The regime came on board with an exceptionally high goodwill and with very high expectations from the citizens. But the regime was up to a slow start, from the perspective of the economy. The key reforms, especially in respect of the petroleum industry and the infrastructure sectors were also slow in coming. The collapse of oil price and activities of the militants in the Niger Delta regrettably compounded the economic challenges of the country, culminating in a recession. The good news is that the outlook for the short to medium term looks better now than a year ago.
Policy Direction: Absence of an economic blueprint was one of the concerns of the private sector in the early days of the administration. However, the Economic Recovery and Growth Plan, ERGP, launched recently by the President has provided clearer economic policy direction of the administration. This enhanced the level of investors’ confidence and lessened uncertainties. The indications are that the government is committed to the implementation of plan. The establishment of the Presidential Enabling Business Environment Council, PEBEC, is also a boost to investors’ confidence.
Investors’ confidence
This is a body chaired by the Vice President which underscores the political will of the government to drive its activities. The Executive Orders released recently provide further proof of government commitment to fostering an enabling environment for investors.
Forex policy: The forex policy was one of the major challenges faced by investors in the past two years. There were issues of uncertainty, volatility of exchange rate, round-tripping which resulted from the huge differentials in the rates, multiplicity of rates, acute liquidity crises which adversely affected investors’ confidence. However, the recent reforms in the forex market has mitigated these problems. The upswing in oil price and increase in oil output had brought a great relief to investors this year.
The forex regime is moving close to a market driven framework in line with the pointers in the ERGP. The frequent injection of liquidity by the CBN has moderated the rates and improved forex liquidity. The forex policy reviews, especially the creation of the investors and exporters windows, are impacting positively on forex inflows and boosting the fortunes of the stock market. Although there are still some fine-tuning to be done, the forex regime is heading in the right direction.
Debt management: There are concerns about the rapid growth in public debt stock. Evidently, the debt profile of the government is not sustainable. The IMF in its Article 4 Consultation Report indicated that 66 per cent of the government revenue was used in interest payment in 2016. This is disproportionate and poses a risk to the macro-economy. In the 2016 budget, the sum of N1.36 trillion was earmarked for debt service. This was 35 per cent of revenue and 76 per cent of capital budget. Similarly in 2017 budget, the sum of N1.66 trillion was proposed for debt service. This was 34 per cent of revenue and 74 per cent of capital budget. The public debt stock grew from N9.5 trillion in 2014 to N17.3 trillion in December 2016. Although the exchange rate effect contributed to the sharp increase in the numbers. But this not detract from the reality of rapid increase in debt accumulation. This is something to worry about.
Besides, the debt structure is impacting negatively on the private sector because of the crowding out effect in the financial market. The bulk of the resources in the economy is now being channeled to purchase of government debt instruments at attractive rates of between 18 and 22 per cent rather than lend to investors in the economy. This has also pushed up interest rates to the 30 per cent threshold for private sector investors. This will surely no help the drive to stimulate domestic investment which is most critical to job creation. Recent data indicate that in Nigeria, financial system credit to the private sector as percentage of GDP, is one of the lowest in the world. It is 14.2 per cent when the sub Saharan average is 45 per cent. The figures for the middle income is 96.5 per cent, while and high income countries are well over 146.6 per cent.
Manufacturing sector: The manufacturing sector experienced some major challenges during the past two years. The factors were both external and domestic. The main external factor was the collapse of oil price which affected forex availability and triggered sharp exchange rate depreciation. There was very little the government could do to stem that. However, the policy component of the problem resulted largely from foreign exchange policy choices which aggravated the problem of forex liquidity. The restriction of 41 items from access to interbank forex market added to the plight of some manufacturing firms. The high interest rate and unfair competition from imported products were also factors that constrained the growth of the industrial sector. High energy cost continued to impede the competitiveness of the sector. Capacity utilization was between 40 – 45 per cent over these period.
The import dependent nature of the Nigerian manufacturing sector also posed considerable adjustment challenges for the sector over the past two years. The good news is that segments of the manufacturing sector that had substantial backward integration capabilities had a very good leverage during the review period. Such firms became more competitive and more sustainable and profitable. They are largely in the food and beverage categories.
Agricultural sector
The sector gained government support especially in funding, especially rice farming and processing. However, the pace of mechanization is still low which is why food prices remain an issue in the country. It is only mechanized agriculture that can guarantee food security in a country with a population of 180 million.
Oil and gas: Pace of reforms in the oil and gas sector has remained painfully slow. PIB has still not been passed and this has been stalling the progress of the sector.
In the upstream segment, contracting processes under the joint venture partnership takes between 24 – 36 months. This is a major problem for investors in the sector. This is one reason that no new investors are coming into the sector.
The downstream is equally plagued by the excessive regulation which has made it difficult to unlock the huge potentials of the oil and gas sector. It desirable to fully liberalize the sector so that investors can go into the sector and inject the desired investment. The price cap on the petroleum products is hurting the sector and impeding progress. There is a huge potential to be unlocked in the sector through appropriate policies and legislations. [myad]
