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LCCI predicts further crash in oil price, heightened fiscal challenges

By on September 11, 2015

The Lagos Chamber of Commerce and Industry (LCCI) has predicted a further crash in crude oil price currently trending at a six-year low of $40 per barrel, noting that prices may crash further when Iran begins to enjoy its international pardon by pumping more oil into the already saturated market.

The president, LCCI, Alhaji Remi Bello, during its 2015 third quarter press conference, warned that if the crash of oil prices happen, it may further heighten the fiscal challenges presently facing the country.

“With this development, we are expecting further downwards adjustments in the budgetary benchmark of oil price which is pegged at $53 per barrel in the 2015 budget. Further pressure on the value of Naira is expected as the development weakens the supply side of the foreign exchange market,” he said.

The LCCI boss said according to National Bureau of Statistics (NBS), Nigeria’s real Gross Domestic Product (GDP) fell to 2.35 per cent in the second quarter of 2015, compared to 6.54 per cent in the same period last year, stressing that the country’s economic growth rate for the second quarter represents a 40 per cent decline from the 3.96 per cent  recorded in the first quarter of the year.

He advised that the Central Bank of Nigeria (CBN’s) foreign exchange policy needed to be urgently reviewed to encourage the inflow of autonomous funds into the foreign exchange market, adding that the current tight exchange controls is a major disincentive to the inflow of diaspora funds, export proceeds and other autonomous funds into the economy, thus worsening the foreign exchange crisis.

“The CBN needs to be creative in its fight against money laundering in order to minimise disruptions to economic activities. Its current approach has caused considerable disruptions

He said the stock market in 2015 remains largely bearish with average year-to-date return of -15.71 per cent  by end of August while depressed international oil market, exchange rate crisis and fears coming from slowing Chinese economy continue to exert negative pressure on the Nigerian equity market.

He said the biggest challenge facing investors currently is the disruptions and dislocations caused by the recent foreign exchange policies of the CBN, saying the country is experiencing very difficult times  and choices are limited.

“We know that the inflow of foreign exchange into this economy has declined sharply following the collapse of crude oil prices. We appreciate the challenge of scarcity of foreign exchange. Tough choices have to be made.  But we have serious reservations over the policy choices of the CBN in managing the current crises.  Significant disruptions, distortions and dislocations have been created in the business environment by the CBN as a consequence of denial of access to foreign exchange market for imports of 41 broad categories of products, including critical inputs needed in manufacturing and service sectors,” he said.

He said the impact of the policy has worsened the business over the last two months, pointing out that several credit lines for Nigerian investors have been lost following the numerous cases of payment defaults to foreign suppliers.
“Even reputable blue chip companies have defaulted for the first time in the several years of business relationship with their foreign suppliers.  Considerable damage has been done to the image of many companies and the country in the international trade and investment arena.  A major confidence crisis has been created for investors,” he noted.
In his words, “Many ongoing transactions before the issuance of the CBN circular have been stalled. These were transactions under bills for collection for which credit facilities were given by foreign suppliers and for which funds could not be remitted.”

He warned that many companies are on the brink of collapse because of the failure to access foreign exchange for raw materials and other critical inputs, stressing that even companies whose inputs are valid for foreign exchange also suffer the same fate.

“The CBN measures is taking a huge toll on investors in the free trade zones. The policies are also a violation of the laws setting up free trade zones.  Investors in the zone are currently in a quandary. The goodwill that Nigeria enjoyed at the advent of this administration in the international business arena is beginning to be eroded by the foreign exchange crises.  There is risk of international isolation of Nigeria if current policies are not reversed,” he said.

He stated further that the economy is now faced with a scenario where there is a much greater pressure to move funds out of the economy than bring funds into the economy.

“This can be likened to a run on a system.  This is a typical scenario which a confidence crisis could create. Future international trade transactions, financial and investment relations are now at risk,” he stressed.

He said the way forward is for the naira exchange rate to be allowed to reflect the fundamentals of the foreign exchange market, and said that a rate that market fundamentals cannot support would not be sustainable.

“We suggest the adoption of a market approach with a periodic intervention by the CBN as the capacity permits.  The CBN should allow the foreign exchange market to function without compromising its oversight to ensure that the market does not become a platform for money laundering,” he advised.

He also said exporters should be allowed to have unfettered access to their export proceed, lamenting that the current policy regarding export proceeds is a major disincentive to export. “The policy that restricts the use of export proceeds to only the banks in which the proceeds are domiciled is unfair and should be reviewed. The owners of export proceeds should be allowed to have the flexibility to undertake transactions either within the bank where export proceed is domiciled or any other bank account of the exporter for purposes of doing their business,” he said.
He also recommended that the CBN should put in place policies that would encourage inflow of forex without necessarily creating a tolerance for money laundering, saying this can only be done through intelligence.

“The fight against money laundering can be more effectively undertaken by intelligence and the right information rather than shutting the forex market. The decision to prohibit the lodgment of cash into domiciliary accounts should be reviewed. This is hurting the economy especially the Small and Medium Scale Enterprises (SMEs) and the informal sector,” he said.

He said the chamber is pleased with the current administration’s 100 days in office, saying that since the new government took over, there has been some improvement in power supply, which has been widely acknowledged across all sectors of the economy and households.

“In the last one month, the expenses on fuel either PMS or diesel has reduced either by businesses or households,” he said.

He also noted the more rigorous action in the war against terrorism, pointing out that although the challenges of insecurity and terrorism had persisted, but stressed that it is evident that the present administration has committed considerable resources to the fight against terror.

He added that the anti-corruption war has gained a new momentum, adding that the tolerance for corruption has reduced and the right signals have been projected to critical stakeholders.

“The impunity that characterised the management of public finance in the last couple of years is being contained.  These are commendable developments,” Bello said.

He noted that the manufacturing and the service sectors have now entered recession after recording successive decline over the last two quarters, saying that the reason for the decline in the 1st half 2015 is partly due to the tight forex policies by the CBN which made it difficult for manufacturers to acquire imported inputs, among other factors.

He stated that the vulnerability of the Nigerian economy to external shocks is beginning to manifest with the collapse of oil crude oil price, saying that the naira exchange rate is under pressure so is the foreign reserve; fiscal stability of the federal and state governments is at risk, as reflected in the inability of many public sector institutions to meet their financial obligations to contractors and civil servants.

”The incidence of abandoned projects is on the increase.  Capital flow reversals have intensified, manifesting especially in steady declines in the stock market.  The implications of this scenario for the macro economy are quite profound and unsettling.  From a fiscal perspective, these are certainly not the best of times for the economy,” he stressed.

He said going forward, there ‎is need for optimising the nation’s revenue‎ by reviewing the tax regime to make the tax system more progressive in character, especially with regard to consumption tax.

“Value Added Tax (VAT) on luxury items and services should be reviewed. Tax administration needs to be strengthened for effectiveness and reduction of leakages in tax revenue. The issue here is not about increase tax rates, but making the system more efficient,” he said.

He also stressed the need to review some trade policy measures to boost customs revenue, stating that the Nigeria Customs Service (NCS) is currently experiencing sharp declines in revenue as a result of the new tariff on vehicles and the forex restriction measures by the CBN.

 

[ThisDay]