Nigeria’s largest business think tank, the Lagos Chamber of Commerce and Industry (LCCI), on Sunday warned that 2021 economic outlook is not very bright.
It explained that there are no quick fixes for the structural issues and the desired regulatory and institutional reforms.
In its Economic and Business Review for Year 2020 And Outlook for Year 2021 released on Sunday, the LCCI said while the security situation requires new strategies and approaches, it remains unclear what new strategies are in the works.
The report, released by its Director General Muda Yusuf, the LCCI said shortage in foreign exchange (forex) available to businesses and end-users will remain one of the biggest hurdles in 2021.
According to the report, while forex supply will face continued pressure in 2021 in the light of relatively lower dollar inflows from oil, foreign investment, and diaspora remittances, the Central Bank of Nigeria (CBN) is expected to sustain its demand management strategies via rationing and restricting access to forex for food imports.
“In year 2021, the CBN will most likely maintain and initiate more demand management policy measures to taper growing demand for forex amid weak dollar inflows,” it said.
The LCCI said without bold policy pronouncements, constraints to the ease of doing business including foreign exchange shortage, escalating production costs, high regulatory costs, infrastructure inadequacies, and delayed cargo clearance, will persist into year 2021.
The report said the Nigerian policy environment is characterized by a great deal of uncertainty. The inconsistent and unpredictable nature of the policy and regulatory environment continues to hurt long-term investment planning and business projections.
Giving more insight into the report, Yusuf said: “These constraints will be more profound on businesses in the real economy. We believe the sluggish pace of recovery will continue to subdue consumer demand, albeit the impact on earnings performance will be disproportionate across sectors.”
He added that while most Micro Small and Medium Enterprises (MSMEs) will struggle to survive in the New Year amid unfavourable economic conditions, large corporates are expected to demonstrate resilience in the coming year.
According to him, the economy will return to the path of positive growth in the second quarter of 2021 and this will expectedly impact on the macroeconomic environment which may ease some of the critical economic conditions currently impeding economic growth.
He said Nigeria’s trade dynamics with the global community is expected to remain almost unchanged in the short-term. With imports continuing to outpace exports, trade deficit is expected to widen in excess of N5 trillion in year 2020, thereby putting pressure on forex.
“Looking ahead in 2021, we expect crude oil to sustain its dominance in Nigeria’s export while manufactured imports will most likely dominate the country’s import bill. We anticipate sustained trade deficit in agriculture, manufactured goods and raw materials goods in year 2021,” he said.
The LCCI boss said total capital inflows for year 2021 might likely range between $10 billion – $11 billion, below 2018 and 2019’s levels. The forex policies, security challenges, sustained fiscal & external risks, infrastructure inadequacies, policy credibility concerns and regulatory bottlenecks may keep capital importation subdued in the short-term.
“Foreign Portfolio Investors (FPIs) are concerned about continual rise in negative real return rate on investment due to rising inflation and inability of FPIs to exchange naira repayments into forex. Given that these issues remain unresolved, we believe FPIs will remain cautious about naira-denominated investment securities in the short term,” Yusuf said.
He added that the value of Nigeria’s trade with the global community stood at N23.2 trillion between January and September 2020, with imports of N13.91 trillion and exports of N9.3 trillion accounting for 60 per cent and 40 per cent of total trade, respectively.
“There has been a sustained expansion in the country’s trade deficit since the start of the year, with cumulative trade deficit at N4.6 trillion in the first nine months of 2020 as exports have grown less rapidly compared to imports. The structure of Nigeria’s export basket remained unchanged as crude exports accounted for 74 per cent of total exports while manufactured goods dominated imports bills between the first and third quarters,” Yusuf stated.
The LCCI noted that micro, small and medium enterprises (MSMEs) in Lagos lost about N2.7 billion due to the coronavirus lockdown and disruptions caused by #EndSARS protests.
He listed major challenges faced by the business community in 2020 to include liquidity crisis in the foreign exchange market, sharp exchange rate depreciation, high energy and production cost, ports congestion, cumbersome and burdensome customs processes, insecurity, inconsistent policies, regulatory uncertainties, land border closure and Apapa traffic gridlock.
He noted that the economy was faced with positive but sluggish growth before the pandemic with real GDP growth averaging 1.94 per cent between second quarter 2017 and first quarter 2020, much below population growth rate of 2.6 per cent.
“While recovery to growth trajectory is expected to take full course most likely in second quarter 2021 due to base effect of second quarter 2020 when output contracted steeply by 6.1 per cent. We expect the pace of recovery to remain subdued within the region of one percent in year 2021 in the absence of shocks. In our view, Nigeria’s recovery prospects depend largely on oil price and production level as GDP performance in recent quarters has significantly mirrored trends in both variables,” Yusuf said.
He pointed out that headline inflation is expected to remain elevated as the combination of food supply shocks, forex policies, higher energy costs, forex illiquidity, heightened insecurity in major food-producing states, will continue to mount pressure on domestic consumer prices.
