‘There’s insufficient engagement between government and business community’

Muda Yusuf is the director general of Lagos Chamber of Commerce and Industry (LCCI). He opens up on the business environment in Nigeria, lack of clarity of government economic direction, dwindling oil price and policy pronouncements so far to tackle the economic challenges in the country. He subscribes to backward integration and its positive effects but said the nation needs to attract investment in infrastructure and create the environment for the policy to thrive.  Excerpts

How would you describe business environment so far?

The business environment has been characterized by a lot of uncertainty. The level of investors’ confidence has declined considerably and profit margins are falling. Many businesses are closing shops, especially those in production and those that have not closed shops are in the verge of doing so. Prices are rising and inflation pressures are increasing.  Investors are not sure exactly what direction the government wants to go. As we speak, even though we have had couples of policy pronouncements in the medium term expenditure framework in the budget, still a clear direction has not been properly articulated. The kind of reforms we were expecting to see at the beginning of the administration we are yet to see especially in the oil and gas sector. The privatization and the reforms in the electricity sector seem not to be delivering the expected outcomes as consumers are complaining about the quality of delivery of power. We all know how strategic power is to the development of a country like ours. Of course the global oil price that declined has a lot of ripple effect on the economy, government revenue, exchange rate among others. But the response of the CBN to the declining of crude oil price and the scarcity of forex seem to have compounded the problem. The problem would not have been as much as we have if the policy responses have been right. Nigeria is not the only economy and not the only commodity dependent economy, but if you look at what has happened in terms of impact on the Nigerian economy seems to be way completely heavy and beyond what other economies are experiencing. There is an issue with the policy response. Generally, things are quite difficult, people are not too comfortable and the citizens are beginning to feel the heat and unless we do something quickly and urgently the situation can spin out of control.

Are you saying that the earlier air of hope is disappearing?

About the economy yes I am. The expectations have not been met at all.  Some still say that it is early; to me it is not too early. How long will it take to give the right kind of signals? Within few days of assumption of office, you can give kind of signals that can give the investors the confidence of your direction and people can begin to take position.

Other school of thought will argue that the administration is still cleaning the dirty room, what is your take on this?

No, those things are not mutually exclusive. You cannot say because you are cleaning up the system, that is why you cannot make clear policy pronouncements, undertake necessary reforms. Cleaning and policy pronouncements can happen together. Cleaning up the system is a different thing; it doesn’t disturb the administration from giving the right kind of signals to investors

How are your members responding to this challenge; Are they discussing with government?

One of the loudest voices in the advocacy space is the Lagos Chamber of Commerce and Industry. We are advocating for the right kind of policy, for instance to attract investment, advocating the need to review forex policy which seems to have created more problem than solving, advocating that we should create more space for the private sector to play a role and advocating for reforms in the downstream oil sector so that government will stop throwing good money after bad. For instance, look at the refineries, by now we expected government to have come out with a clear statement laying how private investors will be encouraged to set up their refineries. If you listen to experts, they don’t think that the right thing to do is to continue throwing money after those refineries. Government really needs to liberalise the downstream oil sector as it is the low hanging fruit for the nation.

How would you say the forex policy has affected the economy and your members?

The forex policy has created more problems than it has solved. On the forex policy, there is the issue about the official rate. What we have now is fixed exchange rate. In economics, when you fix an exchange rate, you must have the reserve to support it. One major problem is that CBN has fixed the rate in which it has no reserve to support. Therefore it is not sustainable. This has created a major crisis. Average demand could be at about $4 billion monthly and capacity to support the demand could be at about $1 billion per month and this has created a gap. Then, how do you allocate efficiently.  The current model of managing the foreign exchange market is not efficient. When this happens, there is challenge of corruption; people now need to influence to get the forex. You must be an Angel to resist the temptation not to take advantage of the situation. The model is crippling a lot of industries. There is a situation you don’t mind to buy something if you can get it to move on, but here it is not available. Some companies have been functioning for more decades and never experienced a situation they cannot pay their suppliers, but they are now facing integrity challenge. Again foreign investors would not come in to country when they cannot remit money home. What CBN has been doing is to concentrate on managing demand. Our major forex supply which is oil has gone down. We have Diaspora funds that normally comes in free before which hit about $21 billion in 2014; export proceeds; foreign investors funds; funds that come in through expatriates and multinationals. But if you say those funds should come in at official rate, the funds will not come in. if they come they will not get the forex to remit.  We have to deal with the rest of global community as no country can go it alone. I agree that it is good to look inwards but even to package some goods locally; you need some imports to do that.

In times like these, what should be the role of organizations like yours and others?

They should push on to government in situations like this. LCCI has been doing that. But I must admit that there is no sufficient engagement between government and the business community. There has not been any major interaction between the President and the private sector, apart from what we had during the campaign. Ok the Vice President was at the Nigerian Economic Summit for the roundtable. The President interacts more with business people outside the country than those locally.

Specifically how do you see the restriction on some imports?

Even some manufacturers associations are complaining about the import restrictions on those items. Our position was that, first of all, there should be a process to any product under import restriction. Already there is official import prohibition list enacted in tariff book which lasts for seven years to make for stability of the economy and for planning. It is also consistent with the treaties the nation has signed. Suddenly the list appeared without consultations with certain bodies.

It appears that government position is to check excess consumption of foreign goods and make manufacturers look inwards, what is your opinion?

Government can check excess foreign good consumption with certain policies. When government has fiscal policy tools, you use them such as tax policy to shape behavior of investors. That is why those tools are there. If you want to encourage or discourage investor, there are things you do. In the tariff book, there are items that carry up to 50 percent levy apart from the normal duty. This is to support or penalize some sectors. Machinery was zero percent duty, there is reason for it. Rice at some point was 120 percent duty – 100 percent duty and 20 percent levy to encourage local production but after some pressures it was reduced. Fiscal policy measures are easier to deal with on selective incentive. You don’t provide incentives using forex, it is not sustainable. We have seen similar experiences in the past when we were selling essential commodity and fertilizer on heavy subsidy. What happened was that the goods were diverted. You can deploy subsidy in cases that people cannot divert. The forex regime now is a heavily subsided and that is why it must always get to the wrong hands. My approach is that the nation must adopt a flexible exchange rate regime. This is different from devaluation. Devaluation is a policy to boost export. It is not necessarily because there is a forex crisis. When China devalued it was not because there was forex crisis. It is because they wanted to boost export. Japan also did it. Other countries have also done it. It is a trade policy strategy.  A flexible exchange regime we are advocating is to improve the allocation efficiency to manage the crisis of scarcity as we have it. The flexible exchange rate would allow movement depending on fundamentals. The flexible exchange will create liquidity in the forex market. It will make planning easier for investors. It will encourage more inflows in the system. Not that investors will come in at official rate and when they want to go out, they file papers in the bank but they are told there is not forex. The system is transparent, it may cost more but it will not cost as we are witnessing in the parallel market.

In the short term what are the other solutions to grow commerce and industry?

Investment is about confidence and removing uncertainty in the economy. In this case, forex is essential to the economy. No matter what you produce, you have one or two components of import. In short term, we should address the issue of this policy by adopting flexible exchange regime. Again relax the controls in the inflows of forex. If somebody is coming with export proceeds, he/she should come freely and have access to the proceeds.