The real sector is acknowledged as the economy’s driver. However, for the sector to be vibrant and drive diversification, experts say there must be demand. But, sadly, the purchasing power of the naira and, by extension, Nigerians has drastically reduced-no thanks to the authorities’ failure to harmonise fiscal and monetary policies to curtail rising inflation, interest and exchange rates, which have compounded the sector’s woes. Assistant Editor CHIKODI OKEREOCHA reports.
The real sector is under tremendous pressure. Already clobbered by the dearth of supportive infrastructure, particularly power supply, rising inflation, interest and exchange rates may have added a more disturbing dimension to its woes.
For instance, inflation rate is 18.55 per cent, according to the National Bureau of Statistics (NBS). Interest rate hovers between 14 and 20 per cent. The exchange rate of the naira to the dollar is at a record low of N306 and N497 at the official and parallel markets. Unemployment has risen to 13.3 per cent.
These indices or parameters, which measure the health of the economy particularly the real sector, have been rising, indicating more turbulence for real sector operators. The high inflation, interest and exchange rates are manifesting in the form of declining consumer purchasing power, declining corporate sales and profitability, increasing delinquency in meeting obligations, and high morbidity and mortality of businesses, among others.
The NBS recently released the Consumer Price Index, which measures inflation, with the index rising to 18.55 per cent in December last year. The Bureau said the 18.55 per cent was an increase of 0.07 percentage points over the 18.48 per cent recorded in November 2016. It attributed the increase to a rise in the price of electricity, housing, water, clothing, footwear and education.
Economic and finance analysts, however, said there were other factors driving the high inflationary rate and other microeconomic indicators. For instance, the Managing Consultant, Nesbet Consulting, a Lagos-based firm of finance and management consultancy, Dr. Alaba Olusemore, said insurgency in the Northeast part of the country was also a factor.
According to the loan management expert and Fellow, Chartered Institute of Bankers of Nigeria (CIBN), the activities of Boko Haram insurgents have created a lot of production problems, which drastically reduced food supply and resulted to increase in food prices. This, in turn, drove inflation up.
He also told The Nation that the higher exchange rate of the dollar to the naira was also another factor pushing up inflation. He explained that the upward swing in the naira/dollar exchange rate and the fact that most goods and services consumed in the country are imported meant higher prices for the imported food items as well as other necessary inputs used by manufacturers to produce most local staples.
Olusemore, however, traced the current pressure faced by the naira against the dollar to the persistent fall in crude oil prices at the international market. He said the slump in oil prices, which started mid-June 2014, unleashed negative consequences, part of which was less accretion to the nation’s foreign reserves.
Nigeria depends on oil for 70 per cent and 95 per cent of her revenue and foreign exchange earnings. But global oil prices have been tumbling since June 2014, putting the finances of Africa’s largest economy/oil producer under severe pressure. From over $115 per barrel in June 2014, oil price nose-dived to around $28 per barrel by January 2016.
Although of late there has been gradual rebound in oil prices, it has not been substantial enough to offer succour to an economy already badly hit by recession. The dwindling foreign exchange earnings have continued to exert tremendous pressure on the naira, forcing it to lose its value over the years. The naira has been buying fewer and fewer goods and services each succeeding year.
The Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Mr. Muda Yusuf, noted that a major factor driving the current inflationary trend is the exchange rate depreciation, which has pushed up costs across all sectors of the economy.
He also said uncertainty around the foreign exchange policy negatively impacted investors’ confidence, which consequently affected output. Besides, CBN’s restrictive import policy, Yusuf, said, is a major contributing factor to the new wave of inflationary pressures.
How the situation hurts
It is easy to see why real sector operators are losing sleep over the rising inflation, interest and exchange rates. For most of them, the fear of decline in consumer purchasing power is the beginning of wisdom.
For instance, with the drastic reduction in the purchasing power of the naira and, by extension, Nigerians, real sector operators, particularly manufacturers, are agonising over low or no patronage of locally-produced goods and services.
The former President/CEO, Neimeth International Pharmaceuticals Plc and Managing Consultant, Starteam Consult, Mazi Sam Ohuabunwa, observed that market contraption, manifesting in decline in consumer purchasing power, had forced not a few consumers to prioritise their expenditures.
Ohuabunwa, who spoke at a recent Annual General Meeting (AGM) of Ikeja branch of Manufacturers Association of Nigeria (MAN), said consumers now focused more on needs than wants, as they struggle to make ends meet. This has resulted in decline in corporate sales and profitability.
Indeed, inflation erodes consumers’ purchasing power by persistently reducing the quantity of goods and services that their income can buy, making peoples’ income increasingly worthless. This situation, according to experts, brings about a fall in the standard of living of the people and creates severe problems for the growth and development of the economy.
Also, with interest rate or cost of funds well over 20 per cent, real sector operators find it extremely difficult to sustain their businesses at that level. If the cost of funds goes up, local production suffers. Most local operators regard 20 per cent corporate funding as killing. This is so considering that they face competition from cheap products coming from Asian countries, particularly China.
According to Yusuf, high cost of funds is responsible for the high mortality rate of manufacturing firms, especially at the medium and the small-scale level. He said it was also responsible for why return on manufacturers’ investment is slow and turn-around fewer.
Indeed, the situation is worse for Small and Medium Enterprise (SMEs). High interest rate is acknowledged as one of the constraints to SMEs’ growth. While big companies may survive in a regime of high interest rate, it would pose a serious challenge to small enterprises because of their low capital base.
With the rise in interest rate, cost of borrowing has gone up, especially for SMEs. In the short-term, businesses find it difficult to cope, forcing many of them to lay off workers, resulting in rising unemployment and, by implication, increase in crime wave.
Inflation also hurts the real sector by discouraging real investments and limiting export because of its effect on the value of the local currency. Investors know that during inflation, they receive lesser value (that is, weak naira) than they invested in projects, this discourages investments.
There are also fears that the inflationary trend may have compounded the sector’s competiveness. The thinking is that the situation has created more problems for the country in its transactions with the rest of the world by making its exports more expensive than before.
By reducing Nigeria’s share of the global market, experts say the hope of earning more foreign exchange to meet financial obligations is under threat. Apart from putting the country in deficit in its balance of payments, efforts at encouraging the non-oil sector to reduce the over-dependence on oil proceeds are also undermined.
MAN President Dr. Frank Udemba Jacobs lamented that manufacturers, government and consumers are feeling the pain of the rising inflation. He said, for instance, that if manufacturers are not making profit, they would be unable to pay tax to government.
He also said because of inflation, manufacturers, who, unfortunately, do not have the luxury of increasing their prices, even in the face of rising costs and reduced consumer purchasing power, have had to pile up their unsold inventory.
According to him, this has a cyclical effect as, “with high unsold inventory, production would be constrained and eventually reduced, productivity would decline, competitiveness would be affected and could, as a final unfortunate consequence, lead to down-sizing or, right-sizing of employees.”
He pointed out that manufacturers’ challenges have been compounded by the scarcity of forex, which further constrained the sector, especially those products with high imported inputs. “High inflation has led to higher cost of production, at a time that there is scarcity of forex and in the face of dwindling working capital and has, consequently, led to declining capacity utilisation,” he said.
Experts proffer solutions
To curb the rising inflation and save the real sector and Nigerians the agony of rise in price levels, Olusemore said the CBN, in line with its core mandate of maintaining price and exchange rate stability, should adjust downwards banks’ Cash Reserve Ratio (CRR) to make more funds available to them to lend to the real sector to produce.
He also said investing more in public works would boost liquidity in the system while also creating jobs. He, however, said mitigating the effects of inflation required a combination of sound and robust monetary and fiscal policy framework.
The economist noted that apart from the right monetary policy that pays attention to controlling inflation, interest and exchange rates, fiscal policies such as tariff structure or import duty should be looked into.
“Some of the fiscal policies are not well thought-out,” Olusemore told The Nation, pointing out that the recent ban on importation of vehicles through land borders has compounded the unemployment problem in the country.
For industrialist and economist Mr. Henry Boyo, the pillar of any economy is monetary policy and the pillar of monetary policy is interest rate, inflation, and exchange rate. “When you get those ones right, like in other countries, you will fix the economy,” he said.
Pointing out that high interest rate makes it impossible for the real sector to grow, he said high inflation was the main driver of poverty. He said in most advanced economies in the world, interest rate was below two per cent, while exchange rate remained stable for many years, even as cost of funds is also below two per cent.
According to Boyo, forcing these rates down is not rocket science; what is required is a robust monetary policy to address the challenge of excess liquidity in the system. He argued that excess supply of money into the system was responsible for the unacceptably high inflation rate, high cost of funds and high interest rates.
Ohuabunwa could not agree less. “Exchange rate, interest rate and inflation rate can all be moderated by sensible and co-ordinated policies. Investment flows preferentially to macroeconomic stable environments that actually seek, welcome and reward investors,” he said.
But Boyo insisted that this could not be achieved until and unless the CBN stopped its conscious, deliberate and misguided payment arrangement that unilaterally substitutes naira allocations for dollar-derived revenue. He said such payment arrangement results in market imbalance, which ultimately weakens the naira exchange rate.
The industrialist also said that CBN’s monetary policies aggravate the level of inflation in the country. According to him, by substituting naira allocations for dollar-derived revenues, CBN unleashes hundreds of billions of fresh naira inflow into the coffers of commercial banks. And the humongous cash surplus in the system is pitted against less goods and services.
The expert explained that the resultant market imbalance drives higher prices and fuel inflation. He said that with rising inflation, incomes buy less and less goods and services. Even higher incomes buy less because of the rising general price level.
Boyo, therefore, insisted that CBN must stop the obnoxious payment policy and instead adopt the use of dollar certificates or coupons (strictly not cash) for payment of monthly allocations to the three tiers of government.
He said instead of CBN getting dollar from the government and substituting it with naira, the apex bank should give the certificates to beneficiaries who would go to banks to change the certificate into naira. He reasoned that using the dollar certificate will bring down interest rate, inflation and exchange rates.
