This Recession Makes Life Difficult For Citizens And Increases Level Of Misery – DG LCCI, Yusuf

In this interview with NIKE POPOOLA, the Director-General, Lagos Chamber of Commerce and Industry, Dr Muda Yusuf, speaks on the impact of recession on the country among other economic issues
Friday Olokor and

Nigeria has technically entered into recession, with the economy contracting by 3.62 per cent in the third quarter. How will this affect the average citizen?

The effect of the recession has already started to manifest in the lives of citizens. There is evidence of growing unemployment, high inflationary pressure, weakening purchasing power, worsening poverty and general social restlessness. All of these are part of the manifestations of an economy that is in a decline. Because the economy is slowing down and contracting, opportunities for new jobs are shrinking and retention of existing jobs is at risk.

What are the impacts of the recession on the economy at large?

The contraction in the economy has worsened the mortality rate of businesses, especially the MSMEs. The performance of many businesses in terms of sales, turnover and profitability has declined significantly as a result of the economic slowdown. Businesses have been experiencing escalating production and operating costs, which are taking a toll on their performances. Businesses are faced with the serious challenge of exchange rate depreciation as well as foreign exchange liquidity crisis. All of these have affected the performance of many businesses as their costs have risen sharply and aggregate demand has declined. The turnover of many businesses has also dropped.

Quite a number of businesses are having difficulties in sustaining their current staff strength. These are some of the impact of recession on the economy and on businesses. The drop in inflow of foreign exchange has caused the foreign reserves to come under pressure and the debt profile of the government has been rising as revenue performance weakens. The size of the public debt is already at an unsustainable threshold.

Inflation has been on the rise, hitting its highest rate of 14.23 per cent in months. How will this impact on the recession?

The present economic condition presents what we call stagflation. This is a condition that is characterised by a stagnating economy and rising inflation. These conditions naturally make life difficult for citizens and increase the level of misery of the average Nigerian. It means that the purchasing power of the citizens is getting weaker in the midst of galloping inflation; this is double jeopardy as it deepens the degree of poverty in the system. High inflationary pressure impacts adversely on investment and can therefore aggravate recessionary conditions in the economy.

What measures should be put in place to curb the rising inflation?

The current inflationary phenomenon being experienced in Nigeria is driven largely by variables impacting on cost. In other words, it is a cost push inflation and some of these cost variables include the cost of transportation, high energy cost, cost of customs and port processes, and high tariff regime in the country. There’s also foreign exchange liquidity crisis, which is affecting production of many manufacturing firms as they cannot access foreign exchange for raw materials and equipment.

Therefore, if we must tackle inflation, we need to fix all these variables that are affecting the operating and production costs of businesses. We also need to review the foreign exchange management framework to ensure better liquidity in the foreign exchange market so that manufacturers can have better access to foreign exchange to import their raw materials and other imports. The lingering security problems in parts of the country, which are affecting agricultural output and impacting on food security need to be addressed.

We should improve the public transportation system by focusing on mass transit, especially the railway system, to reduce the cost of transportation of both agricultural and non-agricultural products across the country. All these factors need to be taken together as a strategy to curb inflation.

European countries, where most goods are imported from, are having another wave of the COVID-19 pandemic. Do you feel lockdowns in those countries can have effects on Nigeria’s economy?

The new wave of lockdown occasioned by the rising incidence of COVID-19 pandemic in Europe has implications for the global economy. This could affect the Nigerian economy because of our high dependence on commodity export, particularly crude oil. If the lockdown intensifies, it may lead to another slowdown in the global economy, which will reduce the demand for crude oil and trigger another round of price collapse. This will negatively impact our external sector and consequently put pressure on our reserves and our foreign exchange.

There is also the possibility of another round of disruption of the supply chain for businesses, which again may disrupt the production processes of domestic firms. This can trigger another round of product scarcity in the economy. There is also a probability that global travels may again be disrupted, depending on the extent of the lockdown in Europe. If it becomes widespread, then global movement and travels may again be widely affected and this will put another pressure on the economy.

How soon do you see the country coming out of recession?

My conjecture is that we will be out of recession by the second half of 2021. This is because the current contraction in the economy is likely to linger till the fourth quarter of this year and the contraction may continue, albeit marginally, till the first quarter of 2021. Thereafter, barring any major disruption to economic activities either domestically or globally, the economy may return to the path of growth in the second quarter of the year.

What are the things the government can do for the country to come out of recession on time?

What the government can do is to address the critical issues that are impacting on investment, consumption and export. These are the major components of our GDP and any recovery effort will have to focus on these key variables. Some very important policies that we need to fix in order to impact positively on these three critical variables include our foreign exchange policy, which must be appropriate, and it has to be consistent. We need to remove all the uncertainties around the foreign exchange market so that investors can plan and minimise their risks.

We need to ensure that we address all the bottlenecks associated with international trade processes, especially at the ports and in particular with the Customs, the terminal operators as well as the access the ports. There is a need to remove the multiple checkpoints and the numerous desks that importers are made to go through in cargo clearing processes. Customs reform has become imperative in order to deepen the trade facilitation role of the agency. We need an effective trade facilitation framework to support economic recovery.

In the medium to long term, we need to address the structural issues, especially around the huge infrastructure deficit. This has continued to be a major impediment to productivity in the economy. The security environment also needs to be much better. In many parts of the country, security is still a major problem, which is negatively affecting investment.

The naira has suffered more depreciation of recent despite interventions by the Central Bank of Nigeria. What can be done to ease the pressure on the currency?

The first thing that needs to be done is to ensure that we have a market-driven exchange rate as much as possible. This will help to rid the foreign exchange market of the numerous parasites currently profiting from the rent opportunities, which the current rate premiums provide. This will reduce the component of demand that is driven by rent seekers. The market-driven rate will also boost supply of forex from other sources.

The current official rate for forex imports is a disincentive to the inflow of foreign capital and remittances into the economy. A market rate will incentivise the inflow from other sources such as export proceeds, diaspora remittances, FDIs and even more portfolio inflows. A market-driven exchange rate will impact greatly on the supply side of the foreign exchange market and help to ease the pressure. We should give better conditions to encourage non-oil exporters to repatriate their export proceeds, and to encourage the FDIs, diaspora remittances and so on.

What is the impact of foreign exchange scarcity?

The foreign exchange scarcity has had numerous impacts on companies. It has caused capacity underutilisation in the manufacturing firms; and it has intensified inflationary pressure as a result of product scarcity, because many factories cannot produce as they cannot access foreign exchange. It has imposed a lot of pressure on the parallel market, which gives a very distorted signal on what the exchange rate should normally be.

It has created a great deal of uncertainty in the economy and escalated the risk of investment. Investors are not sure exactly what the model of forex allocation is, how much forex they will get, and when etc. All these create lots of problems for investments generally and adversely impact investors’ confidence.

The CBN retained the Monetary Policy Rate at 11.5 per cent at its November Monetary Policy Committee meeting. What effect will this have?

The outcome of the MPC meeting was expected. The CBN has practically exhausted its policy arsenal as far as credit stimulus to the economy is concerned. The economy has been evidently impacted by the monetary policy measures. We have a multitude of intervention funds, the loan to deposit ratio, guidelines on treasury bills, Federal Government bonds and open market operations. For the medium and large enterprises, there is adequate domestic currency liquidity for bankable proposals. Though the MSMES still have issues with access to the funds, because of some of the credit conditions.

However, the bigger issue for many businesses is the liquidity crisis in the foreign exchange market. Many firms cannot access forex for raw materials, equipment and machinery, among others. This is one area where the CBN intervention is much desired at this time. Many investors are in a quandary as a consequence of this situation. The foreign exchange management framework needs an urgent review to fix this crisis.

– Punch