PRESS BRIEFING ON THE STATE OF THE ECONOMY BY THE PRESIDENT OF LAGOS CHAMBER OF COMMERCE & INDUSTRY, MRS. TOKI MABOGUNJE, HELD ON WEDNESDAY, 5TH MAY 2020 AT COMMERCE HOUSE, VICTORIA ISLAND, LAGOS
Lagos Chamber of Commerce & Industry
Asiwaju [Dr] Michael Olawale-Cole, CON
Lagos Chamber of Commerce & Industry
Mr. Knut Ulmoven, MFR
Vice Presidents and Other Officers of the Chamber
Honorary Life Vice Presidents
Council Members of the Chamber
Dr. Muda Yusuf
Gentlemen of the Press
It is my pleasure to welcome you all to my second press conference on the state of the economy in the year 2020 and as President of the Lagos Chamber of Commerce & Industry. Let me begin by expressing our thanks to all of you for the good coverage given to our Press Conferences and other activities of our Chamber.
Distinguished Gentlemen of the press, as you are aware, coronavirus codenamed Covid-19, has dominated our news feed for the past few months and has destabilised the way we are used to living our lives and doing buisnesses over the years. The Covid-19 outbreak has dealt a severe blow to the global economy, disrupted, and still disrupting business, economic and financial activities across the globe. Businesses are shutting down operations. Factories are on hold. Schools are on recess. Trade activities are on hold global equities and commodities markets have been severely affected. It is therefore imperative for us to address the nation on our perspectives on issues bordering on the economy and the private sector at this critical and trying period in our national and economic history.
Before I proceed, let me pay tribute to our frontline health workers for their commitment and immense sacrifice in the fight against the Covid 19 pandemic. I would also like to extend our condolences to the families of all those who have lost their lives to this pandemic. Let me join the government in appealing to all citizens to support the current efforts of government in the fight against the pandemic. We should continue to abide by the various protocols that have been outlined in the wake of the partial lifting of the lockdown – social distancing, wearing of face masks, using of hand sanitisers, high level of hygiene and regular washing of hands.
The Lagos Chamber of Commerce & Industry notes the sustained recovery of the Nigerian economy as GDP growth advanced to 2.55 percent in the final quarter of 2019, compared to 2.28 percent in the preceding quarter. We however also note the broad-based underperformance across key sectors such as agriculture, trade and manufacturing, with strong potentials to drive economic diversification.
Following the fallout of the covid-19 pandemic, we see the short to medium-term outlook for the economy as bleak, as the pandemic has led to an unprecedented collapse in commodity prices, capital flight, turmoil in the capital market, supply chain disruption across sectors and destabilization of commercial and economic activities. Hence, we resonate with the International Monetary Fund’s position on a looming severe contraction of the economy by year end-2020.
However, we are of the view that the current covid-19 experience presents an ample opportunity for the government and policymakers to pursue structural reforms and put in place home-grown policies. Reforms such as the liberalisation of the petroleum downstream sector, exchange rate convergence, securitizing government’s equities in joint ventures, privatizing government’s redundant assets, PPP-led infrastructural development, export diversification, agro-based industrialization and cut in governance costs are direly needed to aid the rebound of the economy going forward and especially in times of adversity.
We are deeply concerned about the slump in crude oil prices due to weakening demand as Brent, Nigeria’s benchmark grade, has dropped by over 60 percent since the beginning of the year. The crash in global oil prices incited intense fiscal and external pressure on the economy and severely distorted the Federal Government 2020 budget as a result of the country’s huge exposure to the oil market.
While the Organization of Petroleum Exporting Countries and Allies and G-20 jointly agreed to reduce supply by 13.2 million barrels per day effective May 1, 2020, we believe that this action may not significantly boost oil prices to desired levels if global oil demand remains subdued. This has dire implications for small oil producers like Nigeria with limited buffers and weak foreign reserves. The IMF projects significant economic contractions in oil-exporting countries, with Nigeria’s GDP forecast to plunge by 3.4%. Most oil companies have reduced their capital expenditure minimise losses and we are concerned about the consequent effects of all these developments on investment and employment in the oil industry generally. The Federal Government’s revenue targets, budget plans and fiscal stability are all under increased pressures as result of shrinking oil receipts induced by low oil prices and huge volume of unsold supplies.
The Lagos Chamber notes the continued depletion in external reserves since the beginning of the year. Foreign exchange reserves have depleted by 12 percent or $4.7 billion between January and mid-April 2020 due to weak dollar inflows and net portfolio outflows. Depleting foreign reserves limit the extent to which the Central Bank of Nigeria can intervene in the foreign exchange market.
We observe that about a third of the foreign reserves belong to foreign portfolio investors in OMO bills and this put foreign reserves under increased pressure amid weakening oil prices. We are of the opinion that the continued dependence on portfolio investment is unsustainable, as foreign investors may develop apathy for naira assets in the face of an impending recession. More so, the sustained depletion of foreign reserves amid supply-demand imbalance in the global oil market will only exacerbate the country’s vulnerability against external shocks.
The sharp contraction in oil prices and continued depletion of external reserves forced the CBN to embark on a downward adjustment of exchange rates across various windows. LCCI notes that exchange rate at the Official, Bureau-de-Change and Investor & Exporter windows was weakened to N360/$, N378/$ and N380/$ respectively from N306/$, N357/$ and N366/$. The naira has weakened to about N420/$ in the parallel market since March 2020 when the CBN halted dollar injection in the foreign exchange market. The technical devaluation of the naira has implications for production cost, project cost with foreign currency components, imports, investment, consumer prices and cost of servicing foreign currency obligations by corporates and government. We believe that another ‘price adjustment’ is inevitable in the next three months if global oil prices fail to pick up by the end of the second quarter.
We note the disparity across different exchange rate segments. We urge that the gap between official rate and the parallel market be effectively managed so as not to give room for round-tripping or arbitrage opportunities. Harmonizing the multiple exchange windows into a single window and a market-driven or liberalized foreign exchange system should be the goal.
We observed the impressive performance of the Nigerian stock market in early-to-mid January 2020, sadly, the gains recorded have been eroded due to divestment by foreign investors on uncertainties around the covid-19 crisis. With the current uncertainties in the macro-environment, the outlook for the equity market is bleak as the covid-19 shock has significantly distorted the earnings projections of listed corporates. We, however, believe this period of low stock prices presents ample opportunity for investors to take position in fundamentally sound stocks with demonstrated history of consistent earnings growth and dividend payment.
We note the continued uptrend in headline inflation since September 2019 when the Federal Government shut the land borders. Official reports showed that consumer prices accelerated by 12.26 percent in March 2020. This marks the seventh consecutive month of rising consumer prices. Both food and core inflation accelerated by 14.98 percent and 9.33 percent respectively in March. We believe consumer prices, especially food, will come under pressure in coming months due to disruption to agriculture value chain and commencement of planting season, which is a period of reduced agricultural output. Also, the impact of currency devaluation and the recent increase in VAT rate will most likely make inflation trend higher in months ahead.
Intense inflationary pressures exert negative impact on households purchasing power, investment, production cost and business operations. We urge the government to stem rising consumer prices through measures aimed at bridging supply gaps and reducing transportation costs. Similarly, there is need to address the security concerns in the country, especially in the major food-producing areas.
Socioeconomic and Business Impact of Lockdown
The Lagos Chamber acknowledges the efforts of Federal Government, states, monetary authorities and organized private sector towards containing the covid-19 pandemic. While the containment measures were necessary to slow the spread of the virus. We observe that the lockdown had profound social consequences because of the weak mechanism to cater for the vulnerable groups in the society. The palliatives given by the various governments though laudable were not sufficient to address the social fallouts of the lockdown. The high level of informal activities in Nigeria suggests that millions of Nigerian households who survive on daily income for life essentials were severely affected by the lockdown.
The LCCI notes the following relief measures by Federal Government and Central Bank towards protecting households and businesses affected by the crisis. The relief measures include but not limited to:
- Creation of N500 billion Crisis Intervention Fund by the Federal Government to improve healthcare infrastructure nationwide and support special public work programmes in the 36 states of the Federation.
- Establishment of N1.1 trillion intervention fund by the CBN fund for local manufacturers, including pharmaceutical firms to enhance import substitution and expand critical healthcare infrastructure.
- N50 billion credit facility established by Central Bank of Nigeria (CBN) through NIRSAL Microfinance Bank for households and SMEs severely affected by the pandemic.
- Proposed passage of Emergency Economic Stimulus Bill. The provisions are (a) 50% rebate on corporate taxes; (b) tax waivers on essential medical supplies; (c) 180-day mortarium on mortgage obligations under National Housing Fund.
- One-year extension of moratorium on all CBN intervention facilities effective March 2020 and Reduction in interest rate on CBN intervention facilities to 5% from 9% effective March 1, 2020.
- Three-month repayment moratorium for social welfare schemes such as FarmerMoni, Market Moni and TraderMoni.
- Three-month repayment moratorium for all Federal Government-funded loans issued by the Bank of Industry, Bank of Agriculture and Nigeria Export-Import Bank.
- Contribution by the coalition of private sector to tune of about N23 billion to support the government.
- Expansion of social register from 2.6 million households to 3.6 million households.
- We commend the Nigeria Shippers Council and the Shipping Companies for the demurrage waivers during the period of the lockdown. We enjoin the Terminal Operators to extend similar concessions to importers.
Socioeconomic and Buisness Impact
- While we acknowledge the efforts of the government towards protecting the most vulnerable, we note that the palliatives were poorly articulated and failed to adequately capture significant fraction of low-income households who rely on daily income for livelihood. For example, the social register did not cover up to five percent of about 87 million Nigerian households living below the poverty line. The inability of most low-income households to benefit from these palliatives mean higher poverty incidence as their businesses suffer collapse from the lockdown.
- We also note the increased level of social unrest in Lagos State following the activities of some unscrupulous element, taking advantage of the lockdown. There were cases of robbery attacks in some parts of the state. We implore the Lagos State Government & security agencies to take proactive steps in preventing reoccurrence as the importance of security cannot be over-emphasized at this critical period.
- The lockdown has significantly destabilized business & economic activities especially in the informal and MSMEs space given their lack of adequate cash buffers to withstand the shock. Findings from our survey on the covid-19 crisis impact on the Lagos business community revealed that 81 percent of our respondents were ‘severely’ affected by the pandemic with the median daily revenue loss of N500, 000.
- Although government have rolled out raft of relief measures to support businesses, we observe that these packages are tilted more towards formal establishments while micro and small-scale enterprises as well as informal businesses have been largely left out.
- The outlook for the business environment is bleak. We believe that businesses will continue to grapple with devastating shock of the pandemic amid weak macro fundamentals for some time to come. We might likely see businesses downsize operations, retrench workers, slash salaries to save cost or even collapse. There is potential risk for high business mortality rate in the near term.
The current economic crisis has a silver lining. It will throw up opportunities in some areas including import substitution, creativity and innovation, and the non-oil export.
Import Substitution and Backward Integration
As a result of Covid-19, we expect that global economy will be recalibrated, with global supply chains becoming more complex and dynamic. There are already signals of protectionist tendencies and possibilities in the light of border restrictions on the movement of human and goods. In the days ahead, countries across the world may place technical embargo on exports of essential goods in a bid to meet local demand and as way of managing disruption to global supply chain.
We strongly believe a scenario as this will not bode well for import dependent countries like Nigeria, as limited supply of raw materials will further damage already constrained manufacturing capacity utilisation, and shortage of essential items including pharmaceutical products will devastate consumer welfare and dampen the general standard of living. We are however convinced therefore, that the current situation presents an opportunity for the country to stimulate and promote import substitution. This implies changing the narrative from the base, mobilise resource and galvanize critical stakeholders and actors to reach consensus to commit to creating an economy that will not only produce significant proportion of its major commodities (intermediate and finished goods), but equally competitive on a global scale
The new approach to import substitution must be a holistic concept of policies and deliberate strategies with the buy in from both the public and private sectors. Government must lead from the front through assurances of continuity of policy and programmes thereby give impetus to the private sector and venture capitalist to make investment decision in priority intermediate and finished goods.
Non-Oil Export Promotion
We are of the view that the current situation in the global oil market present an opportunity for redirecting our export initiatives and over dependence on oil, focusing on the non-oil sector. However, the government needs to create policies that will intensify local production in the real and service sectors. We believe that there is a need for collaboration and partnership between the private sector and the government (ministries and agencies) to achieve any meaningful success in this drive as it will help bridge the gap between government prescriptions and the real needs of the private sector.
We strongly believe that to drive non-oil export and stimulate participation of SMEs, customs procedures and documentation procesess must be less cumbersome and technology driven.
Creativity and Innovation
With the Covid-19 pandemic pushing the global economy (Nigeria inclusive) to the precipice, creativity and innovation in goods and services have become very imperative and necessary, perhaps the competitive advantage factor. Opportunities for productivity and economic optimization abound in sectors like healthcare, agriculture and food, manufacturing, ICT amongst others. The success or otherwise of Nigeria at this critical period will depend to a large extent on our ability to leverage on creativity and innovation to build a competitive economy and promote import substitution going forward. We however believe there is also need for sustained improved domestic productive capacity and human resources in priority sectors.
Although agriculture remains the largest sector of the Nigerian economy and employs two-thirds of the entire labour force, production hurdles have significantly stifled the performance of this sector. Over the past 20 years, value-added per capita in agriculture has risen by less than 1 percent annually and it is estimated that Nigeria has lost USD 10 billion in annual export opportunity due to continuous decline in the production of some commodities, according to Food and Agriculture Organisation (FAO). Over the years, Food production increases have not kept pace with population growth, resulting in rising food imports and declining levels of national food self-sufficiency (FMARD, 2008). The main factors undermining production includes reliance on rainfed agriculture, smallholder land holding, and low productivity due to poor planting material, low fertilizer application, and a weak agricultural extension system amongst others.
With Covid 19 induced lockdown in some states, the food situation is most likely to worsen with farmers having to cope with movement restrictions and paralyzed supply chains. Transport restrictions and quarantine measures are likely to impede farmer’s access to markets thus curbing their productive capacities and hindering them from selling their produce. This would most likely drive up food inflation which currently stands at 14.98% and has been a major driver of headline inflation with increasing food prices. In addition, farmers might be hindered from working on their land and buying seeds or other essential inputs. There is also the challenge of shortages of labour, which could disrupt the production and processing of food, especially for crops that are highly labour intensive.
We commend the effort of the Minister of Agriculture and Rural Development, in inaugurating a joint technical task team on emergency response to COVID-19, towards facilitating free and unhindered movement of food, livestock and agricultural inputs and farmer’s movement across the nation during the lockdown, and 2020 farming season to avoid food crises. However, we are of the opinion that more actions are required beyond free and unhindered movement of food.
Although there is no evidence that livestock and poultry birds are at risk of the virus, the animal industries in some countries are being affected by consumer fears and this in a way affected the demand of animal and animal by-products. We therefore urge the Minister to work with relevant agencies for farmers to adhere strictly to health measures both in and outside the farm and create a biosecurity protocol for producers of animal products as well as fresh fruit/vegetable producers. We strongly believe that this would address any consumer fears that may arise as well as curb any possible transmission of Covid 19 through agricultural products.
Our propositions to the government are informed by the findings from our recently conducted survey on the impact of COVID 19 lockdown on businesses as well as interactions with major stakeholders in the private sector. Findings showed that demand has reduced significantly with revenue severely affected. Majority (83%) of business owners plan to cut down salaries, downsize workforce or a combination of both. Businesses therefore request adequate stimulus and intervention to preserve investments and save jobs. More than half (54%) of business owners want banks to reduce interest rate and give moratorium on loans, 29 percent want reduction in tax liabilities, while 17 percent want waivers on import duties and demurrages.
In the light of the foregoing therefore, policymakers and the organized private sector need to come together to rescue the economy from collapse at this critical time. Recognizing the role of business and investment in the economy, it is imperative to have an urgent rescue package that would enable businesses navigate the storms as well as preserve employments. We therefore propose the following support measures for the business community for consideration:
- A year tax break for healthcare & pharmaceutical companies, airlines, manufacturers, agro-processors, SMEs and hospitality players.
- Temporary suspension of 50 percent increase in VAT rate till year end. Also, P.A.Y.E should be suspended for the next six months. This would help boost the purchasing power and aggregate demand, thereby stimulating the economy.
- Agro-processing companies should enjoy import waivers for the next one year. This is critical to support food security and agricultural supplies.
- Commercial banks are implored to offer reprieve to businesses and corporates indebted to them. The reprieve could be in form of loan moratorium and restructuring. We urge the CBN to review the cash reserve ratio downwards to 20 percent from the current 27.5 percent, to enable commercial banks have more liquidity to support businesses.
In the aviation industry, we recommend:
- Support towards augmenting insurance premiums which are dollar-denominated as cover were mostly underwritten abroad due to lack of local capacity.
- Support to pay for operational cost including international lease rental on grounded aircraft and maintenance (C& D-checks).
- Full implementation of the Executive Order on Removal of VAT from Air Transportation.
While we commend the government on the various measures already put in place to cushion the effect of this pandemic both on individuals and buisnesses, we are concerned that the current approaches used in implementing some of these measures would not yield the desired result. There is therefore a need for restrategising and ensuring proper coordination both at the states and federal level. We urge the government to focus on the completion of critical infrastructure projects nationwide such as the Lagos-Ibadan expressway, Lagos-Ibadan rail project, Enugu Airport, the Second Niger Bridge, East-West Road, among others. Also, there should be an upgrade of power and broadband infrastructure across the country in order to support ICT and digital economy.
These public goods would have significant positive impact on commercial activities and businesses as they reduce cost of doing business and boost productivity. The private sector should be encouraged and incentivized to contribute to investment in infrastructural development. Finally, we strongly urge engagement of the private sector by regulatory institutions and agencies of government in addressing national economic issues so that intended benefits are achieved for the common good.
I thank you for your attention.
TOKI MABOGUNJE [MRS]
LAGOSCHAMBER OF COMMERCE AND INDUSTRY
5TH MAY 2020