LCCI Flays Nigeria’s Fiscal, Monetary Policies

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Muda Lawal

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The Lagos Chamber of Commerce and Industry criticises the monetary and fiscal policies of the Nigerian government as affecting investors’ confidence which results in lull in the economy

By Anayo Ezugwu  |  Sep 12, 2016 @ 01:00 GMT  |

THE Lagos Chamber of Commerce and Industry, LCCI, has blamed the current lull in Nigerian economy on the inability to regain the confidence of investors, both local and foreign.  Reacting to the state of the economy, Muda Lawal, director general, LCCI, said the instability and inconsistency in the foreign exchange management policy have been complicating matters.

“The economy has a major structural defect of being heavily import-dependent. This cannot be fixed in the short term. Therefore, the shocks arising from the collapse of oil price and the corresponding depreciation in exchange rate of the naira were inevitable. But the policy responses could make a whole lot of difference in the profundity of the impacts of these shocks on the economy and the citizens.”

He said historically, autonomous supply of foreign exchange had been higher than the Central Bank of Nigeria, CBN, supply. “This has virtually dried up because of the collapse of investors’ confidence. Of course, the plunge in crude oil price was a major cause. But perhaps the bigger issue is the unstable and inconsistent foreign exchange policy which has continued to create uncertainty in the forex market, thus deepening the liquidity problems.

“For an economy that is in fragile mode and for an economy that is highly exchange rate sensitive, policy actions and pronouncements that could impact the market should be done with utmost caution and care. This is imperative to avoid unintended consequences which may hurt the economy in very profound ways. Such is the recent suspension of nine banks from the forex market. These are shocks that the economy can ill afford at this time.

“It is right to penalise banks for proven infractions, but this should be done in a way to minimise collateral effects on investors and the larger economy, given the high sensitivity of the economy to developments in the foreign exchange market. This is even more so at a time when the economy is grappling with a major confidence issue in the forex market. There should be more creative and less disruptive ways of imposing such sanctions.

“Many innocent investors and citizens are already bearing the brunt of this action given the unprecedented hike in naira exchange rate. Ongoing forex transactions in the affected banks have been stalled with serious consequences for investors. The second major policy development that could pose a risk to the stability and transparency of the foreign exchange market is the recent policy on sectoral allocation of foreign exchange.

“The CBN circular did not indicate any code to properly define what would qualify as raw materials and machineries. The first concern will be that of definition. The result of this will be discretionary interpretation by the banks as to what qualifies as raw materials and machineries. The second major concern is the potential crowding out of other sectors in the forex market. Sectors outside the manufacturing sector account for over 85 percent of the country’s GDP and jobs in the economy. They all have varying import contents in their operations.

“Therefore, if a minimum of 60 percent of all forex allocation goes to manufacturing for raw materials and machineries; what happens to other sectors? Currently, petroleum products imports are priority and could take another 25 per cent of foreign exchange. This implies that the rest of the sectors would settle for the balance of 15 per cent. This is clearly not a sustainable framework.”

Lawal, stressed that fiscal policy measures are better suited to address sectoral imbalances than monetary policy. According to him such policy tools include import tariffs, taxation and other incentives. Above all, he said there is need to upscale infrastructure investments very urgently. These are the more effective ways to fix the structural problems of the economy than monetary policy.

“What is key for monetary authorities is to ensure that financial markets are efficient and transparent; and to ensure that there is discipline among players. This is the time to seek quick wins. One of the quick wins is to review current trade policy measures to reduce the pressure of cost on investors and citizens. The exchange rate depreciation has an inherent structural correction effects on the economy. It naturally rewards inward looking initiatives and resource based enterprises.

“It is too much of a shock on the economy to combine high import duty regimes with a weak and rapidly depreciating currency. Conversion of import values at current exchange rates for purposes of computation of import duty and other port charges have escalated costs beyond measure and had paralysed many businesses. Ensuring a balance between the interests of investors, producers, consumers and the welfare of citizens is a strategic imperative at this time,” he said.

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