By Merit Ibe [email protected]
Many businesses and investors are still struggling to survive in the context of a fragile economic recovery and shocks of the COVID-19 pandemic.
Most investors have scaled down while several others have suspended operations.
The twin shock of supply and demand caused by the outbreak has implications for businesses. First, the supply shock reduced the economy’s ability to produce goods and services at a given price. An industry’s reduced capacity to produce goods, for example 60 per cent of its pre-crisis output, contributes to the supply shock.
On the other hand, demand shock reduced consumers’ ability to purchase goods and services at a given price.
While the pandemic shocks were trying to abate, the onset of the Russian invasion of Ukraine has inflicted yet another profound macroeconomic dislocations and supply chain disruptions on the global and domestic economies. It is a case of multiple devastating shocks on the economy and businesses.
Chief Executive Officer of the Centre for the Promotion of the Private Enterprises (CPPE) lamented that it is bad enough that stakeholders in the economy are contending with predicaments, which are partly consequences of dysfunctional monetary and foreign exchange policies of the Central Bank of Nigeria.
Some of these predicaments include record plunge of the Naira exchange rate to about N590 to a dollar; unprecedented disparities between official and parallel market exchange rates, which have created grave distortions and dislocations in the economy.
The disparity in rates he said has created a paradise for forex brokers and currency speculators. “The business of forex round tripping is also flourishing. There is a liquidity crisis in the forex market on a scale never witnessed in recent history.”
Many players, especially in the economy are faced with great difficulty in accessing foreign exchange to import raw materials, equipment and meeting their foreign payment obligations to their partners. Some have suffered reputational damage, created serious country risk and perception problems for the Nigerian economy. This had also negatively impacted foreign capital inflows into the economy.
All of these have put the economy under severe strain, weakening growth outlook.
Yusuf added that the spike in diesel cost, aviation fuel (Jet A1) and natural gas have increased production and operating cost across all sectors.
Another major headwind, he noted is the worsening insecurity in the country, adding that the state of insecurity has reached a frightening level deserving of a state of emergency declaration.
“This trajectory portends serious adverse implications for economic growth prospects and investment outcomes. We cannot retain, scale or attract investment in an environment that is not secure. This is true of domestic and foreign investments.
“Investors’ confidence has been greatly undermined with investments across all sectors being adversely affected. When investment is in jeopardy, livelihoods are negatively impacted. Worsening insecurity is adversely impacting lives and undermining livelihoods. This is taking a huge toll on both the social and economic life of the nation.
He said Major macroeconomic indicators suggest that the Nigerian economy is floundering and is being further weakened by these headwinds. A stumbling economy cannot afford these multiple shocks. The government therefore needs to take urgent steps to pull the economy from the brink.”
Yusuf said it is imperative for the country to operate as a true federation, which it claims to be. The unitary character of the country is making it difficult to unlock the economic potentials of the subnational. It is perpetuating the culture of dependence on the federal government. It is necessary to scale down the size of government and cost of governance. We should note that fiscal sustainability is driven by both cost and revenue. Therefore, managing the major drivers of cost and revenue is imperative. As far as possible, the government should pushback in sectors or activity areas where the private sector has capacity to deliver desired outcomes. We should see more concessioning and privatisation at all levels of government.
Lukman Otunuga, a Senior Research Analyst at Forextime (FXTM), noted it’s no secret that many developing countries boast of high fiscal deficits in the pursuit of economic growth.
He said Nigeria’s debt profile is a perfect example of how excessive government spending can place an economy in an unfavourable position, despite its mission to stimulate growth.
Over the past 10 years, Africa’s largest economy has spent beyond its revenues. Nigeria’s total public debt is expected to reach 44.2 per cent of GDP by 2027. One of the primary dangers of a budget deficit is the continued increase in prices.