KPMG has listed global pressure points and external shocks, fiscal unsustainability, exchange rate market, credit and reactive policy environment as factors that would determine the success of the Nigerian economy in 2020.
The multinational professional services firm disclosed this at the America Business Council’s second economic update on Wednesday in Lagos.
Speaking at the forum, the Associate Director, Strategy and Economics, Management Consulting, KPMG Nigeria, Olusegun Zaccheaus, explained that the the global developments in 2020 portends significant risks for the Sub-Saharan countries.
Others factors are investment for growth, productivity, technology and digital disruption, socio-economic pressure and consumer pressure points.
While providing an update on the Nigerian economy, it was stated that it currently stands on a slippery slope of recovery. According to KPMG, the Nigerian economy which recorded a growth rate of 6.21% in the first quarter of 2014, has continued to witness very slippery growth recovery since the 2016 recession.
Debt crisis amidst weak revenue
On Nigeria’s debt issue, KPMG stated that the nation’s revenue relative to GDP has been declining, with debt service ratio to revenue accelerating since 2016.
Following this, it was further disclosed that the 2020 budget revenues targets are ambitious, and this made the Federal Government push strongly for revenues across all fronts through the introduction of the 2019 Finance Bill.
Meanwhile, it was stated that the increase of VAT by 50% by the Federal Government might potentially affect sales negatively in major sectors of the Nigerian economy, as consumers are highly sensitive to price changes.
CBN’s Intervention fails to ease vulnerabilities
While addressing the Central Bank’s efforts to stabilise the Naira, it was disclosed that the currency has not depreciated, thanks to forex intervention by the CBN which amounted to $39 billion since August 2018.
Although KPMG noted that some progress had been recorded, and these include stabilizing the foreign exchange market, improved liquidity in the market and rise in portfolio investments.
However, key underlying issues still persist. Some key issues highlighted at the forum include foreign exchange supply gap, depletion in reserves used to defend naira, expensive OMO instruments in a bid to attract foreign portfolios and overvaluation of the Nigerian Naira which indicates that exports are becoming more expensive and less competitive.
It was emphasized that the huge gap between the foreign exchange supply and demand led to price distortions and increased demand in the parallel market which contributed to a wide gap between the official and parallel rates.
Nigeria’s multiple exchange rate systems
On the controversy surrounding multiple exchange rate system, KPMG disclosed that Nigeria may already be operating a multiple exchange rate system which more or less conforms with the criteria listed by IMF for determining a multiple exchange rate system.
According to KPMG, a review of the criteria for establishing multiple exchange rate practices by the IMF disclosed that Nigeria’s current exchange rate system has at least three characteristics that meet the definition of multiple exchange rate practices. The three criteria currently satisfied by Nigeria include multiple foreign exchange markets, different rate for different transactions and foreign exchange auctions.
While concluding on this, it was stated that Multiple exchange rates practice inhibits economic growth and the continued application of the multiple exchange rates practice may have unintended consequences in the long run.
Volatile Policy environment driving skilled talents to other climes
KMPG stated that the Volatile, Uncertain, Complex and Ambiguous (VUCA) policy environment has negative impact on the overall growth in the economy. Following this, social wheel pressure is spinning and this has resulted in a growing flux of skilled talent to other climes like Canada, U.K, Australia and the United States.
In conclusion, it was disclosed that the CBN policy focus areas are expected to shape 2020 monetary and market developments. However, KPMG warned that to successfully navigate the downturn and thrive in the subsequent upturn, organisations need to adopt a Proactive Strategic Posture.
According to the tax firm, an organisation that takes a proactive strategic posture has greater chances of surviving the turbulent time and take opportunity of the upside of recovery while minimising the risks in the downturn.