Five months on, President Muhammadu Buhari, Commander-in-Chief of the Armed Forces and Chief Economist of the Federation, could neither name a cabinet nor provide a template for the economic direction of his administration. Consulting Editor CHIMA NWAFO examines the implications
At the Indo-Africa Business Summit in far away New Delhi, India, President Muhammadu Buhari, while reassuring the Indian business community of his efforts to re-engineer the Nigerian economy despite the global crude oil price crash, told the global media of his war against corruption and how he met an empty treasury. Back home, economic and political watchers flayed the President’s oft-repeated “Nigeria is broke” statement and the fact that he chooses to make key socio-economic and political statements while abroad rather than speaking to Nigerians from the seat of power within the country.
In his reaction, Second Republic governor of old Kaduna State, Alhaji Balarabe Musa, was particularly miffed by the President’s recent outburst of the country being broke. His words: “Nigeria – with enormous human resources, a flourishing agricultural profile and tremendous crude oil deposits – cannot be said to be broke. What we need is leadership. Our agricultural potential is great. What we need now is a government that can perform. We have All Progressives Congress (APC) government that is in power, and for five months they are not doing anything: all they are saying is ‘Nigeria is broke.’ The President had insight into the economy before he assumed power: why is he making an issue of it now? Nigeria has been broke for some time now; it did not start yesterday.” The radical politician added that what Nigerians are expecting to hear from the leader is what he is doing to turn the economy around.
Chief Olorunfemi Bashorun, former Secretary to Lagos State Government and now a businessman, is not equally impressed by words. He believes the President holds the ace. “Evidence of bankruptcy abounds everywhere,” he said. “It is very easy to see it. I am also a business man. Money is not moving around. The economy is short of funds. Government is the biggest organisation that funds the economy. Today contractors are not paid, workers’ salaries are not paid. There are abandoned projects everywhere. Look at the recent federal allocation: it’s a paltry N366 billion as against N860 billion sometime in the past.”
Policy Vacuum
Despite President Buhari’s assurance of his commitment to macro-economic stability through effective fiscal and monetary policy measures, not much is on ground to match words with action. However, market watchers expect a lift from the prevailing fiscal inertia as the APC government eventually forms a cabinet this month of November. The policy vacuum also created the problem of confidence, especially among foreign business partners and would-be investors. The absence of confidence – noted former Central Bank of Nigeria (CBN) governor, now Emir of Kano, Mohammed Sanusi II – is the greatest challenge facing the economy. And economic observers are almost unanimous in that perspective: that the lack of confidence in the economy was fuelled by the inability of the President to name a finance minister or an economic team that could have designed a fiscal template spelling out the administration’s economic direction, five months after inauguration. That prevailing milieu compelled the CBN Governor Godwin Emefiele, to take responsibility for both fiscal and monetary policies, at least, till the appointment of a minister. Consequently, he enjoyed presidential backing.
Economic fundamentals
Meanwhile, the underlying fundamentals of the economy – declining output, capacity under-utilisation, rising unemployment and evolving international environment – call for an urgent need to reposition the economy on a path of sustainable growth. This is urgent and of great concern given Nigeria’s status as an oil-rich country hit by abject poverty. Understandably, while the CBN is in firm control of the monetary policies, such cannot be said for the fiscal demands. As a result, the CBN effected control measures to check the unflattering economic fundamentals, including restricted access to foreign currency for importation of specified categories of goods, without calling it an outright ban. While the Manufacturers’ Association of Nigeria (MAN), whose members may reap some rewards from the policy, lauded the measure, the Lagos Chambers of Commerce, which consists mainly of elite importers, flayed the proposition.
Pundits also recalled that whereas the President was yet to take action on core aspects to reflate the economy, he had within his first 100 days suspended selected federal infrastructural development projects and contracts, leaving thousands of breadwinners jobless. Workers in the building and construction industry were the direct victims of that presidential pronouncement. According to Comrade Amechi Asugwuni, President of the National Union of Civil Engineering and Construction Workers (NUCECW), 60,000 members of his union lost their means of livelihood to that directive. He, therefore, charged the Federal Government: “Channel the same effort in fighting corruption (and Boko Haram) on infrastructural development, in order to create jobs for the teeming unemployed. It has become critical; and we are still lacking answers because we have no plan for infrastructure. Fight against corruption is like fight against indiscipline: which must continue side-by-side with development. We believe that the President should, as a matter of urgency, reactivate all the ongoing projects across the nation. The reactivation is to reactivate the employment of Nigerians.” The union leader advised that rather than outright suspension of ongoing projects, the President should constitute a committee to monitor projects, as well as entrench labour-friendly policies.
CBN Measures Backfire
Perhaps, viewing the effect of the Central Bank of Nigeria’s restriction measures from the perspective of overseas partners and foreign direct investors, the London-based global wire service Reuters featured a critical analysis of the import restriction control announced by the apex bank.
It wrote: “The central bank has restricted access to foreign currency to import 41 categories of items to stop a slide of the naira; but the Manufacturers Association of Nigeria said this, in fact, amounted to 680 individual items. The foreign exchange bans are part of a long-term plan by President Buhari to encourage local manufacturing: but they run the risk of pushing the economy closer to recession, after growth halved in the second quarter, compared with the same period last year. Many items on the central bank list – ranging from incense and toothpicks to plywood, glass and steel products – are not available in Nigeria in sufficient quantities. While Nigeria grows a lot of tomatoes, transport is poor and it lacks facilities to produce the concentrates needed by factories making tomato paste, a delicacy in West Africa.
“Nigeria stepped up import controls when Buhari led a military government in the 1980s, and the economy suffered then too. Razia Khan, Chief Economist, Africa, at Standard Chartered Bank, said there was little certainty the latest controls would boost manufacturing too. ‘Nigeria has had substantial experience with similar import-substitution policies in the past,’ said Khan. ‘Rarely have they succeeded in creating a vibrant, competitive industrial sector, with the capability of creating the employment growth that Nigerian demographics otherwise demand.’ Companies also suffer from the central bank’s attempt to stop the dollarisation of the economy. A ban on cash deposits of foreign currency has forced firms to use informal ‘transfer markets’ whereby people abroad wire dollars on a company’s behalf. That exchange is well below the official rate to the dollar. Some executives now carry bags of cash to deposit in neighbouring countries. For some, though, the measures offer hope.”
The measures actually offer hope to struggling medium small and micro enterprises (MSMEs) and agricultural value chain establishments yearning for such controls to stem the unfair competition with imported goods. For example, the reported shortage of 600,000 tonnes of palm oil – used in the production of soap, detergents, cosmetics, cosmetics, etc – which is now restricted is quite disturbing to market observers. First, palm oil is an unfortunate victim of the petro-dollar induced neglect of agriculture. Of greater worry is the fact that some companies such as Unilever, PZ Cussons, UACN, among others that have been exploiting and trading in palm oil for over nine decades, had refused to heed the call for backward integration. And now, they are among the industrialists captured in the lamentation of Alhaji Muda Yusuf, Director-General of Lagos Chambers of Commerce: “Many companies have defaulted in fulfilling foreign obligations . . . even blue chip companies, for the first time.”
MAN, on its part, pleaded with the CBN to exempt 105 items from the list, and suggested the inclusion of 93 finished goods “as they are locally produced in enough quantities.” But the CBN Governor is unimpressed with their propositions. However, pundits aver that the downturn in the economy is a blow to President Buhari, who pleads his commitment to end dependence on oil revenue, but is slow in taking the necessary actions that will drive the much-desired change, even as he keeps spending un-appropriated funds in fighting the Boko Haram insurgency, as well as rehabilitation of its victims.
The Treasury Single Account (TSA), though initiated by the former Minister of Finance Dr Ngozi Okonjo-Iweala way back in 2013, was not forcefully implemented until President Buhari mustered the political will, dusted the document and instituted it as a potent policy tool to compel transparency and financial discipline in ministries, departments and agencies (MDAs). The remittal e-collection, according to an official, is a technology platform deployed by the Federal Government to support the collection and remittance of all government revenue to a consolidated account domiciled with the Central Bank of Nigeria. This marked the beginning of the implementation of Treasury Single Account system in Nigeria. This aspect of his war against corruption has so far proved effective in mobilising the much-needed revenue for the government, as CBN sources attest, but it’s effect on the economy, especially deposit money banks, has not been salutary.
Said an economic analyst: “The benefit of a TSA to the country and the people is the mechanism it provides for proper monitoring of government receipts and expenditure. It will help to block most, if not all the leakages that have been the bane of economic development.” CBN governor Emefiele in a media interview admitted the positive effect of TSA on government revenue, which he attributed to high level of compliance by banks in paying into the single account hosted at the apex bank. But as some market watchers noted, banks had no choice given the take-it-or-leave-it deadline and the consequences of non-compliance. He posited: “The exit of funds of revenue-generating parastatals such as the Nigerian National Petroleum Corporation (NNPC) out of commercial banks would undoubtedly have negative impacts on the system. In the coming months, the nation would witness a return to deposit war among banks as each one devises gimmicks to attract funds from the private sector. In the extreme, the price of bank stocks could plummet at the Stock Exchange.” In the short-term, however, banks have not started to manifest signs of the expected operational impact occasioned by the huge loss of guaranteed sources of deposit.
Domestic Economy
Assured of presidential backing, the CBN governor is not moved by the complaints and criticisms against the measures taken so far to shore the naira and maintain macro-economic stability. In an interview with the Financial Times, he justified the controls as an avenue to job creation. “I read an advertisement in a paper that shortly after we announced the foreign exchange exclusion for the importation of tomato paste, they advertised for almost 1,000 jobs,” he said. He ruled out another devaluation of the naira, but instead, loosened monetary policies to inject liquidity into banks.
Given the softening oil prices, output growth in the first half of 2015 trended downwards from the level in the fourth quarter of 2014. According to the National Bureau of Statistics (NBS), real Gross Domestic Product (GDP) grew 2.35 per cent in the first quarter of 2015: a significant drop when compared with the 3.96 per cent and 6.54 per cent in the preceding quarter and corresponding period of 2014 respectively. Real GDP growth is projected by the NBS to stabilise at 2.63 per cent in 2015, compared to the 6.22 per cent recorded in 2014. The non-oil sector was the major driver of growth in the second quarter of 2015, at 3.46 per cent. However, the overall economic outlook activity is expected to improve, subject to sustained improvement in the generation and supply of power, which energy industry sources say depends majorly on gas supply to the gencos, availability of refined products, and the military’ success in checkmating the Islamic insurgency in the North-East.
The Monetary Policy Committee (MPC), in its third quarter meeting, observed that the year-on-year headline inflation edged upward to 9.3 per cent in August from 9.2 in June/July 2015. The August increase in headline inflation reflected the marginal rise in both core and food components of inflation. Core inflation rose to 9.0 per cent in August from 8.8 per cent in July; while food inflation rose to 10.1 per cent from 10.05 per cent over the same period. The committee said the uptick in inflation was mainly traceable to higher energy prices, delayed harvest and cost of importation. Broad money supply, according to the MPC, contracted by 2.23 per cent in August; below the level of December 2014.On annual basis, money supply contracted by 3.34 per cent, which was significantly below the growth benchmark of 15.24 per cent for 2015. Net domestic credit (NDC) rose by 11 per cent, which annualises at 16.49 per cent within the same period. At that level, NDC was within the provisional benchmark of 29.30 per cent for 2015. It also noted that growth in aggregate credit was traceable majorly to growth in Federal Government borrowing, which peaked at 140.13 per cent in August 2015.
During the period under review, rates in all segments of the money market were largely influenced by the level of liquidity in the banking system. Money market interest rates were relatively volatile, reflecting fluctuations in the banking system liquidity during the period. The MPC also expressed satisfaction with the average naira exchange rate, which it said remained stable at the intra-bank segment, but significantly volatile at the Bureaux De Change (BDCs) segment of the foreign exchange market during the review period. The inter-bank opened at N196.95 to US dollar between July and September 18, 2015, representing a depreciation of N0.5k for the period. At the BDC segment, the exchange rate opened at N224.50/US dollar and closed at N211.5k. This represented an appreciation of N13.00 for the period. They attributed the relative stability in the inter-bank market and improvements in the BDC window to effects of various administrative and policy measures. Consequently, gross official reserve dropped modestly from US$31.30 billion at end July 2015 to $30.63 billion on September 17.
The MPC noted that the overall macro-economic environment was fragile, and that the economy slowed down in the second quarter of 2015, making it the second consecutive quarterly-less-than expected performance, adding: “Growth has come under severe strains, arising from declining private and public expenditures. In particular, non-payment of salaries at the state and local government levels is a key dampening factor on consumer demand.” It also observed that the demand pressure on foreign exchange market was enormous as oil prices continued to decline. Given the foregoing backdrop, the report noted there were signs that some of the banking sector performance indicators could be stressed, if conditions worsen further. As if that was not enough, the committee cautioned: “Specifically, liquidity withdrawals following implementation of the Treasury Single Account (TSA), elongation of the tenure of the state government loans, as well as loans to the oil and gas sector, could aggravate liquidity conditions in banks and impair their financial intermediation roles, thus affecting economic growth, unless some actions were taken to ease liquidity conditions in the markets.” Unfortunately, none seemed to be coming, at least, in the short term.
Conversely, the MPC sounded a strong note of warning that stirred economic analysts, market watchers and the media into a frenzy of discussions and analyses. It stated: “Having seen two consecutive quarters of slow growth, the committee recognised that the economy could slip into recession in 2016, if proactive steps were not taken to revive growth in key sectors of the economy.”
Given the prevailing circumstances, the committee agreed that synergy between monetary and fiscal policies was the most potent option to stimulate growth. The President’s verbal assurances of his commitment to macro-economic stability notwithstanding, the nation’s financial managers further noted that the impact of the persisting decline in crude oil prices on the fiscal position of the Federal Government continues to reflect in rising credit. On a positive note, the MPC said that the initial market reaction to the decision by JP Morgan to twist CBN’s hand by excluding Nigeria from its Government Bond Index for Emerging Economies (GBI-EM), had largely dissipated, as yields soon adjusted to pre-announcement levels. It reiterated its unwavering commitment to naira exchange rate stability, despite the pressures. The MPC also cautioned against diversion of funds to forex demands, but stressed that they should be applied to specific growth-enhancing, asset-creation lending by banks. It placed emphasis on agriculture and MSMEs as preferred sectors for rapid generation of productive employment and wealth creation.
Impending Recession
Two weeks after the MPC’s caution about the possibility of a recession next year, if proactive measures were not taken to stimulate growth, Mr Emefiele rose to douse the mounting tension it created. Following the pronouncement, concerned citizens and market watchers had begun to dissect the state of the economy vis-à-vis the financial managers’ warning. For example, at the screening of the first batch of the second set of the ministerial nominees in the Senate, the issue of recession was one of the questions thrown at Kemi Adeosun, a former senior manager at PriceWaterhouseCoopers and immediate past Commissioner of Finance, Ogun State. She said notwithstanding the current indicators, that the economy was just experiencing a downturn and not yet in recession. NTA’s Good Morning Nigeria programme, anchored by Kingsley Osadalor and Blessing Abu assembled a team of experts who discussed the disturbing trend. Prof Akpan Ekpo, Director-General, West African Institute of Financial Management, dismissed Nigeria’s GDP status on which the indicators were predicated. He said that Nigeria’s rating as the largest GDP in Africa was not structurally based, but rather dependent on the nation’s crude oil earnings, hence the decline is in sync with the global drop in crude oil price. He said there was nothing to worry about an economy going into recession, except if the economy is not properly managed. The professor said that seasonal recession is a common feature of both advanced and developing economies. He equally dismissed CBN’s claim of macro-economic stability, noting that the high rate of unemployment and depth of poverty in the country does not support the claim.
Mr. Tilewa Adebayo, an investment banker, stressed the need to institute measures that could instill confidence in the economy, a factor he said is currently lacking, due to the absence of a clear-cut and accurate articulation of a fiscal policy. Given the definition of recession as downturn in an economy marked by two consecutive quarterly drops in estimated growth rate of the GDP, Adebayo agreed with Prof Ekpo that Nigeria’s problem emanated from poor management of the country’s crude oil resources; which he said constituted only 14 per cent of the GDP but generated 90 per cent of the nation’s revenue. He said even after a finance minister has been appointed, it made no difference as what is required is prudent management of the economy. He recalled that when the idea of saving excess crude earning was initiated by the immediate past Finance Minister Dr (Mrs) Ngozi Okonjo-Iweala, it was Governors Chibuike Amaechi, Adams Oshiomhole, etc, that kicked against it and took the Federal Government to court, insisting that the Constitution did not provide for saving for the rainy day. Ironically, same progressive governors are among those who are now seeking presidential intervention to enable them pay salaries. On his part, Mr. Moses Tule, a director at the CBN, who had earlier expressed confidence in the management of the nation’s macro-economic environment, expatiated on the dynamics of the prevailing crisis in the global oil market, which has impacted heavily on Nigeria’s monolithic economy. He said what Nigeria faced was not the decline in oil price alone, but a three-dimensional problem: First, the loss of the country’s largest market, the United States; second, the challenge of searching for another large market/buyer; third, even after a market has been found in Asia, they are yet to appreciate the premium quality of Nigeria’s light crude, which costs more. He also agreed that states should exploit local sources of revenue rather than depend absolutely on hand-out from the Federation Account.
Naira Devaluation
In its latest report on World Economic Outlook, the International Monetary Fund (IMF) had called for a weakening of the naira and other African currencies. This was based on the findings of its report entitled, ‘Adjusting to lower commodity prices.’ The report had forecast a 4 per cent growth rate for Nigeria’s GDP in 2015, because of the decline in income from crude oil. The latest forecast is 2.5 percentage points lower than its 2014 projections for Nigeria. In response to the devastating impact of the global oil price fall, the Federal Government had slashed its real GDP growth rate forecast of 6.4 in the 2015 budget to 5.5. The IMF report anticipated slow growth in sub-Sahara Africa this year – from the projected 5 per cent in 2014 to 3.8 per cent in 2015.
In its market analysis report, Renaissance Capital (Rencap) supported devaluing the naira, based on market indicators. It posited: “The authorities appear to be relying on recovery of stolen funds (estimated at $150 billion on August 18, 2015) and blocking of leakages to boost foreign exchange reserve ($31.6 billion on August 18) and, in so doing, avert naira devaluation. The question is whether the authorities can recoup a significant amount in the short term to avert depreciation. The sharp slow-down in foreign reserves accretion in August, following the $2.5 billion spurt in July, does not.
“CBN Governor Emefiele, in his Financial Times interview partly attributed the recent improvement in foreign reserve to greater compliance from revenue agencies in remitting to the TSA account at the CBN. However, recovered monies have yet to be realised. We think this will be a protracted mission, and the timing and magnitude of what is recoverable is too uncertain for the CBN to rely on to shore the naira.”
On restriction of access to forex by importers of specified items, Rencap agreed with Khan that Nigeria will not be able to fill the gap locally, as plans to expand domestic output usually takes time, given the natural production cycle of agricultural products. Fitch Ratings, which under the immediate past regime affirmed Nigeria’s long-term foreign and local instruments of negotiation, warned that Nigerian banks and other businesses would be adversely affected by the current economic slow-down.
In reaction to arguments for and against the CBN control measures, a Lagos-based economist, Gabriel Adeseun, in a Sunday Vanguard publication averred: “I have also been amused by critical opposition by some private sector operators to the 41 items of import exempted from foreign exchange eligibility by the CBN. That makes me to ask: In whose interest are these oppositions to the foreign exchange policy?”
Equally unimpressed by proponents of naira devaluation based on the effect of the global decline in oil price and its impact on every segment of the Nigerian economy, Adeseun took a retrospective look at Nigeria’s earlier seasons of crude oil fortune and its attendant burgeoning foreign reserve. “Just out of curiosity I tried to check if there were occasions when the naira exchange rate was revalued during periods of oil price increase, with high accumulation of foreign reserve in excess of $50 billion. I found none. No foreign investor then raised the issue of need to revalue the naira, to reflect the new comfortable reserve level…. We cannot hope to rely on free market forces to achieve stable economy under the circumstance. Even the advanced economies, we have seen and heard how their governments have intervened and still intervening to move their economies to a desired direction.”
SMEs Petition the President
Although both the CBN and the Presidency in their official pronouncements appreciate the significant role of the informal sector in President Buhari’s effort to re-engineer the economy and reduce dependence on crude oil, ironically, operators of small and medium enterprises (SMEs) feel threatened by the regulatory activities of some Federal Government agencies. Chairman of the Cosmetics/Toiletries Group of the Manufacturers Association of Nigeria, Mr Akpan Umoh, has decried what he described as over regulation of the SMEs by agencies of the Federal Government. In a chat with a ThisDay reporter, he narrowed it down to the National Agency for Food Drug Administration and Control (NAFDAC) and the Standard Organisation of Nigeria (SON). His words: “NAFDAC’s regulatory fee is very exorbitant – it uses good manufacturing practice (GMP) to regulate the industry. Now, SON is doing the same, giving it a different name: MANCAP. And it is demanding SMEs to pay N600,000 as service charge before importing machines required to expand manufacturing operations, under the guise of SONCAP import permit. Note that the machines are not available locally, and SON has no standard for them. This demand has delayed expansion projects of some manufacturers for five years. We import goods from the seaports and pay duty to Customs – what are NAFDAC and SON, etc, doing at the ports? Whose interest are they serving? Knowing your pedigree and the thrust of your government, we are calling on President Muhammadu Buhari to, please, save the industry and put measures in place to streamline the activities of regulatory agencies.”
The MAN sectoral leader also noted that besides the unhealthy supervisory regimen of NADFDAC and SON, “Nigeria has the harshest regulatory environment in the world, as shown by the International Finance Corporation’s ranking, which placed Nigeria 147 among 189 economies measured in its report titled, ‘Understanding Regulation for Medium and Small Enterprises.’ He said that the IFC report defined enabling environment as one that gives SMEs access to funds for industrial production. “Therefore, the current high interest rate of 25 per cent must be brought down. There are institutions that have free funds: the CBN, commercial banks, insurance companies, and even the agencies that are trying to kill SMEs with high charges,” he said.
Mr. Umoh regretted the current growth rate where manufacturing contributes a paltry 5-6 per cent to the GDP. “Everything is wrong with the industry – from poor infrastructure to high lending rate, to hostile operational environment. Over 130 companies closed shop in the past five years. Vibrant SMEs is what made China, India, Indonesia, Taiwan, etc, to become Asian Tigers.”
He also cautioned President Buhari to be wary of advice from the organised private sector, which gives government wrong advice about the economy, “brandishing fake capacity utilisation figures to curry favour from government for themselves and their companies.” Corroborating Mr Umoh’s concern about funding of SMEs, Alhaji Yusuf noted: “The SMEs contribute over 70 per cent of the jobs in the economy, yet enjoys less that 10 per cent of total credit in the financial system. This is a critical issue that must be addressed if the economy must be inclusive.”
Pho shows: President Muhammadu Buhari
Source business & economywatch
