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Unfavourable tariff, forex policies pushes trade to negative growth territory

Unfavourable tariff, forex policies pushes trade to negative growth territory

The customs duty tariff hike combined with Central Bank of Nigeria (CBN)’S Foreign Exchange (FX) restriction on some items and the continuous weak purchasing power might have pushed the wholesale and retail trade sector to a negative growth territory in the second quarter of 2019, analysts say.

The sector had remained on a positive trend over the past three quarters since Q3 2018. According to recently released National Bureau of Statistics (NBS) GDP report, it contracted marginally by 0.25 percent after recording positive growth of 0.85 percent, 1.02 percent and 0.98 percent in Q1 2019, Q4 2018 and Q3 2018 respectively.

“Growth in the trade sector has remained on a downtrend over the past three quarters after rebounding from a recession. However, looking at Q2 numbers, trade declined to – 0.25 percent can be attributed to the trade policies particularly regarding tariffs which have not been favourable. A key one is the adjustment of excise exchange rate from N305/$ to N326/$,” Ayorinde Akinloye, a consumer analyst at CSL Stockbrokers said.

“And furthermore, domestic consumption still remains weak. Consumer income has virtually being stagnant in nominal terms while inflation remains in double digit territory. Thus once demand remains poor, trade would definitely weak,” Akinloye further said.

Between the end of the first quarter (January-march) and second quarter (April-june) of 2019, the CBN with immediate effect added textiles and oil palm effective to the 41 items that have remained ineligible for forex sale in the interbank market since June 2015. And in the third quarter (July-september), the bank further added milk and food items to it.

In June, the Federal government increased the exchange rate for customs duty by 6.5 percent to N326/$ from N306/$ with immediate effect with the aim to generate more revenue. This recent development implies that importers and exporters whose products are valued and transacted in dollars will now have to pay additional N20 per dollar worth of goods.

Johnson Chukwu, CEO, Cowry Asset Management Limited said, “Consumer spending and disposal income is still low. People are only spending money on necessities. There is minimal discretionary spending going on in the country and this will continue to happen in the third quarter.”

Data from the NBS on Gross Domestic Product (GDP) by Income and Expenditure approach at 2010 purchaser’s values show that consumption expenditure of households has been declining at varying pace since it rose by 1.5 per cent in 2015.

Also, the country’s per capita income declined to $2,049 in 2018 from $3,268 in 2014, according to the International Monetary Fund (IMF).

Ayo Akinwunmi at FSDH Merchant Bank said that people still don’t have money to spend and that the trade sector is very important to the economy. “The trade sector corresponds to the manufacturing sector. What you are producing is not really being traded.”

From the report, the manufacturing sector recorded a negative growth of -0.18 percent in Q2 2019 for the first time since q4 2017. Food, Beverage and Tobacco under manufacturing sector fell marginally 0.54 percentage points to 1.22 percent in Q2 2019 from 1.76 percent in Q1 2019.

Some consumer companies or manufacturers like PZ Cussons, Unilever Guinness Plc and Nigerian Breweries Plc, have started to trade cash for credit in a bid to stimulate revenue by extending friendly credit conditions to distributors given their weaker sales and lower margin.

“They are doing this to make distributors take enough goods from them,” said Abiola Gbemisola, research analyst at Lagos-based Chapel Hill Denham.

“People don’t have money to spend and the companies are producing, so they have high inventory and a way of reducing their high inventory is to give their goods on credit,” Gbemisola posited.

The sector exited recession for the first time in 2018 after recording two negative growth rates. It grew by 0.98 percent in Q3 2018 after contracting by -2.14 percent and -2.57 percent in Q2 and Q1 respectively.

Then, analysts attributed it to the CBN intervention of improving the supply of dollars in the FX market for businesses generally.