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Mabogunje: We expect economic growth from non-oil sector in subsequent quarters

The President, Lagos Chamber of Commerce and Industry (LCCI), Mrs Toki Mabogunje, a lawyer, in this interview with TAIWO HASSAN, bares her mind on the challenges facing the Nigerian economy, especially with COVID-19, forex crisis, insecurity and interest rate, among others

 

What is your assessment of the global economic development in half year 2021?

 

 

Well, the COVID-19 vaccination continues to gain momentum in several advanced economies and a few developing ones, thereby supporting economic activities globally.

 

According to JP Morgan, the Global Composite Purchasing Manager’s Index has maintained its upward trajectory since the beginning of year 2021, rising to 58.4 index points in May 2021 from 56.3 points in the preceding month.

 

This reflects sustained improvement in global activity level, largely supported by continued progress in the vaccination programme in advanced economies and sustained policy support by fiscal and monetary authorities.

 

Likewise, it is instructive to note that several developing economies are still having difficulties in accessing COVID-19 vaccine.

 

Data by the World Health Organisation showed that less than three per cent of Africa’s population had been vaccinated as of end-May 2021. This poses high vulnerability risks to the continent.

 

What is your view on World Bank’s forecast for global economic growth for this year?

 

The upward revision of the World Bank’s global growth projection reflects renewed optimism for global recovery this year.

 

The bank expects global output to expand by 5.6 per cent in 2021, to stage its strongest post-recession pace in eight decades. Recovery is expected to be driven by massive policy support and continued vaccination deployment in advanced economies.

 

However, recovery will be uneven across countries amid highly unequal access to vaccination.

 

Growth is expected to be fragile in several developing economies as the joint impact of elevated COVID-19 infection rates, limited access to vaccines, partial withdrawal of policy support and weak capital inflows will likely offset the benefits associated with rising commodity prices and stronger external demand.

 

The emergence of a new COVID-19 strain and debt sustainability concerns in developing economies are major downside risks to global outlook. Meanwhile, consumer prices have been on the upward trajectory in most advanced economies, largely driven by higher energy prices, pent-up demand and base effects.

 

Nonetheless, global monetary authorities have continued to favour output expansion amid rising inflation by sustaining the pace of their quantitative easing programmes aimed at stimulating the financial markets and the economy in general.

 

In recent times, oil prices have been on the upward trend, what is the implication for global  economic growth?

 

Oil prices crossed the $76 per barrel level at the beginning of July 2021. The bullish trend in oil prices could be attributed to improvement in economic and industrial activities in Europe and Asia, coupled with continued progress in COVID-19 vaccine administration as well as high compliance level of OPEC+ members to output reduction agreement.

 

The group agreed to ease output cuts by two million barrels between May and July 2021 in response to elevated oil demand in the second half. Market outlook looks promising as the Cartel expects oil demand to grow by six million barrels per day to around 96 million bpd on average for the year.

 

However, the new strain of COVID-19 and re-imposition of restriction measures are major threats to oil market stability in the short to medium term.

 

What is your assessment of Nigeria’s domestic development for 2021 first quarter gross domestic product (GDP) report?

 

Indeed, the chamber noted the improvement in recovery as the economy grew by 0.51 per cent in real terms in the first quarter of 2021, compared to 0.11 per cent reported in the preceding quarter and the pre-lockdown 1.87 per cent in the corresponding quarter of 2020.

 

The performance reflects a slow, but gradual recovery from 2020 recession. However, sectoral performances remain sluggish as eight sectors reported expansion, while 11 sectors contracted. Growth was driven by the non-oil sector, which expanded by 0.79 per cent in the quarter under review.

 

Non-oil sector growth was largely fuelled by expansion in ICT (+6.3 per cent); manufacturing (+3.4 per cent); agriculture (+2.3 per cent) and real estate (+1.8 per cent).

 

We attribute the marginal improvement to sustained relaxation of COVID-19 restriction measures following significant moderation in infection cases in the country, and this is supporting the further reopening of the economy.

 

In fact, agriculture demonstrated resilience in the first quarter amid heightening insecurity and lingering supply chain disruptions orchestrated by the pandemic.

 

Manufacturing returned to positive growth trajectory after three consecutive quarterly contractions, partly supported by developmental finance intervention of the Central Bank of Nigeria amid numerous headwinds confronted by industry players, including foreign exchange illiquidity, domestic inflationary pressure, weakening purchasing power, poor public infrastructure and port-related challenges.

 

Segments of manufacturing with high levels of backward integration had lesser degrees of shocks from foreign exchange crisis in the economy.

However, we note the sustained recovery in the construction and real estate sector, supported by improved activities of private and public sector associated with implementation of capital projects.

The ICT sector maintained its impressive performance in the reviewed quarter.

This was expected given the opportunities created for technology in the post-pandemic era. The cost reflective tariff appears to have impacted positively on the electricity sector, which recorded 8.66 per cent.

This was one of the highest sectoral growth performances in the GDP report. But a lot of issues remain to be resolved in the electricity sector. Electricity supply in many parts of the country is still epileptic. The metering programme is not keeping pace with demand. Other sectors with positive growth numbers in the reviewed quarter include human health and services (+4.7 per cent) and water sewage (+14.8 per cent).

 

What can you say about the performance of transport and trade sectors of the economy this year so far?

 

Transportation and storage sector recorded the most severe contraction of 21.9 per cent principally driven by double-digit contraction in road transport sub-sector (-24 per cent) and aviation (-12 per cent).

 

The weak performance of road transport sub-sector could be attributed to the multidimensional impact of insecurity on movement of people, goods and services and that of aviation sector to difficulties experienced by industry players in sourcing foreign exchange, which has continued to impact operational costs with a corresponding spike in air fare.

 

However, trade, Nigeria’s second sector by output contribution, maintained its negative growth trajectory in the first quarter, having contracted by 2.4 per cent. We note the sustained moderation in the scale of its contraction in the first quarter, which partly reflects the gradual (positive) impact of border reopening on the sector’s performance amid other structural challenges facing the sector.

 

Is the World Bank’s projection of Nigeria’s population growth rate at 2.7 per cent and current population good for the economy?

 

Juxtaposing current growth level with population growth estimated at 2.7 per cent by the World Bank implies the economy is not growing fast enough to create new opportunities for its rapidly-growing population.

 

Nigeria’s actual output performance is significantly below its potential output level.

 

Achieving key development outcomes such as employment creation and poverty reduction will always remain elusive in the light of fragile recovery, and this reinforces the need for policymakers to pursue critical reforms to bolster confidence in the economy, accelerate postpandemic recovery and alleviate poverty.

 

The IMF and World Bank are projecting growth figures of 2.5 per cent and 1.8 per cent respectively on the assumption of stronger commodity prices, transition to market-reflective exchange rate system, vaccination progress, and gradual implementation of reforms in the oil sector.

 

While these factors appear somewhat realistic in our view, we believe (a) rising insecurity; (b) lingering forex illiquidity; (c) low vaccination rate and (d) lack of will to follow through critical reforms constitute major downside risks to the country’s growth outlook.

 

However, with oil sector in contraction due to production constraints and regulatory issues, we expect the non-oil sector to drive growth recovery all through this year.

 

Nonetheless, we also expect higher oil prices and likelihood of higher production volume (following supply easing by OPEC+ between May and July) to support growth performance in the third and fourth quarters.

 

For a prompt recovery of the economy, what are the Chamber’s recommendations for national GDP rebirth?

 

Accelerating the pace of recovery requires both fiscal and monetary policymakers to be well-coordinated in promoting growth-enhancing and confidence-building policies that would encourage private and foreign capital inflows into the economy.

While CBN has adopted the NAFEX rate as the official rate in the gradual transition to a unified exchange rate system, the currency market is still beset with persisting liquidity challenge evidenced by wide premium between the NAFEX and parallel market rates.

To consolidate on this positive development, there is a need for CBN to scale up its intervention efforts and roll-out more friendly supply-side policies to boost liquidity in the market.

 

This would help bolster investor confidence and attract foreign investment inflows into the economy.

 

Also, deliberate effort towards making the business environment more conducive for MSMEs and large corporates at national, sub-national and local government level is imperative.

 

This can be achieved by addressing the structural bottlenecks and regulatory constraints contributing to high cost of doing business. A supportive and conducive investment environment is critical in facilitating private sector involvement in economic recovery process.

 

We are recommending that deepening deregulation efforts in the downstream oil industry by ensuring market-reflective pricing model for petroleum products.

 

Meanwhile, the recent passage of the Petroleum Industry Bill is expected to drive private investment in the oil & gas sector and intensify diversification efforts within the oil sector to gas and other petrochemical products.

 

The Chamber is emphasising a clarity in government’s policy direction by ensuring consistency in economic policies. Policy consistency is imperative for long-term investment planning and business projections.

 

We also want to see holistic and dynamic review of the security architecture to address the seemingly worsening security situation in the country.

 

What is the Chamber’s stance on the country’s foreign exchange market as related to CBN’s unification of NAFEX as official exchange rate?

 

I can categorically say the Lagos Chamber welcomes the adoption of the Nigerian Autonomous Foreign Exchange Rate (NAFEX) as the official exchange rate. The unification is expected to improve the country’s currency management framework given that the multiple exchange rate system had been creating uncertainty issues and source of arbitrage.

The development is expected to bolster confidence of foreign investors in the economy. The move will also help the country to unlock external financing opportunities particularly from key multilateral institutions such as the World Bank and IMF, who had for long advocated for a unified and flexible exchange rate system.

 

However, we note the forex market is still faced with liquidity challenge. Many investors are lamenting about the difficulties in accessing foreign exchange for the importation of raw materials, equipment and critical inputs for production and processing.

 

The situation is taking a huge toll on capacity utilization, recovery and sustainability of businesses in the production sector.

 

The LCCI notes the indefinite extension of the Naira for Dollar scheme by the Central Bank of Nigeria. We consider this as part of CBN’s efforts at encouraging foreign exchange inflows into the economy via remittance proceeds.

 

The apex bank also licensed 10 new international money transfer operators (IMTOs) to facilitate remittance flows into the economy.

 

On the country’s insecurity situation, how is the business community coping with the straits?

 

The Lagos Chamber notes with serious concerns the worsening security situation in the country. It is scary that banditry attacks, abduction, herders-farmers conflict, vandalism and insurgency have become recurring incidences in Nigeria. The impact of this crisis on the Nigerian economy remains profound and multi-dimensional.

 

The crisis has crippled lots of private and public investments across the nations.

 

Many households have lost their means of livelihoods. Many farmlands across the country have been destroyed with consequent impact on food production and food security. The situation has projected the economy as an unsafe destination for private and foreign investments.

 

If unaddressed, it could thwart government’s efforts in attracting foreign capital into the economy. We note that investor confidence in the economy had been weak before the COVID outbreak, and many investors still see Nigeria as a risky environment despite stronger oil prices and exit from recession.

 

Confidence may not be restored in the near term if there is no significant improvement in the security environment. The situation has also impacted fiscal position by making government incur additional expenditure as contained in the supplementary budget, mainly to fund security operations.

 

This could worsen 2021 fiscal deficit in the light of low revenue mobilization. It is important to have this challenge resolved at all costs.

 

Decentralizing the security eco-system by enabling state and local governments take key security-related decisions is an option to consider. It is also important to ensure a concrete and sustainable means of tackling the challenge of youth unemployment by designing programs and policies that would bolster employment opportunities for the youths in the country.

 

What is LCCI’s reaction to the recently held CBN Monetary Policy Committee (MPC) meeting relating to interest rate retention?

 

The Chamber notes the decision of the Monetary Policy Committee of the Central Bank of Nigeria to retain (a) Monetary Policy Rate (MPR) at 11.5 per cent; (b) Asymmetric corridor around the MPR at -700/+100 basis points; (c) Cash Reserve Ratio at 27.5 per cent and (d) Liquidity Ratio at 30 per cent during its May 2021 meeting.

 

We note the committee was faced with a policy dilemma of trying to maintain a balance between stimulating growth and ensuring price stability. The economy is currently in stagflation, evidenced by high inflation, high unemployment level and fragile growth.

 

Weighing the pros and cons of monetary accommodation and tightening, retaining policy parameters was the most appropriate decision in the light of prevailing macroeconomic conditions. We acknowledge and endorse the recommendations presented by the MPC at its last meeting.

 

Key among them include the need for the federal and state governments to show more commitment to the insecurity challenge considering its multidimensional impact on the economy, the need for an effective synchronisation of fiscal and monetary policies to improve the investment climate to attract sustainable foreign direct investments into the economy. This would also help to stabilise exchange rate and boost output growth.

 

There is also need for government to explore private sector collaboration in infrastructural development in the light of prevailing fiscal conditions.

 

While the committee suggested issuance of Diaspora bonds targeted at specific projects, we also encourage government to explore equity options, which has proved to be more sustainable and costeffective than debt.

 

Connecting local assets to global liquidity by transferring certain portion of ownership in key state enterprises to private investors would greatly encourage investment inflows into the economy and unlock revenue opportunities for government.

Furthermore, we restate our position on the need for government to ensure that borrowed funds are tied to specific assets with prospects for sustaining the productive capacity of the economy.

 

We subscribe to the committee’s near-term outlook for the economy. We expect growth to improve in subsequent quarters on account of improved economic activities in the non-oil sector, supported by higher oil prices and production.

 

We anticipate a modest deceleration in inflation in the second half largely on account of base effects associated with 2020’s price level. With the recent downtrend in inflation trajectory, we believe the MPC will be further encouraged to maintain policy parameters at least in near term amid slowing recovery and high inflation level.

 

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