Vanguard (Lagos)

23 July 2012

Nigeria: OPS Decries State of the Nation's Economy

Lagos — The Organised Private Sector, OPS, the body of businessmen in the country, has decried the state of the nation's economy and the poor handling by the government, saying businesses across sectors experienced declines in sales.

A Business Environment Report conducted by Lagos Chamber of Commerce and Industry, LCCI, the premier chamber in Nigeria, concluded that investors' confidence was weakened in the second quarter of 2012 as businesses across sectors experienced declines in sales owing to weak consumer demand and general economic downturn.

The report signed by the Director General of Lagos Chamber, Mr Mudal Yusuf, noted that the trend of some vital macro economic variables was not favourable.

The Business Environment Report was the outcome of an evidenced-based account of experiences of members of the Lagos Chamber and the larger business community on investment climate issues.

According to the report, "interest rates remained high, naira exchange rate weakened, and inflation continued on an upward swing. All these impacted on the operating costs. Investors complained of persistent difficult credit conditions, especially with regards to cost, access and tenure of funds in the financial system. Regulatory institutions did not also help matters as they constituted an added burden on investors, particularly in the real sector.

Security situation worsened

"The security situation in the country worsened and had adverse impact on private sector performance and economy as a whole. The economies of the affected states suffered considerable declines. Distribution of goods and services to the northern part of the country was inhibited, leading to significant reduction in turnover and losses to companies operating from other parts of the country. Infrastructural condition continued to pose severe challenges to enterprises.

"The power situation is still erratic; major roads across the country are still in a poor state; the rail system is still largely in comatose, even though there are ongoing investments in the sector.

"The global economic crises, triggered by the developments in the Euro zone, had implications for the domestic economic conditions. The drop in oil prices affected the level of reserves as well as the capacity to adequately fund the foreign exchange market. This affected the stability of the Naira exchange rate as well as the general price level in the economy.

Exchange rate weakened as inflation rate rises

"The structural problems, which manifests in the weak infrastructure conditions and high production costs, continue to perpetuate real sector crisis in the economy. A weak real sector poses a systemic problem for the entire economy, especially with respect to economic linkages, value addition and job creation. The economy remains largely driven by wholesale and retail trade, oil and gas, a few large enterprises in manufacturing and service sectors and public sector spending.

"The upside, however, is that the growth rate of the country's GDP, which is well over 6 per cent, is one of the best in the global economy; also the Nigerian economy continues to be the dominant economy in the West African sub region with over $250 billion GDP. It is one of the leading economies in the African continent which is currently attracting a lot of interest from foreign investors.

"The potentials are immense but the capacity to harness the potential is still lacking. The Nigerian economy is sensitive to developments in the foreign exchange market by virtue of its structure which makes it greatly dependent on imports. Between January and June, there was an estimated 5 per cent depreciation in the exchange rate of the naira against the dollar. The rate was N157 to the dollar in January and currently ranges from N162-N165 to the dollar, in the inter-bank and parallel market. The major factors responsible for the trend are the declining oil prices and attendant speculative activities.

Implications for business

"The trend has the following implications for business performance: Higher production and operating cost as the cost of raw materials and other imported inputs increase; Heightened exchange rate risk for investor, that borrowed offshore funds to finance projects in the country; Inflationary pressures induced by higher production cost; Policy response of monetary policy tightening may further increase interest rate; Risk of exchange rate volatility; The value of robust reserves lies in the confidence it inspires among investors especially foreign investors and international trading partners."

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