The Director-General, Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, speaks with AKIN ADEWAKUN on the state of the nation’s economy, the various efforts of the federal government to breathe life into it, and why the renewed aggressive tax drive it recently embarked upon might be an anathema to growth of the industrial sector since it targets investors more than the consumers. Excerpts:
SOME experts say it may take some years before the nation’s economy recovers from the impact of the coronavirus pandemic. To what extent would you say the public health crisis has impacted the nation’s economy?
The outbreak of the coronavirus a few months ago has had profound implications for the Nigerian economy. It poses a major threat to the nation’s macroeconomic fundamentals, the impact of which may be systemic and far-reaching. The looming price war triggered by Saudi Arabia, the largest crude oil exporter, portends even more ominous signs for the Nigerian economy. This is coming on the heels of the collapse of the OPEC – Russia alliance. Saudi Arabia is offering significant discounts to its customers and also increasing output.
This sharp drop in oil price has caused significant dislocations in the 2020 budget and in the economy, especially for a country already grappling with challenges of weak revenue performance and a complete erosion of fiscal buffers. There is the revenue effect of the coronavirus which is related to the drop in oil price. Oil revenue currently accounts for about 50 per cent of government revenue and about 85 per cent of foreign exchange earnings. With the current scenario of tumbling oil price, a drastic reduction in the revenue of government is inevitable in the near time. Expectedly, this would have implications for the level of fiscal deficit in the budget; budget implementation will be constrained; infrastructure financing will be affected; borrowing may increase, and the capacity to fund capital project will be severely constricted. Besides, the global supply chain has been deeply disrupted since China, the second largest economy in the world, is a major supplier of inputs for manufacturing companies around the world, Nigeria inclusive. Many manufacturers and service providers in the country are already experiencing acute shortage of raw materials and intermediate inputs. This has implications for capacity utilisation, employment generation, and retention, and adequacy of products’ supply to the domestic market. There is also an implication for inflation, and the pressures are already mounting. So the implications are quite significant.
In what way do you think the country can fast-track its economic recovery and speedily be on growth path?
I think urgent steps should be taken through appropriate policy choices to attract domestic and foreign non-debt private sector capital for infrastructure financing. However, for this to happen, the policy and regulatory environment must inspire the confidence of investors. Idle non-revenue yielding assets of government should be sold to generate liquidity. Foreign exchange market should be liberalised as much as possible to attract foreign exchange inflows into the economy.
Public Private Partnership should be bolstered to attract private capital into the critical sectors of the economy. Urgent steps should also be taken to reduce the production costs for oil producing companies to make the sector more competitive. I also think Public Private Dialogue should be deepened to harness quality ideas on how to navigate through the current shocks in the economy, among others.
The Central Bank of Nigeria (CBN) recently released some stimulus to serve as a reprieve for the nation’s ailing economy. How far do you think this would go in stabilising the economy?
The cumulative N3.5 trillion stimulus and policy measures announced by the CBN to cushion the effects of the coronavirus outbreak on the Nigerian economy are laudable. It is a step in the right direction. It would have positive enterprise level impact on businesses that can access the facility. It will impact their liquidity and operating cost. It also has a symbolic significance and this includes the one- year moratorium on CBN intervention facilities; interest rate reduction on intervention funds; creation of N50 billion credit facilities for SMEs; restricting and refinancing opportunities for existing facilities; activation of N1.5 trillion InfraCo project for building infrastructure; N100 billion facilities for pharmaceutical companies and health care practitioners, and N1 trillion loans to boost local manufacturing and production across sectors.
The health sector component of the fund is particularly laudable, because the present challenge is essentially a public health crisis. Effective public health management response is perhaps the most critical at this time.It would have been nice to extend the support to the public health management systems at the federal and state levels in a more holistic manner as this is the paramount challenge at this time. After all, it is only the living that would do business or worry about the economy.
Any reservations, at all, about the stimulus?
Well, like in most economic challenges, monetary intervention can only fix a fraction of the problem. This is essentially a supply side intervention. There are fundamental macroeconomic issues that investors still must contend with in the current circumstances. These are issues around the implications of the coronavirus pandemic for crude oil price, exchange rate depreciation, depletion of foreign reserves, inflationary pressures, stock market slump and general investors’ sentiments. These are critical drivers of investment decisions and investors’ confidence. Unless the external sector normalises, there is very little domestic policy responses can do to fix these disruptions, especially in the light of the vulnerabilities of the Nigerian economy.
Power still remains a challenge to the nation’s economy. How have your members been coping?
Power sector issue is crucial at this critical stage of our economy, knowing that the increased generation and distribution of power play a significant role in the development of our economy. The Nigerian economy can truly be an investors’ haven if the issues around the power sector are holistically addressed.
We expect to see government provide an enabling environment for private sector investments in the embedded power generation sector. The sector has witnessed myriad of limiting factors like poor gas supply, huge legacy debts and poor access to credit. Presently, the Nigerian Electricity Regulatory Commission (NERC) embedded power regulation allows an independent power producer to embed power within the network of the local distribution company without going through the trouble of connecting to the transmission network. It is evident that government alone cannot fill the power supply and demand gaps in the economy. The private sector must, therefore, be empowered and attracted to actively participate in power generation and distribution.
What would you say are the constraints being faced by Nigerian businesses, especially those in the real sector of the economy?
The nation’s business environment is generally challenging for manufacturing enterprise 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 of the sector will remain gloomy, particularly for the small scale industries
It is impossible to have a vibrant manufacturing sector in the face of rampant dumping of cheap imports in the country. Some of these imports are landing at 50 per cent of the cost of products produced locally. Besides, manufacturers have to worry about high energy cost because the power improvement is yet to be sustained; they have to worry about high interest rates – 20 per cent 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 and many more. The multinationals and other conglomerates in the sector may have the resilience to cope, but 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.
So much has been said on the need to diversify the nation’s economy. But many are of the firm belief that the public health crisis being experienced at the moment should serve as an opportunity to reset. What do you think should be federal government’s agenda for economic diversification at this moment?
Yes, I agree with you that it has become important to begin to set agenda for the Nigerian economy after the pandemic, that is, making a post-pandemic rescue plan.
The pandemic has derailed business projections and several risks have crystallised. Businesses have been grounded by the lockdown; supply chains disrupted, and aggregate demand depressed. Investment assumptions have collapsed across sectors. Businesses are faced with a force majeure and the shocks are profound and unprecedented. The mortality of SMEs is set to heighten as they have tenuous capacity to absorb shocks, especially of a scale that we are currently witnessing.
To save the economy from collapse, we need to salvage investments across all levels – micro, small, medium and large enterprises. Without investment, we cannot have jobs; aggregate demand will remain weak; government revenue will be in jeopardy as tax revenue plummets and economic sustainability will be at risk. This underscores the imperative of an urgent rescue package for business to enable investors to ride out the storms.
One of the ways the federal government intends to shore up its revenue base is through aggressive tax drive over which some experts have expressed their reservations. How right is the government in pursuing this line of revenue generation, especially at this time?
The renewed aggressive tax drive is focused more on investors than consumers. The burden of taxation is more on the investors in the economy than the consumers. It is, therefore, inherently disincentive to investment and economic diversification. The three tiers of government targets investors more than consumers. This is not in consonance with best practice principles in taxation. In an economy which is almost 50 per cent informal, this structure of taxation is not investment friendly. The formal sector of the economy bears the largest burden of the tax system. The tax policy needs to be better attuned to economic diversification through a reduction in the tax burden on investors. Taxation should not be seen only as an instrument of revenue generation; it should also be used as a potent instrument for stimulation of investment.