THE NIGERIAN ECONOMY AT 59
Over the last 59 years the Nigerian economy has transformed from a basically agrarian economy to an economy driven largely by resources from the oil and gas sector. The 2019 first quarter GDP data shows that the non-oil sector accounts for 90.9% of the GDP while the oil sector accounts for 9.1%. The paradox is that the oil sector accounts for over 50% of the nation’s revenue, and over 80% of the foreign exchange earnings. This reflects the mounting imbalance in the structure of the economy since independence. It also underscores the growing decline in the non-oil sector productivity over the past 59 years. This remains the major failing of the Nigerian economy at 59. It makes the economy very vulnerable to global shocks; and weak in economic inclusion.
However, the 20 years of uninterrupted democracy in Nigeria has earned the country enormous goodwill as one of the few stable democracies in Africa. However, core democratic values and ideals are yet to take firm root, especially in the following respects:
i. Transparency in the management of public finance
ii. Rule of law
iii. Separation of powers and the inherent checks and balances.
iv. Quality and independence of democratic institutions – Electoral bodies, Law Enforcement Agencies, Judiciary etc
v. Citizen engagement in the democratic process.
vi. Practice of Federalism
The LCCI recognises that Nigerian democracy is still work in progress. However, as in many advanced democracies, it is crucial to recognise the importance of these democratic ideals in order to sustain our democracy and ensure the advancement of the common good for all citizens.
Economic growth trend, measured by the performance of the Gross Domestic Product (GDP), has been generally positive over the last two decades. This is good compared to growth conditions in most economies around the world. However, it remains a major worry that the economy is still structurally defective as it is too dependent on the oil and gas sector, creating serious vulnerability risks. The lack of political will to reform the oil and gas sector remains a major shortcoming of governance over the past decades.
The transformation in the telecommunications sector stands out as the most successful reform story in the economy. Many sectors have leveraged the transformation in telecoms to make significant progress through the use of ICT, especially in the services sector.
The financial services sector has been significantly transformed since independence through the leveraging technology to enhance service delivery. The sophistication of the industry can compare with its counterparts even in the advanced economies. However, the financial intermediation role of the banking system is still unsatisfactory. It has weak linkages with many other sectors of the economy. This has constrained the impact of the sector on the economy from a systemic perspective.
The quality of the business environment remains a source of concern to investors, especially in the real sector. Weak infrastructure, policy environment and institutions had adverse effects on efficiency, productivity and competitiveness of many enterprises in the economy. These conditions pose a major risk to job creation in and economic inclusion across sectors.
CHALLENGES FOR INVESTORS
The Power situation remains a major burden on business. It is one area in which the trend since independence has been that of progressive decline. Power supply has consistently lagged behind the pace of the economic activities and population growth. This development impacted negatively on investment over the past few decades with increased expenditure on diesel and petrol by enterprises. This also comes with the consequences of declining productivity and competitiveness.
The Security situation in the country deteriorated in the last decade. It impacted on investment risk and worsened the country’s perception and image by the global investing community. Access to markets in the troubled parts of the country has reduced for many enterprises with negative consequences for investors’ confidence.
Related to this are the many cases of ethnic and religious conflicts, herdsmen attacks on communities and kidnapping. The incessant oil theft and the vandalization of oil pipelines remain major concerns for investors in the oil and gas sector. Billions of dollars have been lost in revenue; many lives have been lost as well. The many oil producing communities suffered serious environmental degradation as a consequence of this problem.
Over the last few decades, the challenges of production in the economy had grown progressively largely because of the quality of infrastructure; which is why the risk of industrial investment is high and continues to increase. The various policy interventions have not had the desired impact on the sector. Unless there is an effective and sustained protection and support for the sector, and a dramatic improvement in infrastructure, the outlook for the sector will remain gloomy, particularly for the small-scale industries.
It is impossible to have a vibrant manufacturing sector in the face of cheap imports into the country, and high production and operating cost in the domestic economy. Some of these imports are landing at 50% of the cost of products produced locally. Besides, manufacturers have to worry about high energy cost; they have to worry about high interest rates – 20% and above; they have to worry about a multitude of regulatory agencies making different demands on them; they have to worry about massive smuggling and under invoicing of imports, they worry about trade facilitation issues at the sea ports and many more. For most manufacturing SMEs, it is a nightmare. Yet production is critical to an enduring economic and social stability. The way forward is to address the fundamental constraints to manufacturing competitiveness in the Nigerian economy. Perpetual protectionism cannot fix this problem.
The reality is that job losses in the sector have been on the increase over the decades as productivity declined on the back of the difficult operating environment. However, the multinationals and conglomerates have shown some positive trend in performance and resilience, especially in the foods and beverage sector and other resource-based industries such as the cement industry. Even then, they would do much better if the operating environment were better.
BUILDING A SUSTAINABLE ECONOMY: WAY FORWARD
i. Urgent reforms in the oil and gas sector to reduce the bleeding effect of the current state of the sector on the economy. Such reforms would also boost investment in the sector, increase revenue and create many more quality jobs in the economy.
ii. Streamlining of the foreign exchange management to reduce the cost of stabilizing the exchange rate, boost supply of the forex into the economy, prioritize the unification of the multiple exchange rates, eliminate multiple windows in the forex market and broaden the scope for a market driven exchange rate. All of these are essential to reduce the systemic distortions and disruptions resulting from the current model of foreign exchange management. It is important as well to deemphasize demand management and scale up strategies to support the supply side of the forex make.
iii. Urgent need for strategic responses to the looming fiscal viability and solvency crisis at all levels of governments. Acute revenue challenges are becoming an increasingly disturbing scenario at all levels of government. We need to urgently deal with the escalating cost of governance, fiscal leakages and revenue optimization issues.
iv. Need to reduce the emphasis of attracting and retaining portfolio inflows with high interest rate to the detriment of domestic investment. We should prioritize attraction of foreign direct investments by addressing the key investment environment issues to inspire investors’ confidence. FDIs have much bigger potential impact on job creation, poverty reduction and economic inclusion.
v. The LCCI commends the decision to set up an Economic Advisory Council made up of economists of repute. This would surely facilitate the bridging of the skill gaps in economic management and foster the development of a sustainable framework for the acceleration of economic growth and development.
vi. Infrastructure financing is a big issue that needs very deep reflection as we mark 59th independent anniversary. Without a sound infrastructure base, it will be difficult to achieve the various socio-economic objectives of government at all levels. Infrastructure investment is a key driver of economic growth and development. Budgetary allocations have proved to be grossly inadequate for effective funding of infrastructure in Nigeria. Neither can we continually depend on debt financing as debt profile is already at an unsustainable threshold. It is thus imperative to seek innovative ways of effectively funding infrastructure in Nigeria. We need to develop new strategies to attract private sector capital to the infrastructure space. This should cover the broad spectrum of infrastructure provision – roads, railways, airports, water ways, electricity and other forms of energy.
LAGOS CHAMBER OF COMMERCE AND INDUSTRY [LCCI]
29TH SEPTEMBER 2019