The economy is experiencing hiccups because of policy inconsistencies. One of such inconsistencies borders on monetary and fiscal policies, which change often, thereby affecting critical sectors. Lagos Chamber of Commerce & Industry (LCCI) President Babatunde Ruwase, in this interview with OKWY IROEGBU-CHIKEZIE, says trouble looms, if the trend is unchecked.
How would you describe the economy?
Over the last 58 years, the Nigerian economy has transformed from a basically agrarian economy to one driven largely by resources from the oil and gas sector. The biggest shortcoming of the economy is its dependence on oil. It makes the economy very vulnerable to global shocks and weak in inclusiveness.It should be noted that the 19 years of uninterrupted democracy in the country has earned it enormous goodwill as one of the few stable democracies in Africa. The economy has benefited from this goodwill as investors are more comfortable in a democratic environment. This, among other things, has made Nigeria a major investment destination on the continent. However, core democratic values are yet to take firm root in our democracy, especially in the areas of accountability by the political leadership at all levels, transparency in the management of public finance, rule of law, separation of powers and the inherent checks and balances. Others are quality and independence of democratic institutions, such as electoral bodies, law enforcement agencies, judiciary, citizen engagement in the democratic process and federalism. The LCCI recognises that democracy is still work-in- progress, but it is crucial to recognise the importance of these democratic ideals in the sustenance of our democracy.
Against this background, what, then, are the challenges for prospective investors?
Securing credit facility remains a major problem for investors in this economy. Many small and medium scale enterprises (SMEs) still have serious challenge in accessing credit facility, even at its prevailing high rate. This has continued to be a major inhibiting factor to the capacity of domestic enterprises against taking advantage of the robust market, especially the SMEs. The credit challenge has been identified as the factor with the biggest negative impact on business confidence.
What of the power situation in the real sector?
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.
How much has the security situation affected the productive sector?
The security situation in the country deteriorated in the last few years, impacting negatively on investment risk, worsened our perception and image at the global level. Access to markets in the troubled parts of the country has reduced for many enterprises and this is already affecting sales and profitability. Also, many enterprises have relocated either to other parts of the country, or even outside it. Also there is the issue of the escalating oil theft as well as pipeline vandalism, which have cost the country huge loss of revenue. The environment of affected communities has suffered serious degradation as a consequence of this problem. Indeed, the oil and gas sector suffered negative growth on the heels of this challenge.
In all this, what are the constraints in the real sector?
The 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 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 from 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. The way forward is to address the fundamental constraints to manufacturing competitiveness in the economy. The reality is that job losses in the sector have been on the increase over the years as productivity declined on the back of the harsh operating environment. However, the multinationals and conglomerates have shown some positive trend in performance and resilience, especially in the foods and beverage sector as well in the cement industry. Even then, they would do much better, if the operating environment were better.
Why are manufacturers against Nigeria signing the African Continental Free Trade Agreement (AFCTA)?
One of the major concerns about Nigeria being a signatory to the AfCFTA is the fear of numerous bilateral trade agreements of some African Union (AU) countries with the rest of the world and Nigeria’s underdeveloped industrial and infrastructural sector. It has been argued that this could potentially make Nigeria a dumping ground due to our uncompetitive manufacturing profile, market size and population. These are legitimate concerns of private sector players. It is, therefore, imperative to deepen consultation to address these concerns. However, AfCFTA offers a potential of the largest free trade area in the World. It would create a single continental market for goods and services as well as a customs union with free movement of capital and business travellers. This agreement gives birth to the world’s largest free trade area since the World Trade Organisation, which was formed in 1995. This is in terms of the number of countries, covering more than 1.2 billion people and about $4 trillion in combined consumer and business spending if all 55 countries in Africa join the agreement.
The OPS is also reluctant to endorse the Economic Partnership Agreement (EPA). What is LCCI’s position?
Economic Partnership Agreement (EPA) is a trade and development agreement among the European Union (EU), African, Caribbean & Pacific (ACP) countries. The EPA agreement seeks to boost trade and investment by relaxing trade barriers and restrictions between the EU and ACP countries.The agreement seeks to wave duties and certain taxes on imported goods provide platform for technology transfer and make investment opportunity in ACP countries more attractive. In addition, EPA is expected to promote simplified and clearer rules for doing business, such as paying taxes, customs clearance and processes. The above thrusts of EPA notwithstanding, stake-holders in Nigeria and some ACP countries have expressed concerns on the downside of the draft agreement. It is widely held that EPA if implemented as will likely hot production and job in some sector of the economy. Operators in sectors, such as manufacturing, agriculture, among others, have posted that certain clauses in the agreement will stifle local industry and make them uncompetitive relative to their EU counterparts.
What are the major concerns overtime?
The major concerns include the loss of government revenue due to the exclusion of tariffs in the clause of the EPA which allows for the free flow of certain goods and services, emasculation of the manufacturing industry such that the existing manufacturers will become uncompetitive as cheaper finished goods would flood Nigeria’s market from the EU, job losses and devastating unemployment especially for SMEs. Again, EPA is expected to collapse production activities of certain sectors due to uncompetitive local production capacity. We believe that it would collapse the extractive industries, increase unemployment and poverty Level. Furthermore, the OPS is of the belief that with the porousness of Nigeria’s border, EPA implementation will add to the pressure already coming from the Asian markets. An initial projection by analysts indicates that average import tariff revenue loss of 30 per cent will potentially crystallise if the Federal Government go ahead to sign and implement import liberalisation with European Union (EU). This will have significant and adverse effect on reserves and non-oil revenue of the government.
How has the EU responded to your stance?
The EU has responded to the concerns above and explained that the EPA’s commitment to ECOWAS was deterred of a possibility to invade the West African market with products that could compete with domestic products. It also promised that EU will not be involved in any product or services that Nigeria and other countries in the region are producing. The EU assured of its commitment to extend a minimum of $6.5 billion Euros trade development assistance to ECOWAS countries every five years till 2035. For now, Nigeria, Sierra Leone and the Gambia are the three countries in ECOWAS that are yet to signal its readiness to sign the agreement while Ghana and Cote D’Ivoire are on the verge of finalising their bilateral agreements with the EU. Nigeria and other countries yet to sign the agreement have been threatened with sanctions by EU for its unwillingness of the Federal Government to sign the EPA. One of the proposed sanctions for failing to sign the agreement is the termination of the temporary free market access to export products to the EU.
What are some of the funding issues in the economy?
The public sector activities are heavily funded through domestic and foreign borrowing. This is true of both the federal and the state government. The level of indebtedness is quite high. In the 2018 budget, debt service provision is N2 trillion. This has been the trend over the past five years. This is why debt service as a percentage of government revenue is as high as 60 per cent. Indeed, practically, the entire capital budget of the federal government is funded by debt. The huge deficit financing of the Federal Government budget hurts the economy.
In what ways do the huge debt financing hurt the economy?
The bulk of the debt is used essentially to fund the running of the government, such as personnel and overhead expenses. The cost of borrowing by government is extremely high, ranging from 12 per cent to 18 per cent, which aggravates debt servicing cost. Others are the profound crowding out effect of the private sector in the financial market, due to the high yields in treasury bills and bonds. There is a strong body of opinion that believes that the government is not taking enough advantage of concessionary loans available with the multilateral and bi-lateral agencies, because of policy shortcomings. The key principle of sustainable debt strategy is that it should be used to develop the capacity of the economy to repay the debt; and should also be have a concessionary rate. For several years, the country’s debt strategy was not in consonance with this principle.
What is the role of private sector capital?
Private sector financing is critical to the advancement of the economy. The fiscal condition of government makes this even more imperative. The government is not adequately leveraging funding opportunities in the private sector to support development project. With the right kind of economic policies and the right quality of institutions, it should not be difficult to attract foreign investors to complement public sector financing. Currently, the macro-economic dashboard is looking good, but this must be complemented with quality institutional and policy environment to be able to attract private sector capital for the financing of government projects. The quality of spending is also a very critical issue. This relates to the challenges of leakages and corruption, huge government spending on petroleum importation and the associated leakages and many more.
What are the factors necessary for inflow of foreign capital?
Offshore financing of projects and investments is a critical component of the financing options for an economy. But there are conditions precedents for these to happen. Some of these are ensuring the enhancement of liquidity in the forex market to inspire confidence, and ensuring the transparency of tenders. We also canvass that dispute resolution system must be credible and fast, this is important because FDI investments are long-term investments. Others are ensuring that the macro-economic dashboard inspires confidence as a result of the quality of economic management, robust public-private partnership programmes, transparent bidding and tendering process for public projects, credible dispute resolution system, including quality economic management systems that inspire confidence
What are the constraints to domestic private sector financing?
The key impediments to domestic private sector financing in the economy include the following, the cost and tenure of fund, weak venture capital regime, weak funding from capital market because of the huge returns on investment in the money market. Access to credit by SMEs is very difficult, because of collateral requirements. Many SMEs depend on suppliers’credit, cooperatives, finance companies, relatives, money lenders and microfinance banks to meet their financing needs. The challenges they face have made it difficult for them to optimise the potential in the sector.
The power sector has remained a challenge. What is the position?
Power sector issue is crucial at this critical stage of our economy, knowing that the increased generation and distribution of power plays a significant role in the development of our economy. The economy can truly be an investors’ haven if the issues around the power sector are holistically addressed. We expect to see the government provide an enabling environment for private sector investments in the embedded power generation sector. The sector has witnessed myriad of limiting factors, such as poor gas supply, huge legacy debts and poor access to credit. At present, the Nigerian Electricity Regulatory Commission’s (NERC’s) 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 the 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. However, the effort of the Lagos State Government in its captive power initiatives is timely with its redemptive values to the power sector, at least in the state. Nevertheless, the whole process of power generation and distribution should be made sustainable while also ensuring operational and regulatory framework.
What is your take on China’s increasing role in Africa, and how do you see that playing out over time?
The trade war between United States of America and the Peoples Republic of China has a number of implications for the economy. Indeed, there are three major implications; firstly, China and United States are the two largest economies in the world; therefore, a trade war between these two economies is a war between two global economic giants, for this simple reason such a war would impact the global economy negatively. There is a relationship between the tempo of global trade and global economic growth; when there is a slowdown in trade, global economic growth will be negatively impacted. When this happens, other major economic variables will be affected. A slowdown in the global economy could result in lower demand for commodities which may impact oil price, foreign exchange earnings and foreign reserves. Secondly, tariffs on Chinese products imported to the United States will create supply gaps in the US market. Chinese imports will become more expensive and this will make imports from other parts of the world into the US competitive vis-a-vis import from China. Export from countries not affected by the US tariff hike will, therefore, become more competitive. Within the context of the African Growth and Opportunities Act (AGOA), this situation presents new opportunities for our export in the United States market. It remains for us to develop the capacity to take advantage of this opportunity.
What are the implications of this trade war?
The scenario would trigger migration of investment from China to countries not affected by the US import tariff hike. China is a major hub for export to the United States. With the trade war, many investors in China, whose main export market is US, may begin to seek new locations for their investments. This offers new opportunities for such countries to offer alternative destinations for such investors.
What are the likely effects of the political process on the economy?
The country is gradually building up for another general elections scheduled to hold in first quarter of 2019. This is another defining period in our democratic history. We note that the political transition and electoral process in the country has far reaching implications for the economy. It is important to guide against the tendencies that distract state institutions from governance. This is because political and social stability are critical factors that drive investors’ confidence. On our part, we will sensitise the business community and other stakeholders in the private sector to register and participate in the electioneering process.Thus, we will work to see a more inclusive democratic process through an intensive mobilisation of the business community. We believe that the increased participation would enhance the political transition process.
What is the nexus between politics, economy and investment?
There is a strong nexus between political stability and economic progress. An unstable political environment naturally escalates the risk of investment; it creates anxiety and undermines confidence of investors. Recent turn of events in the polity gives cause for concern. We urge political actors to demonstrate restraint and refrain from activities that could undermine the stability of the polity and create avoidable social tension. This has become very important as political and electioneering activities gather momentum. No meaningful investment can take place where there is no regard for rule of law. We should not create a situation where citizens and investors (domestic and foreign) lose confidence in the state institutions. Public institutions are very important factors in regulating behaviour of citizens and stabilising the society. A loss of confidence in state institution is a recipe for anarchy. We, therefore, need to ensure the credibility and integrity of our institutions. In this respect, we wish to reiterate the critical importance of respect for rule of law and independence and neutrality of the institutions of the state. In particular, we would like to underscore the imperative of non-partisan security agencies and judiciary. Independence of these two institutions is very critical at this time. The loss of citizens’confidence in these institutions could lead to complete breakdown of law and order
What is your take on the Apapa gridlock?
The gridlock in the Apapa axis of Lagos State has imposed and continued to impose unbearable cost on businesses. The dysfunctional state of the ports and associated logistics for cargo clearing has become a nightmare. The cost to business is horrendous. This includes the astronomical increase in haulage cost, increased interest cost (borrowed fund) used for import transaction, high demurrage charges, high insurance premium of vessels coming to Nigeria, high shipping cost, low capacity utilisation due to problem of access to raw materials from the port as well as traffic congestion which has extended to the metropolis from the ports, paralyses of economic activities in Apapa axis and many more. What we are witnessing is a reflection of the several years of neglect of our ports and other infrastructure. We appreciate the recent intervention by the Vice President Yemi Osinbajo, and Lagos State Governor, Mr Akinwunmi Ambode. We also note the decision of the Federal Executive Council (FEC) to award a N72 billion contract to fix the road leading from the Lagos ports to the toll gate. We commend this move and urge that it be followed through to completion. We like to, however, reiterate that these measures need to be holistic, decisive, consistent and sustainable. The rail system need to work, the capacity of the ports needs to expanded, the pipelines for the transportation of petroleum products need to be made functional, and the tank farms need to be better dispersed. We need to urgently restore order and sanity to the Lagos ports and improve access to them. It is regrettable that Lagos port which is major sources of Customs revenue had to suffer the kind of deterioration and challenges; that is, taking place.
How best can the patronage of locally produced goods be encouraged?
The promotion of made-in-Nigeria goods will boost employment generation in the country. A major multiplier effect of patronising local products is the increased demand for local labour.The country’s foreign reserves would also be conserved thus ensuring the stability of our macroeconomy. Patronage of made-in-Nigeria goods would boost domestic production, promote technology transfer and impact positively on our GDP performance. Governments at all levels have major roles to play in the promotion of made in Nigeria products. They are big spenders and could make a significant impact on the fortunes of domestic producers. We would like to see a demonstrable commitment to the recent Executive Order on the patronage of made- in-Nigeria products as well as indigenous skills. Let me underscore the critical importance of an enabling environment to improve the productivity and competitiveness of domestic firms. Presently, the power and logistics situation in the country is a cause for concern. The country’s population is estimated at about 200 million, which offers good market opportunities. Nigeria is home to about one in five Africans. Our population is, therefore, a major source of strength as a nation which we should leverage to promote the Nigerian brand.
