak because of the movement of cargo and petroleum products within the country. It is most inefficient and hazardous. We also urge the government to accelerate reforms in the oil and gas sector to facilitate private investment in refineries to boost local refining capacity and reduce the need to haulage over long distances.

CONCLUSION

The issues raised here are not exhaustive. Our advocacy activity is a continuous one. We have a collective responsibility with various stakeholders to ensure a better investment environment for the progress of the Nigerian economy and the good of everyone.

Alhaji Remi Bello, FCA

President,

Lagos Chamber of Commerce and Industry

Wednesday 9^th September 2015