Deputy President, Lagos Chamber
Mr. Gabriel Idahosa, FCA
Vice Presidents here present
Director General, LCCI
Distinguished Gentlemen of the Press,
It is once again elating to have you all here today for the third quarterly press conference in 2022. At these conferences, we review major developments in the economy in the preceding quarter and communicate our position to the wider business community and government. This is an integral part of our public policy advocacy. Through macroeconomic diagnostics, this briefing is done to highlight areas of concern; and to make recommendations to the government on creating an enabling environment for the private sector to thrive. I wish to acknowledge and appreciate the contribution of the media in driving this mandate over the years. As an institution with the mandate to protect business interests, we restate our commitment to deepening this partnership.
GLOBAL ECONOMIC DEVELOPMENT
On the global scene, the combined forces of rising inflation, weakening growth, worsening disruption to supply chains due to the war in Ukraine, and the fragile recovery from the Covid-19 lockdowns in some economies, have all heightened the concerns about stagflation, worsened poverty, and recession. Central Banks across the world have continued to struggle with controlling inflation and supporting their economies with extra-monetary interventions towards rebuilding supply chains and reduction in production costs. Inflation in the Euro Zone rose to 8.6 percent as of June 2022 and the United States’ economy recorded a 40-year high at 8.6 percent as of May 2022. The Lagos Chamber made the point earlier that rate hikes alone will not curb the inflationary pressures but that there is a need to pay attention to supply-side support to cushion rising production costs due to the high cost of energy and raw materials.
According to the World Bank, the Russian invasion of Ukraine has worsened the harm caused by the COVID-19 pandemic by disrupting economic activities, investments, and global trade in the near term, which may lead to a prolonged period of weak growth and high inflation in the world over. Global growth is projected to crash from 5.7 percent in 2021 to 2.9 percent in 2022. Low growth will likely remain low up to 2023-2024, depending on the length of disruptions and the effectiveness of policy interventions.
2022 FIRST-QUARTER GDP REPORT
Nigeria’s Gross Domestic Product (GDP) grew by 3.11% (year-on-year) in real terms in the first quarter of 2022, indicating the sixth consecutive quarter of positive growth on the back of significant expansionary monetary policies. The Q1 2022 growth rate was higher than the 0.51% growth rate recorded in the corresponding period of 2021 by 2.60% points and lower than 3.98% recorded in Q4 2021 by 0.88% points. However, on a quarter-on-quarter basis, real GDP contracted by 14.66% in Q1 2022 compared to Q4 2021, reflecting a lower economic activity than the preceding quarter.
- The oil sector of the Nigerian economy contracted by 26.04% (year-on-year) in Q1 2022, indicating a decrease of 23.83% points relative to the rate recorded in the corresponding quarter of 2021. This all-important sector has been bedeviled with oil theft, pipeline vandalism, subsidy corruption, and low investments.
- Nigeria recorded an average daily oil production of 1.49 million barrels per day (mbpd) in Q1 2022, lower than the daily average production of 1.72mbpd recorded in the same quarter of 2021 by 0.23mbpd and lower than the fourth quarter 2021 production volume of 1.50mbpd by 0.01mbpd.
- On the other hand, the non-oil sector grew by 6.08% in real terms during the reference quarter (Q1 2022). This rate was higher by 5.28% points compared to the rate recorded same quarter of 2021 and 1.34% points higher than the fourth quarter of 2021.
- The non-oil sector was driven in the first quarter of 2022 mainly by Information and Communication (Telecommunication); Trade; Financial and Insurance (Financial Institutions); Agriculture (Crop Production); and Manufacturing (Food, Beverage & Tobacco), accounting for positive GDP growth. This sector drove the growth in the economy.
- In real terms, the non-oil sector contributed 93.37% to the nation’s GDP while the oil sector accounted for 6.63% of the GDP in the review period.
Assessment & Outlook
In the third quarter, many factors will weigh on growth such as CBN’s rate hike as well as the rate hikes by other central banks around the world; rising energy costs with diesel above N800/litre, Jet-A1 at N710 per litre, and PMS selling above the government-regulated price of N165/litre. These price levels will continue to aggravate production costs which may lead to restrained manufacturing and eventual job losses. The worsening security situation in many parts of the country will continue to threaten agricultural production, manufacturing value chains, and logistics. We expect to experience some fiscal constraints because of debt overhang accompanied by a high debt service burden and heavy subsidy costs. There are therefore heightened fears of contracting output, constrained production, and recession risks as we navigate the murky waters of 2022.
Sustaining the pace of recovery in 2022 and navigating through the growing uncertainties in the global economy requires well-coordinated fiscal and monetary policies in promoting growth-enhancing and confidence-building policies that would encourage private and foreign capital inflows into the economy. To achieve these, LCCI recommends that:
- To ensure food security, agriculture output should be sustainably boosted and continued dependence on imports discouraged. For food security, scarcity is looming large on the horizon, and if nothing smart and quick is done, it would further exacerbate the plight of the poor.
- Fuel subsidies should be removed and oil theft curtailed if not eliminated to provide fiscal space for subsidized production of goods and services as well as for infrastructure, health, and education financing. The Human Development Index (HDI) of Nigeria, which is the index used by the United Nations to measure real development in a country, was 0.539 points in 2019, leaving it in 161st place in the table of 189 countries last published.
- 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 CBN needs to initiate a gradual transition to a unified exchange rate system and allow for a market reflective exchange rate. The CBN also needs to roll out more friendly supply-side policies to boost productive sectors, bolster investor confidence and help attract foreign investment inflows into the economy.
- There is a need to address structural bottlenecks and regulatory constraints that contribute to the high cost of doing business. A supportive and conducive investment environment is critical in facilitating private sector involvement in the economic recovery and growth process.
- The government should initiate moves towards having cost-reflective tariffs in the power sector as this will attract the needed investment to boost power supply and possibly end the frequent crashes of the national grid. We should also begin to initiate special-purpose interventions in boosting the deployment of renewable energy.
Nigeria, in May 2022 recorded a rise in prices at the rate of 17.71 percent, higher than the 16.82 percent rate of change in prices recorded in April 2022. It is also noted that the 17.93 percent recorded in May 2021 is higher than the rate in 2022, a year after. The same reasons can be adduced to have caused this 11-month high rate of price changes, but what is important is the policy response to this scourge. The food inflation in the past months easily confirms that food prices explain a high impact on the headline inflation. Cost of production due to rising fuel prices, forex scarcity, and supply chain disruptions may remain in the short term if these factors are not cushioned.
The position of the Chamber was confirmed by the latest Nigeria Development Update by the World Bank which highlighted the vulnerability of the Nigerian economy due to rising inflation pressures, forex illiquidity crisis, worsening insecurity, poor power supply, and weak infrastructure. We reiterate our position on the rising inflation that rates hike alone will not tame the rising inflation. The Government must invest more in boosting supply and cushioning the cost of production. Also, the burdening impact of fuel costs on businesses will remain as long as we keep importing refined fuels for our teeming population and neighboring countries. We posit that only the removal of fuel subsidies and the boosting of local refining will resolve the worsening crises in fuel supply and its multiplier effects on production and prices.
The total public debt stock of the Federal Government, states, and the Federal Capital Territory (FCT) rose from N39.56 trillion in December 2021 to N41.60 trillion (about $100.07 billion) by the end of the second quarter of 2022 as revealed by the Debt Management Office (DMO). Nigeria’s Debt-to-GDP ratio now stands at 23.27 percent, as against 22.43 percent on December 31, 2021. This is a result of new domestic borrowing by the FGN to partly finance the deficit in the 2022 budget, the $1.25 billion Eurobond issued in March 2022, and disbursements by multilateral and bilateral lenders.
Nigeria’s debt-servicing bill has increased by 109 percent from N429bn in 2021Q4 to N896.56bn in Q1 2022. In Q1 2021, Nigeria spent N310.5bn on domestic debt servicing, while it spent $286.35m (N118.9bn) on external debt servicing, giving a total of N429.4bn. However, in Q1 2022, it was N668.69bn on domestic debt servicing, and $548.79m (N227.87bn) on external debt servicing, giving a total of N896.56bn. The borrowings are significantly increasing and Nigeria is struggling to service these debts due to revenue mobilization challenges and an increased fuel subsidy burden. The International Monetary Fund (IMF) has warned that debt servicing may gulp 100 percent of the Federal Government’s revenue by 2026 if the government fails to implement adequate measures to improve revenue generation.
THE FOREIGN EXCHANGE MARKET
The Naira has recorded unprecedented volatility in the first quarter of 2022 with a widening premium between the official (NAFEX) rate (at N415/USD) and the BDC/Parallel market rate (of N615/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 the process of 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
The Monetary Policy Committee of the Central Bank of Nigeria, in their May 2022 meeting voted unanimously to raise the benchmark interest rate to 13% after two years of expansionary monetary policy. The rate was maintained at 11.5% since September 2020. The hike in rates was primarily to curb the surging inflation rate which stood at 17.7 percent as of May 2022. The CBN is faced with the dilemma of deciding on a contractionary policy in the face of fragile growth. On a balance, it is quite clear and compelling that tackling inflation is quite urgent in the sequence of policy objectives.
The nation’s foreign trade in goods rose quarter-on-quarter, QoQ, by 11 percent in the first quarter of 2022 (Q1’22) to N13 trillion from N11.7 trillion in Q4’21. According to the NBS, the value of exports rose QoQ by 23 percent to ₦7.1 trillion in Q1’22 from 5.76 trillion in Q4’21. Similarly, the value of imports rose QoQ by 21 percent to N5.9 trillion in Q1’22 from N4.87 trillion in Q4’21. The trade balance stood at a surplus of N1.2trillion in the first quarter of 2022.
To sustain this 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 refining capacity, production of petrochemical products, and accelerating reforms in the Oil & Gas sector to attract more foreign investments in the coming months.
The capital importation report for the first quarter of 2022, showed that Nigeria attracted a total of $1.57 billion in capital inflows in Q1 2022, falling by 28.1% compared to $2.19 billion recorded in the previous quarter. Compared to the corresponding period of 2021, Nigeria’s capital importation declined by 17.46% from the $1.91 billion received in Q1 2021. The largest amount of capital importation by type was received through Portfolio Investment, which accounted for 60.87% ($957.58 million). This was followed by Other Investment with 29.28% ($460.59 million) and Foreign Direct Investment (FDI) accounted for 9.85% ($154.97 million) of total capital imported in Q1 2022.
The concern here is that FDIs (at a low of 9.85 percent) are more valuable than the other types of investment inflows. We need more FDIs to create jobs and increase output in the economy. To achieve this, we must tackle the worsening insecurity in many parts of the country and implement investment-friendly policies to create an enabling investment and regulatory environment.
THE RUSSIA-UKRAINE WAR
The war between Russia and Ukraine has unexpectedly lingered since February till date fuelling deeper fears about worsening food scarcity, more people falling into poverty, and that supply chain disruptions may continue for the rest of the year. The war paints a gloomier outlook for the global economy, and especially Nigeria for obvious reasons. The most sustainable solution is for the government to boost local production of hitherto imported staples to levels that meet local demand.
In preparing for the reality of our near future, we urge the Federal Government to take seriously the completion of projects like the Trans-Saharan Gas Pipeline, a planned natural gas pipeline from Nigeria to Algeria. With this, we can explore the opportunity of exporting gas to Europe in the long term. We should also target Trans-Saharan and European markets with the ongoing construction of the Ajaokuta, Kaduna, and Kano Gas Pipeline, popularly known as the AKK Gas Pipeline. Arising from the calamities of this war, Nigeria can explore emerging opportunities to earn huge foreign exchange inflow in the medium to long-term.
We reiterate our recommendation that refining our crude remains the most sustainable option especially when we consider the huge cost of subsidies on government finances. In refurbishing the refineries, the government should consider the joint venture model similar to the Nigeria Liquified Natural Gas (NLNG) model.
The menace of oil theft has become a national disaster and a critical threat to our revenue base. Nigeria is losing crude oil at the level of about 91 percent of output. Nigeria lost $3.2 billion in crude oil theft between January 2021 and February 2022, as revealed by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), the LCCI Oil Producers Trade Section (OPTS), and the Independent Petroleum Producers Group (IPPG). This puts the figure at about N1.36 trillion when converted to Naira with the official rate of N416 to the dollar exchange rate. In the first quarter of 2022, oil theft was worth N434 billion (about $1 billion). This menace has prevented Nigeria from meeting its crude oil output capacity. Out of about 141 million barrels produced in the first quarter, about nine million barrels were lost to crude oil theft.
The Chamber has consistently advocated for the removal of fuel subsidies and full deregulation of the petroleum downstream sector to attract required investments into the sector. No investor wants to invest in an industry where they cannot even recover their cost of production. While we expect some respite from the commencement of commercial private sector refining and modular refineries, we call on the regulators to ensure a conducive business environment that supports these investments coming on stream soon. The twin factor of fuel subsidy payments and crude oil theft have combined to deny Nigeria the gains of the high crude oil price on the international market.
The national grid has collapsed six times this year alone. It is obvious that the national grid cannot supply sufficient power to meet the electricity demand by Nigerians. There have been issues with vandalization of power installations, a disrupted gas supply, distribution companies (DISCOs) lacking the capacity to take up power generated by the power generating companies (GENCOs), and the challenges of achieving 100% metering for power consumers. With the cost of diesel at record levels and persisting poor power supply, businesses are running on unsustainable costs and producing at uncompetitive prices. This can lead to job losses if output is constrained due to the unbearable cost of production. If not quickly tackled, these challenges will likely subdue the GDP growth potentials and projections for 2022.
We recommend that government invest more in technology to fight pipeline and power installation vandalism. The government should create funding for critical infrastructure and special purpose intervention in the power sector. The newly launched Infrastructure Corporation of Nigeria (Infracorp) has a mandate to focus on power, renewables, transport, and logistics. The INFRACORP will succeed in mobilizing private sector participation if we can achieve cost-reflective pricing in the power sector. The most sustainable solution to Nigeria’s power shortages is the transition to renewable energy.
The worsening insecurity profile in Nigeria is reaching a worrisome dimension with the unfortunate incident on Sunday 5th June 2022, where attacks were launched on worshippers at the St. Francis Catholic Church, Owo in Ondo State. The terrorists’ invasion into the south-west region is another worrisome development that needs a decisive and coordinated response.
The Lagos Chamber of Commerce and Industry is concerned with the current insecurity crisis because of its impact on businesses and the economy. It is also very concerned because of the apparent threat to our forthcoming general elections in 2023 and, by extension, a threat to democratic governance. In the absence of peace and security, it would be challenging to hold credible, free, and fair elections that would reflect the choices of the electorates in choosing those that should lead them.
We need to address the root causes like youth unemployment, drug abuse, uncontrolled small arms, and unmanned borders through which foreigners infiltrate into our territories. We also need to boost security enforcement through frequent recruitments into the security agencies and well supported with modern weaponry and deployment of warfare technology. Community policing and intelligence gathering needs to be given official endorsement and systematically managed.
The 2022 Global Peace Index published by the Institute for Peace and Economics ranked Nigeria at 143 out of 163 countries, only better than countries like Iraq, Syria, Libya, Afghanistan, Sudan, Somalia, Yemen, and Russia, which are typically known to have been conflict areas for a long time. The security situation is unfortunately deteriorating and daily creating fears of Nigeria falling into a failed state.
INDUSTRIAL ACTIONS IN OUR TERTIARY INSTITUTIONS
The industrial action undertaken by the Academic Staff Union of Universities (ASUU) has lasted for 141 days today. It is more disheartening that there is no hope in sight on resolving the disagreement between the government and the lecturers. In the same vein, the Joint Action Committee of the Senior Staff Association of Nigerian Universities and the Non-Academic Staff Union of Education and other Allied Institutions commenced their strike since March 25, 2022, making it 69 days today. The Lagos Chamber and the business community are concerned as this negative development can worsen our security challenges, increase drug abuse among our youth, and raise our social vices. We cannot look to half-baked graduates to build a prosperous economy. Nigeria must begin to pay more attention on improving its latest Human Development Index (HDI) which stood at 161st out of 189 countries.
Distinguished Gentlemen of the Press, it is our collective responsibility to engage with the government in creating an enabling investment environment for the advancement of the Nigerian economy and the good of all investors and economic players. However, to achieve this, we need to have the right policy and regulatory framework. The Lagos Chamber, through engagements like this press conference, has consistently lent its voice to possible solutions to the several challenges facing our nation.
Our policies and regulations must foster business competitiveness at national, sub-regional, continental, and global levels. This requires that the governments at all levels pay more attention to the economy at this critical time. The business community demands this commitment at a time when it is feared that governance may suffer on the altar of politicking as we approach the general elections in 2023. The mandate of this government covers the period to the handover in May 2023 and would therefore expect to see a determined government wishing to leave enduring legacies in the history of Nigeria.
As a private sector advocacy group with the mandate to promote the interests of the business community, 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.
Thank you for listening.
ASIWAJU (DR.) MICHAEL OLAWALE-COLE, CON
LAGOS CHAMBER OF COMMERCE & INDUSTRY,
TUESDAY 5TH JULY 2022