Improving state of Nigerian economy
By Chief Solomon Onafowokan,
President, Lagos Chamber of Commerce and Industry - updated: Tuesday 24-06-2008
Shamsudeen Usman,
Minister of Finance
Exchange Rate Development
A commendable feature of the Nigerian economy
in recent years is the stability of the Naira
exchange rate. We have even witnessed some significant appreciation of the Naira in the last one year. As you know, Nigeria is a major beneficiary of the rising global oil price, being an oil producing country. The funding of the foreign exchange market has therefore not been impeded in any way. Secondly, the growing investors’ confidence in the Nigerian economy had boosted the inflow of foreign exchange into the economy. The quantum of foreign exchange inflows from Nigerians in Diaspora has also been on the increase. I should acknowledge the role of the monetary authorities (the CBN) in achieving and sustaining this stability through its constructive monetary policy management. The outlook for the rest of the year is that this stability will be sustained.
Interest Rate Development
A lot has been achieved in the Nigerian financial system since the commencement of the Banking sector reform in 2004. The stability of the financial system has improved, corporate governance standards have been enhanced, capacity of banks to fund bigger projects has increased, use of IT applications in service delivery has improved, and many more.
But curiously; we have not seen any notable reduction in the cost of funds in the economy. This is one big concern to us in the private sector. For most investors, cost of funds is still generally above 20 per cent. This is not good enough for investment growth. It has also further perpetuated the short term disposition of investors in the economy.
Long term investment cannot be sustainably funded at the current level of interest rate.
The credit conditions for SMEs are even much worse. They are faced with the challenge of higher cost of funds and the added constraint of access to I credit. Most of them can not meet the collateral requirements of the banks. Yet, if we must harness the huge entrepreneurial potentials of our people, we need to construct credit policies that would boost private enterprise at the small and micro enterprises level.
Currently, most of the small businesses patronize the informal financial markets and finance companies where they pay interest rates which are sometimes as high as 80 to 100 per cent per annum. Private enterprise growth in all advanced economies is driven principally by good credit conditions. We have noted the current initiatives on Micro Finance Banks which had been designed to deal with this challenge. We would continue to track developments in these institutions and offer suggestions as and when necessary. Meanwhile, we propose the following measures to bring down the current cost of funds and improve the access of SMEs to credit:
There should be a Credit Guarantee Scheme in ‘place to give cover to the SMEs. This idea was mooted by the CBN some years back but was not followed through. We suggest that the policy be revisited and urgently implemented. This will reduce the risk of lending by banks to SMEs and ultimately reduce the cost of funds (to SMEs) as well as improve their access to credit.
ii. With the recapitalization of the insurance companies, they are also now in a position to develop products that could be used as guarantees to secure credit from the banking system. This is the practice globally and our insurance firms should strive to meet this standard which would significantly enhance their relevance to private sector development.
iii. Public sector funds, specifically federal government capital allocations, should be released to the banking system at competitive deposit rates. This would boost the supply of loanable funds in the Banking system and considerably reduce the cost of funds. Keeping public sector funds outside the financial system is an unorthodox monetary policy practice and could trigger distortions in the economy. Government funds need to be reinjected into the economy to aid the principle of circular flow of income since a portion of the funds were drawn from the private sector in form of taxes in the first place.
We appreciate the concern of the monetary authorities about inflation and the possible pressures on the naira exchange rates as likely outcomes of releasing public sector funds to the financial system. But we reckon that the resultant income and output growth from a low interest rate regime would itself significantly moderate inflationary pressures. We, cannot afford to underestimate the role of credit in driving investment growth, boosting output, creating jobs and alleviating poverty. If our foreign reserves of $60 billion could be kept in foreign banks, why can’t our public sector funds be mode available to our domestic banking system? Indeed, we expect that part of our foreign reserves should by now be kept with the domestic banks.
Inflation and Food Security
We are beginning to witness a trend of spiraling inflation. Official statistics indicate that inflation rose from— 6.6 per cent at the end of December 2007 to 8.6 per cent in January 2008, but fell slightly to eight per cent in February this year. What is most disturbing in the current scenario is the skyrocketing food prices. And from all indications, there is a real possibility that the situation may get worse unless we act very quickly. Prices of some staple food products had gone up by between 20 per cent to 100 per cent within the first quarter As you are perhaps aware, this development has both global and domestic dimensions some of which I shall review as follows:
i. The increasing rush by the west to biofuel to reduce the impact of spiraling crude oil price had caused a significant diversion of grains into ethanol production. Indeed, many farmers worldwide have abandoned the production of other food items in favour of grains used for the production of ethanol.
ii. Escalation of transportation and production costs as a result of soaring energy cost.
iii. The incident of Global warming and inherent climatic change had caused a number of natural disasters such as desertification and flooding, reducing the size of arable land available for agricultural production.
I acknowledge and commend the recent intervention of the federal and state governments to deal with the food security challenge as follows:
i. Waivers on ‘import duty and levies on rice over the next 6 months
ii. Provision of N10 billion credit support for rice farmers to boost production at a subsidized interest rate of 4% and a repayment period of 15 years.
iii. Release 11,000 metric tones grains to from the nation’s strategic reserves, Once again we commend the responsiveness of government in this regard, These measures are clearly much better than the earlier pronouncement that government was going to directly import rice to the tune of N80 billion which would have been marred by all sorts of abuses and malpractices. In matters like this, what is needed is for the right incentives to be put in place to encourage the private sector to increase its level of importation or production as the case may be.
Let me stress that food importation can only be a short term measure. The enduring solution to the food deficit situation lies in boosting domestic food production in a sustainable way. We therefore recommend the following short and medium term measures in addition to the steps already taken by government: ‘
I. Provision of subsidy for the procurement of critical farm inputs such as tractors ‘and equipment; agricultural processing equipment and fertilizer should be increased by about 20 per cent and sustained over a minimum of five years. Domestic capacity for fertilizer production should be improved.
II. Greater investment in irrigation facilities to encourage farming activities all year round and this should apply to all parts of the country, not just the northern part.
III. A policy of reducing import through accelerated local production of grains should be put in place immediately and mode to work such that within a period of 2-3 years, the local requirement will be met sustainably, export to West Africa encouraged and one import virtually mode irrelevant.
IV. Funding of the Nigeria Agricultural, Cooperative and Rural Development Bank as well as the Bank of Industry needs to be considerably improved to facilitate agricultural production and processing.
Meanwhile, I should stress that situations like these present immense opportunities for investment in agriculture. This may well provide the necessary stimulus to restore our agricultural sector to the desired place of pride in the economy.
Infrastructural Facilities
The problem of infrastructural deficiency is perhaps the most critical challenge facing the private sector currently. It has continued to exert severe pressure on operating cost, constraining competitiveness and impeding efficiency in a global economic setting. The most critical of the infrastructural components now are power and transportation. The real sectors of the Nigeria economy are the worst hit. Other implications are as follows:
i. Reluctance of financial institutions to fund the real sector.
ii.High and increasing mortality rate of real sector enterprises.
iii. General decline in the local value-addition since it is the real sector that could effectively and sustainably drive the growth in local value addition.
We appreciate the declaration of the state of emergency in the energy sector. We also note and commend the steps taken so for by the National Assembly in dealing with propriety, integrity and credibility issues in the power sector contracts. However, we call for an expeditious action to make power available for production and make transportation (especially rail system) available for the movement of goods and persons in the economy
Use Of Excess Crude Revenues And Foreign Reserve
Recently, the Revenue Mobilisation, Allocation and Fiscal Commission proposed that the excess crude revenue should be utilized for impactful government intervention in the revitalization of the country’s infrastructures. The Commission specifically suggested that the fund be used to resuscitate the Railway System, the Power sector and the Roads. We fully endorse this position.
The current stock of funds in the Excess Crude Account is about $15 billion. It is our conviction that this is one of the best and quickest routes to fix the nation’s infrastructural problem.
Where feasible, the concept of Public Private Partnership should be employed to harness private sector resources (financial and human) for infrastructure development and maintenance. The private sector needs to be encouraged through tax and other fiscal incentives as well as consistency of government policy.
We should, however, be discerning enough to differentiate between those infrastructure components which the private sector could provide and those which the government is better placed to provide. The truth is that commercial viability is the primary consideration in any private sector investment. Therefore, the private sector would invest in infrastructure only to the extent that such investments are commercially attractive and competitive. All things considered, I would say that the governments at all levels have a basic responsibility to drive and provide leadership in infrastructure investment.
We would go a little further to request that a portion (about 20 per cent) of the current $60 billion foreign reserve should be made available for the funding of critical infrastructure investment in railways, power, roads construction and rehabilitation.
These investments are necessary to unleash the private sector energies and potentials for the diversification of the economy and the generation of the momentum for sustainable growth and development. There is need for the National Assembly to perform its oversight function efficiently, cost-effectively and proactively to ensure that money approved is judiciously expended.
The Budgetary Process
The 2008 Budget was presented to the National assembly on November 14, 2007 and was passed into law in April, 2008, some five months after. Even as we speak, there are still some lingering differences which, according to reports, will be addressed through a supplementary appropriation.
In our view, there is a need to clearly define the roles of the executive and the legislature in the budgetary process. Since our democracy is a nascent one, these are perhaps reflections of the challenges of the learning process. One could see evidence of overlapping, duplication and sometimes conflicting responsibilities and actions.
For instance there is need for clarification on whether the National Assembly has the power to include new projects in the budget; there is need to shed light on whether the National Assembly has the power to expunge or reallocate resources in the budget proposal presented by the Executive; to what extent can the assembly vary the basic assumptions of the budget?
These are some critical ambiguities which needs clarification. It seems to me that the judiciary is in the best position to make this clarification.
The relevant Committee of the Lagos Chamber would look more closely at this and identify options for seeking a judicial clarification.
Business Ethics And Integrity
Recent developments in the country have raised fundamental issues bothering on the standard of business ethics and integrity in the Nigerian economy. The Lagos Chamber of Commerce and Industry takes such matters very seriously. Indeed, we have a strong Committee on Business Ethics chaired by a very distinguished elder statesman and we have strong sanctions against any erring member. The production or importation of substandard products (especially electrical, ICT and pharmaceutical products), smuggling, tax evasion are all variants of ethical issues that we need to collectively denounce.
My appeal to our colleagues in the private sector is 10 strive at all times to uphold the basic tenets of business ethics and integrity. As major stakeholders in the Nigerian economy, we have a duty to set and operate within the highest standards of ethical conducts and discharge our corporate social responsibility as demanded by the state. Breaching of business ethics undermines and distorts the whole essence of private enterprise and free market economy.
Corruption
Recent reports and revelations from the National Assembly public hearing on the National Integrated Power Project (NIPP) give serious cause for concern. It reflects the quality, integrity and credibility of the procurement process in the public sector. The fact that corruption is one of the most critical constraints to the progress of the country has been strongly underscored by the revelations. It also perhaps reflects what could possibly have been happening in other spheres of the public sector. It is one thing to conceive a good idea and put resources behind it; it is another thing for such resources to be well utilized. Evidently, there is still a lot to be done to curb corruption in the polity. In this regard, we recommend as follows:
Sanction on corruption offences should be prompt and have strong deterrent effects.
Greater promotion of the principle of transparency and accountability Freedom of the press and political competition ore crucial in this regard. The passage of the freedom of information bill would also facilitate the realization of transparency and accountability objectives.
Rules and regulations governing procurement process as well as those relating to national Economic management should be very clear and unambiguous. Discretionary powers among the political leadership and the bureaucrats in all ramifications should be reduced if not completely eliminated.
There should be level playing field, for all operators and players in the economy. Monopoly powers should be minimised if not completely eliminated in the economy.
Scrapping Of Smeeis
At its recent Banker’s Committee Meeting, the Bankers decided to scrap the Small and Medium Enterprises Equity Investment Scheme. (SMEEIS) and focus more on supporting micro finance banks. The argument was that the equity arrangement was not yielding the desired result. Neither the banks, nor the SMEs were particularly keen about the equity model of financial interventions and this gave way to the new concept of credit support.
We do not have any objection to this, but as earlier stated in this presentation, we should have a way of dealing with the problem of collateral requirements even’ within the micro-finance banks framework. Unless we are able to construct appropriate models of intervention in this regard, the nagging problem of access to credit by SMEs would persist. Furthermore, there should be guidelines to ensure that funds meant for micro enterprises do not end up in other more lucrative spheres of the economy such as the stock market or recycled through other channels within the financial system. I must emphasize that this is a real possibility which the regulatory authorities should anticipate and be ready to deal with. Unless we do this, the concept and philosophy of micro-finance would be defeated.
There should also be a way of enforcing compliance by states with the requirement that 1 % of their annual budget be provided in support of micro credit as contained in the guidelines. If need be, this mandatory contribution could be deducted at source from the statutory allocation to states.
Patronage Of Made-in-Nigeria Products
As I mentioned earlier, the mortality rate of manufacturing firms in the country is high and rising inspite of the widely acknowledged large market. The market shore of Nigerian products in many sectors is low and continues to decline. The challenge is that of competitiveness. But if there is a deliberate policy at the governmental level to patronize made in Nigeria products, a considerable impact would be made on the sustainability of domestic manufacturing firms.
We therefore reaffirm our call for a deliberate policy of government patronage of made-in-Nigeria products. Government should direct its agencies to patronize Nigerian products as follows: Uniforms of the Armed Forces, Police paramilitary organization, Medical Personnel, etc. should be made from fabrics made in Nigeria. This alone is enough to keep our domestic textile industries vibrant all year round.
Nigeria made ICT products, Automobile, Food items etc. should also attract government for patronage.
Gas Policy
We welcome the new Gas Policy of government intended to ensure that part of the local gas production are made available to the domestic market. This would lower the price of Liquefied Petroleum Gas (LPG) in the country and reduce deforestation. But there is still the challenge of the cost of cylinders. To complement the new policy it is desirable to subsidise the current cost of gas cylinders. This is crucial to make the policy achieve the desired results.
Domestic Refineries
We commend the Federal Government for its revitalization of the domestic refineries. All the Refineries, Kaduna, Port Harcourt arid Warri have come on stream, operating at about 60 per cent capacity.
Some of the Refineries have been out of production for about two years. But even at optimal output levels, the refineries can only meet about 50 per cent of the domestic demand. This is a challenge that we need 10 urgently address and this has become even more urgent giving the soaring global oil prices. At times like this, it is much more economical to refine petroleum products domestically than import. The problem of pipeline vandalisation also needs to be concurrently addressed. We support the idea of community involvement through community policing of pipelines.
We should also put appropriate incentives in place to encourage private investors in refineries. The level of private investment in the refineries is not good enough for the sustainability of the sector. The key bottlenecks to private sector investment should be identified and redressed. A public sectorled downstream oil sector activities cannot be in the long term interest of the country.
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