ADDRESS ON THE STATE OF THE ECONOMY BY THE PRESIDENT OF THE LAGOS CHAMBER OF COMMERCE AND INDUSTRY, ASIWAJU (DR.) MICHAEL OLAWALE-COLE, CON, HELD ON TUESDAY, 10TH JANUARY 2023, AT THE COMMERCE HOUSE, VICTORIA ISLAND, LAGOS
THE DEPUTY PRESIDENT, LCCI
MR. GABRIEL IDAHOSA, FCA
VICE PRESIDENTS HERE PRESENT
THE HONORARY TREASURER AND DEPUTY TREASURER
DIRECTOR GENERAL, LCCI
DISTINGUISHED GENTLEMEN OF THE PRESS,
I present the compliments of the Lagos Chamber of Commerce and Industry to you all at this first press conference in 2023. Thank you for continuing with us on this journey of quarterly reviewing significant economic developments in the preceding quarter and this particular period, the review of 2022, and communicating our position to the broader business community and government. This has become our traditional model of doing public policy advocacy in our quest for a more robust economy and a more business-enabling environment. Through macroeconomic diagnostics, this briefing is done to highlight areas of concern; and to make recommendations to the government on policy alternatives that can better empower the private sector to thrive.
Let me specially acknowledge and appreciate the media’s contribution to driving this mandate over the years. As an institution with the mandate to protect business interests, we appreciate the media’s commitment to deepening this partnership.
Global Economic Development
As we enter the year 2023, the global economy, beyond the mounting uncertainties, may continue to face a confluence of challenges. From persistently high inflation and aggressive global monetary policy tightening to the continued disruptions caused by the Russia-Ukraine war and the energy crisis, weak consumer demand, and political upheavals, our projected outlook remains a hard landing.
With several shocks suffered by many economies over a more significant portion of 2022, various projections and analyses of economic conditions across regional blocs point to the likelihood of a recession or a significant slowdown of growth in 2023 due to spiraling inflation, high energy cost, monetary policy tightening, and weakening consumer demand. Global growth, though positive, slowed down by about 50 percent between 2019 and 2022.
Looking further into 2023, the war in Ukraine and mounting sanctions on Russia may all continue to impact supply chains for commodities and shocks to financial systems across the world. The likely failings of the G7 countries’ agreement on the Russian oil price cap, the resurgence of COVID infections and the likely return of restrictions, and renewed tensions in the middle east may all continue to keep oil prices upward and volatile in the short term. Oil prices rose by 44.87 percent in 2022, the highest in five years.
With recent projections from the international monetary fund (IMF) that one-third of the world economy would be in recession, Nigeria, though not on the list, may feel like a recession for millions of Nigerians if we bring into focus the latest multidimensional poverty index.
2022 Third-Quarter GDP report
Nigeria’s gross domestic product (GDP) grew by 2.25% (year-on-year) in real terms in the third quarter of 2022, lower than the 3.54% recorded in the previous quarter and 4.03% in the corresponding quarter in 2021. However, the growth indicates that the economy has recorded an eighth consecutive quarter of positive growth on the back of significant expansionary monetary policies.
Assessment & outlook
The growth was primarily driven by the services and agriculture sectors, which contributed 7.69% and 1.34%, respectively. The growth recorded in the sectors was higher compared to 7.37% and 1.20% recorded for the services and agriculture sectors in the previous quarter. However, the oil & gas and manufacturing sectors contracted by –22.67% and –1.91%, respectively.
The decline in oil and gas was attributed to the massive cut in daily oil production, estimated at 1.20 million barrels per day (MBPD), due to oil theft and insecurity. Also, the high inflation rate and continuous rise in interest rates are major factors responsible for the contraction in the manufacturing sector. And with the excruciating burden of inflation, forex scarcity, high energy cost, and weakening purchasing power, many more production activities may be constrained in the coming months.
- The Federal Government needs to sustain its targeted interventions in selected critical sectors like agriculture, manufacturing, export infrastructure, and tackling insecurity.
- We urge the government to keep track of plans to tackle oil theft, to boost oil exports, and earn more foreign exchange. We also commend the government for the effort being made to date to combat the cartel involved in oil theft. If these efforts had started earlier the nation would have made huge economic gains. We, therefore, appeal to the government to intensify these efforts.
- The government deploys innovative thinking to tackle natural disasters like flooding by implementing environmental guidelines and establishing preventive infrastructure. The impact of climate change on agriculture is becoming more evident by the day, and quick response is critical to avert food insecurity and worsening food inflation.
- The cost of logistics has gone up due to the poor state of our roads and the lack of connection among farms, factories, and markets. LCCI commends the Federal Government for the recent effort to improve infrastructure, such as the completion of the second Niger bridge, which is a key national infrastructure, with immense socio-economic benefits for the contiguous states and indeed the entire nation. The project was funded through the presidential infrastructure development fund (PIDF) created by President Muhammadu Buhari and managed by the NSIA. LCCI wants to see more of such developments for the benefit of the organized private sector.
- To reduce the shocks from disruptions to supply chains for raw materials, manufacturers should be assisted with subsidized input and more allocation of forex for importing critical inputs.
- While the Central Bank of Nigeria (CBN) embarks on monetary tightening to tame inflation, it should ensure that targeted concessionary credit to the private sector is sustained for MSMEs.
The 2023 Federal Government budget
The signed 2023 budget of ₦21.83 trillion ($48.51 billion) represents an increase of ₦1.32 trillion over the initial executive proposal of ₦20.5 trillion. The total revenue estimates in the 2023 budget are put at ₦10.49 trillion, with an overall budget deficit of ₦11.34 trillion, representing 5.03 percent of GDP. With 22 percent of projected revenues expected from oil-related sources and 78 percent from non-oil sources, we need to keep track of the funding and promotion of the non-oil sector for more output in 2023.
Looking at the huge deficit to be financed by borrowing, can we consider more efficient alternatives to new borrowings? Can we issue equity to finance the deficit instead of using debt? Can we break the path in which the Federal Government only approaches the debt markets at home and abroad and never approach the equity market at home or abroad? Investors invest both in debt and equity.
Our approach should not be to continue issuing only debt, especially with the increasingly unbearable burden of interest payments that exposes our fiscal vulnerability. Massive equity financing is the choice we should all urge the Federal Government to consider now. Nigeria should henceforth use equity financing as an exclusive way of funding budget deficits. We do not have to make colossal interest payments if we embrace equity financing. We can use some of the proceeds of our equity issuance to pay some of the debt, make the fiscal situation more sustainable and rekindle much-needed confidence in our economic and fiscal resilience.
Beyond the figures and policy statements contained in the 2023 Federal Government budget, the chamber wishes to highlight some recommendations for implementation:
- We can improve the performance of the 2023 budget by studying how the 2022 budget has performed. Looking at what has worked well, what failed, and what must be corrected in the implementation of the 2023 budget.
- Governments at all levels must put actionable policies in place to address the high fuel and food costs. The high inflation rate will continue to distort most of the budget assumptions and targets if not curtailed.
- Particular attention must be put on investing more in transport infrastructure to resolve the many logistical challenges that have impacted the movement of goods across the nation.
- Looking beyond oil revenues, we can enhance our forex earnings through the increased inflow of foreign direct investments. We need to invest more in infrastructure and critical port reforms to reduce the bottlenecks in our export logistics and processes that will boost non-oil production and exports.
- We urge all the budget monitoring agencies to promote more transparency and inclusion in the budget process towards improving the ranking of Nigeria in the open budget index carried out by the international budget partnership (IBP) through its open budget survey (OBS). Transparency, oversight, and public participation in the national budgeting process are necessary to boost the confidence of Nigerians in the budget process.
The Foreign Exchange Market
The naira continued to record unprecedented volatility throughout the year 2022, with a widening premium between the official (NAFEX) rate reaching a current rate of ₦461/USD and the BDC/parallel market rate reaching up to ₦750/USD. The Chamber’s position is that monetary authorities need to liberalize the fx market by unifying the multiple fx rates and ensuring fx rates are market-driven. This is critical in enhancing stability, liquidity, and transparency in the fx market. The unification is expected to improve our currency management framework, given that the multiple exchange rate systems have continued to create uncertainties and sources of arbitrage.
Monetary Policy Development
During the year 2022, the Central Bank of Nigeria (CBN), in response to the spiraling inflation rate, deployed a tightening monetary policy to stabilize prices. The rates rose from 11.5% in January and peaked at 16.5% as of November 2022. This is expected to rise further during the MPC meeting in January to 17% to curb the persistent inflation and prevent capital flight.
The Chamber had earlier recommended that rate hikes alone would not curb inflation except for the real factors like food supply disruptions, high energy costs, scarcity of forex, and the security challenges around agricultural production locations that have fueled low production and high logistics costs. In 2023, we need fiscal interventions to support strategic sectors like manufacturing, agriculture, and transport logistics and more allocation of forex to productive sectors.
The nation’s foreign trade in goods declined quarter-on-quarter, QoQ, by 9.68 percent in the third quarter of 2022 to ₦11.60 trillion from ₦12.84 trillion in the second quarter of 2022. According to the NBS, the value of exports declined QoQ by 19.89 percent to 5.93 trillion in Q3’22 from ₦7.41 trillion in Q2’22. However, the value of imports increased QoQ by 4.22 percent to ₦5.66 trillion in q3’22 from ₦5.44 trillion in q2’22. The trade balance stood at a surplus of ₦269.34 billion in the third quarter of 2022.
To significantly grow the trade surplus, we need more investment in export infrastructure, enhanced and automated port operations, tackling high production costs, and boosting the supply side of the forex market to improve liquidity and ease access to forex. We need to also diversify our exports by boosting our local crude refining capacity, production of petrochemical products, and accelerating reforms in the oil & gas sector to attract more foreign investments in the coming months.
The headline inflation in November 2022 reached a 17-year high at 21.47%, which is 0.38 higher than the preceding month. Food inflation, at 24.13% in the same month, has significantly influenced headline inflation all through 2022. The inflationary pressures were primarily attributable to high energy prices, foreign exchange scarcity, insecurity, and supply chain disruptions. With the persisting war in Ukraine and high spending by the government on the forthcoming general elections and census, we foresee a further rise in the inflation rate in the short term.
We reiterate our position on the rising inflation that a rate hike will not tame the increasing inflation without complementary targeted financing of critical sectors like agriculture, power, energy, and defense. The government must invest more in boosting supply and cushioning the cost of production. Though the planned removal of fuel subsidies may cause inflation to rise in the short term, it remains the best economic decision to reduce our unsustainable debts. We expect the government to roll out cushioning policies before the possible removal later in the year.
Nigeria’s national debt reached ₦44.06 trillion in 2022Q3 from ₦42.84 trillion by the end of 2022Q2. With the planned restructuring of the ways and means loans from the CBN and the fresh borrowing planned for the 2023 budget deficit financing, Nigeria’s debt profile will climb to about ₦77 trillion at the exit of this present administration in May 2023. The 2023 budget deficit would be financed mainly by borrowing ₦7.04 trillion from domestic sources; ₦1.76 trillion from foreign sources; ₦1.77 billion from multilateral loan drawdowns; and privatization proceeds, ₦206.18 billion.
The Federal Government spent a total of ₦5.24 trillion on debt servicing between January and November 2022, out of its n6.5 trillion retained revenue for the same period, according to the finance ministry. The amount puts the country’s debt service-to-revenue ratio at 80.6 percent for the period under review, a figure far above the World Bank’s recommended 22.5 percent for low-income countries like Nigeria. We must warn again that borrowing to fund subsidies, which is spending the money we do not have, is totally unsustainable.
The 2022 Finance Bill
The Lagos Chamber, rising from the interactions with our members and several stakeholders in the broader business community, has placed a responsibility on itself to share the concerns about the 2022 finance bill as approved by the national assembly and as it awaits the assent of the president.
In recognition of the potential impact of the 2022 finance bill on the operations of our members operating in various sectors of the economy, the Lagos Chamber has reviewed the bill. It is pleased to provide some comments on affected sectors:
- Recent statistics reveal that Nigeria has struggled to attract investments into the oil & gas industry and that investments in the Nigerian oil and gas sector have declined significantly in the last seven years. The operations overheads of oil and gas companies remain above 40% above the global benchmark.
- In line with FGN priorities and ongoing initiatives to give incentives for gas production, several sections of the PIA clearly show the determined efforts by the government to limit gas-flaring and contain very steep penalties. Also, gas flare fees/costs are treated as a penalty and as such a non-tax-deductible item. And oil and gas companies in Nigeria have reduced flaring by 70% since 2000 while nearly doubling overall production and commercialized volumes in four-folds.
- With the plan to exit some large enterprises from the pioneer status incentives, the government can save about ₦6trillion tax expenditure (waivers, exemptions, incentives granted by the government), according to the honorable minister of finance, budget and national planning in her 2023 budget presentation. On the path of caution, we urge the government to tread conservatively in raising tax rates, since there are new ways of rescuing some tax expenditures to add up to government revenue in 2023. Leaving rates at their levels will not lead to a loss of revenue.
- The oil sector’s contribution to gross domestic product (GDP) through 2022 was just around 5% but this sector accounts for over 85% of foreign exchange earnings and about 50% of total government revenue. This suggests that this sector requires a sensitive regulatory environment to avoid disruptions to investments in the sector.
- With the divestments by some IOCs from the oil and gas sector, we need to reposition the industry through a steeply implemented petroleum industry act (PIA) to pave the way for new investments and encourage indigenous companies to reflate the sector with required investments. Industry statistics revealed that indigenous companies contribute about 30 percent of crude oil and 20 percent of the country’s gas production, and 40 percent and 32 percent of oil and gas reserves, respectively.
Based on feedback from operators in the oil & gas sector and the wider business community, we recommend the following:
a. We suggest retention of the tertiary education tax (TET) rate at 2.5%, particularly as it was increased from 2% to 2.5% about a year ago. At the proposed rate of 3%, Nigeria’s effective corporate income tax rate would rise to about 36%, which is one of the highest rates in the world, according to available research.
b. Retain the 30% CIT for all oil and gas companies
c. Consider amending the petroleum profit tax act with the same provision in the PIA section 104
d. Gas flares-out projects should be supported with the right incentives to ensure monetization of the resource for the benefit of the Nigerian economy.
e. It is also recommended that finance bills are presented for extensive stakeholders’ consultations before the national assembly passes them.
The Lagos Chamber of Commerce and Industry will continue to work towards mobilizing the private sector to support the implementation of the 2023 federal budget. On achieving revenue targets for the budget, the MDAs and Government Owned Enterprises (GOES) can intensify their revenue mobilization efforts in an enabling environment where the private sector thrives.
To achieve the laudable objectives of the 2023 budget, we urge the government to sustain current efforts toward the realization of crude oil production and export targets by creating an investment-friendly oil and gas industry. Public-private partnerships (PPPs) are the best models to fast-track the pace of our infrastructural development.
The New Naira Design and Withdrawal Limits
Relying on the powers of the CBN act 2007, the management of the CBN sought and obtained the approval of President Muhammadu Buhari to redesign, produce, and circulate new series of banknotes at ₦100, ₦200, ₦500, and ₦1,000 levels in late 2022.
The new naira notes are already in circulation since December 15, 2022, while the old notes and the new notes will circulate together until January 31, 2023, when the old notes will cease to be legal tender in Nigeria.
Beyond the reasons and economics of currency management, we urge the CBN to embark on an aggressive push for a truly cashless economy to reduce the attraction to holding cash. If this is not done, the currency in circulation will rise again as hoarding of the new notes may occur.
The government, being the biggest spender, should establish a cashless payment for its procurements. This can also be supported by more automation of government activities that require payment for services by the public. With more automation and less human interface, corruptive tendencies will reduce.
We commend the Federal Government’s planned policy that all payments from the public treasury beyond the threshold approved for daily cash limit by the Central Bank of Nigeria must be done electronically with effect from March 1, 2023. The implementation of this policy and the strict monitoring of it can be very effective in deepening the cashless economy.
Improved Security and the 2023 General Elections
With heightened interest in the transition to a new administration in May this year, the security profile around the conduct of the general elections is not comforting enough to guarantee a secure electioneering process. To actualize a free, fair, and credible election, there is a need to deploy more technology to boost security communication and more surveillance infrastructure at critical locations across the country.
We also expect to see massive enlightenment campaigns against thuggery, violence, and security breaches. Election managers should engage constructively with all critical stakeholders including, the traditional community, civil societies, media, and security agencies. The recent Edo train attack where 31 passengers went missing should not be allowed to happen. The Citizens deserve to know the preparedness of the government in conducting the general elections as a way of boosting their confidence in the process and endearing their participation.
Distinguished gentlemen of the press, you have been a worthy partner in projecting our engagement with the government towards creating an enabling investment environment for the advancement of the Nigerian economy and the good of all investors and economic players. The Lagos Chamber of Commerce and Industry, through engagements like this press conference, has consistently lent its voice to possible solutions to the several challenges facing our nation.
Let me reiterate our call on the government to remain focused on tackling the many economic issues even as we approach the general elections next month. As a private sector advocacy group with the mandate to promote the business community’s interests, the Lagos Chamber shall continue to engage relevant government agencies, the media, and other interest groups, where and when necessary, on actionable recommendations for a thriving business community.
An earnest appeal to all Nigerians
Dear Nigerians, this year’s election is critical to the survival of our nation, and we know that every democratic nation determines its leaders by the decision of the citizens who vote. As the voice of the organized private sector, LCCI appeals to everyone to get involved and use the power of numbers to sustain Nigerian democracy. Get your PVC today, and more importantly, please cast your vote wisely.
Thank you for listening.
(Dr.) Michael Olawale-Cole, CON
President, Lagos Chamber of Commerce & Industry,
Tuesday 10th January 2023