The massive macro-financial shock caused by Covid-19 has continued to ravage the global economy putting all systems and nations under severe financial instability never seen in history. Stock Markets around the world have been pounded and ravaged, and oil prices have fallen to an all-time low. Nigeria is not spared from this crisis. Total revenue expected to be realised from the 2020 National budget was N8.42trillion. However, following the Covid-19 pandemic, revenue projection was reduced to N5.16trillion. This represents a drop of close to 40% or N3.26trillion. Key sectors like manufacturing, maritime, aviation, hospitability and the creative industry, collapsed resulting in huge financial and job losses. The World Bank 2020, Global Economic Prospects, June 2020, forecast that the Covid -19 pandemic will plunge all countries into the worst recession in history. GDP of advanced economies are projected to shrink by 7 percent. The outlook for emerging market and developing economies is bleak as they are forecast to contract by 2.5 percent. This would represent the weakest showing by this group of economies in at least sixty years. The crucial issue is – How do we avoid and or minimize the impact of inevitable recession on our economy?
The first and critical policy action is to harmonize fiscal and monetary policy. Fiscal policy must be expansionary. In other words, big spending is required to massively stimulate the economy. This is called Keynesian economics named after the economist John Maynard Keynes. Keynesian economics served as the standard economic model in the developed nations during the latter part of the Great Depression, World War II, and the post-war economic expansion (1945–1973). American President, Franklin Delano Roosevelt used the Keynesian economic model by spending massively on public works programs to get America out of the great depression. The mantra for Nigeria is to spend big to get out of recession. We acknowledge the government has adopted an expansionary policy by borrowing massively but we must have a clear strategy. First, we must determine our Public Sector Borrowing Requirements (PSBR). Additionally, we will need to identify an inventory of Public Sector Spending Requirements (PSSR). The PSBR and the PSSR should be indexed to identify funding gaps. Additionally, an inventory of government assets should be created as we have many wasting assets that can be converted to cash. Using the abandoned Federal Government Secretariat in Lagos as the index case, informed valuers believe it has a forced market value of N100 Billion. This can build the East-West Road. Abandoned projects abound, Ajaokuta Steel, Aladja Steel, the Newsprint at Iwopin, the various steel rolling mills around the country, the Onitsha Port, etc. It is believed these assets are worth at least N15, trillion yet untapped. These wasting assets, if sold will boost fiscal policy immensely. Turning to Monetary Policy, we clearly need a very flexible monetary policy with interest rates pegged at no more than 5% (Single-digit) to create a framework for quantitative easing and open market operation (OMO).
Quantitative easing (QE) makes borrowing easy for business. QE makes burden on business lighter. OMO flood the economy with liquidity. A harmonized fiscal and monetary policy will lay the foundation to rebuild the economy. Three requirements to avoid a recession are Job creation, revenue mobilization and control of cost of governance. If we get the macroeconomic environment right, which is the alignment of fiscal and monetary policy, it will release economic energy to create Jobs estimated at between 5 and 6 Million, year on year. With respect to revenue generation with the right framework, massive funds can be generated and pumped into the economy. With respect to cost of governance, everybody knows it is far too high. In the revised 2020 budget, 73.5% of total expenditure are for salaries and debt servicing, while only 26.5% are for capital expenditure. This is unsustainable. We cannot continue to borrow to pay high recurrent bills. Rather we must invest in capital expenses to reflate the economy. The Government has taken steps to implement the Orosanye report but there needs to be a timeline for implementation. Corruption is a leading cause of high cost of governance. It is important to review anti-corruption strategies to reduce public corruption. Tackling the menace of big government and public corruption will give us more balanced revenue to debt profile. With the macroeconomic framework highlighted above, we can now review some critical factors that can help grow the economy and avoid recession.
Diversification of the Economy
This is one area government needs to urgently activate because of the massive budget deficit. Nigeria runs a mono –cultural economy as 85% of her revenue is derived from crude oil exports. As a result of the price shocks occasioned by COVID -19, crude oil receipts have gone down and are no longer able to sustain the economy. The total revenue expected to be realised as stated in the 2020 budget is N8.42trillion, including a deficit of N2.17t. However, following the COVID -19 pandemic, fiscal deficit has grown from N2.17t to N5.37t, which must expectedly be financed by fresh borrowing. We are now running a deficit budget and borrowing massively. Unless we diversify the economy, we will continue to borrow to the point where it becomes unsustainable. Many governments have paid lip service to diversification, but this is the time to develop a very strong policy on diversification. We must follow the example of the United Arab Emirates which diversified its economy by reducing dependence on oil receipts from 100% to only 35% by going into service and smart industries. Some of the sectors to diversify our economy into are Agriculture, Transportation, Aviation/Space, Rail and road transportation, Maritime, Hydrocarbons, solid minerals, information technology and entertainment.
Nigeria has no trade policy which is why it is a major dumping ground for foreign goods. We spend billions of dollars importing basic food commodities that can grow locally. We must grow what we eat. We need to reverse this with a robust trade policy. Trade policy refers to the rules and regulations on imports, exports, tariffs, duty etc. Trade policy rests on a tripod of critical factors – import substitution, tariffs, border enforcement and compliance. We need to enact trade remedies legislation and a trade Expansion Act. These legislations will impose anti-dumping duties on non-essential products. There are also special duties and measures we can impose on exports into Nigeria which are subsidized by a foreign country. The trade remedies legislation will prohibit imports if it is adjudged that they will cause material injury to local industries, for example by impeding local growth. It is also important to enact legislation that will support the recently established Nigerian Office for trade negotiation (NOTN). It is crucial that the office is elevated to ministerial level. We need to establish a National Customs and Border Enforcement Services. This Border Enforcement Services will need new legislation to merge immigration and customs services. The Border Enforcement Service will replicate the US Customs and Border Enforcement Agency. The merged service will reduce duplication and proliferation of agencies at the borders. To comply with ECOWAS protocol and the African Continental Free Trade Agreement (AfCFTA), the border closure policy should be replaced by a border enforcement policy. A strong trade policy will help create millions of jobs, grow local industries and expand the economy.
Access to Capital
Capital is the oxygen and lifeblood of the economy. One of the areas where we can tap into capital is the Housing/property market. Eighty percent (80%) of Nigeria’s businesses rely on land and housing as collateral. Unfortunately, the slow administration of the Land Use Act in terms of consents and permits has meant that the banks have not accepted untitled property as collateral. This has caused incalculable damage to businesses in need of capital. A recent study shows that the housing inventory of Nigerian property exceeds six trillion dollars. Nigerian property and housing market is dead capital because 80% of them have no title or bad title and therefore not good as collateral for bank loans. So creating the proper legal framework to make dead capital fungible (easily transferable) will create an instant credit market and enable Nigerians to borrow on their property. A Land Use Administration Act will introduce new rules to make the consent process more efficient and give confidence to banks to accept title documents as collateral. This process will create an instant credit market to drive the economy and will easily contribute at least 5% to GDP.
Government stimulus intervention
Because of COVID-19, the economy has taken a very big knock. It is the responsibility of government (like most western countries) to reboot the economy by supporting businesses with a business support fund of at least 50 trillion. We applaud the government for the injection of funds to support the economy. We note the following:
- Nigeria Economic Sustainability Plan (NESP), 12-month, 2.3 Trillion Naira ‘Transit’ Plan between the Economic Recovery and Growth Plan (ERGP) and the successor plan to the ERGP
- Ministry of Trade and Industry, MSME Survival Fund, The Guaranteed Off take Stimulus Scheme and the Credit Support to MSMEs and Priority Sector and
- Central Bank of Nigeria N10 billion loans and grants approved for various groups and organisations for pharmaceutical and healthcare-related research, under the COVID-19 intervention scheme.
- The Special Public Works programme expected to engage 774, 000 Nigerians to cushion the effect of COVID-19 pandemic.
It is a good start but not enough. The Government should look to ways and means by the CBN to inject at least 50 trillion into the economy. Government can intervene through a National Credit Guarantee Agency to support viable business proposals so they Business can easily access credit. Major economies of the world run on credit. The key is that the creditor is assured that he will be paid by government guarantee. Another key institution is the Development Bank (DBN). Nigeria has a Development Bank, but unfortunately undercapitalized. The DBN needs to be properly capitalized to boost the economy.
Enabling Business Environment
The factors listed above will not work without an enabling business environment. The first step is to have an efficient legal and regulatory system. For instance, the Nigerian judicature is based on the 1875 Judicature Act. The consequence is that cases take too long to resolve. It takes between 5 to 20 years to resolve simple contractual disputes. Investors, both local and international, will not invest in a country where simple contractual disputes take between 5 to 20 years to resolve. We must give urgency to this sector and reverse legal failure. A speed of justice policy will reduce delays. In this regard, the National Assembly must consider enacting the Administration of Civil Justice Bill to ensure efficient administration of civil disputes. Also, new methods of dispute resolution should be considered such as Alternative Dispute Resolutions, small claims courts, traditional and customary arbitration. Quasi-judicial administrative tribunals can be established for sectors, following the UK example. In England there are many administrative courts for Telecommunications, Taxation, Transportation, Insurance, Education, Financial Services, Trade, Investments, etc.
Discipline of Execution
Nigeria has a plethora of laws, regulations, guidelines and Executive Orders. The challenge is lack of implementation of these laws and regulations. Unless rules are enforced, Nigeria will not easily overcome recession. A vigorous government policy is needed to implement diversification, strong trade policy and access to credit etc. There needs to be timelines and harmonization of work of the various government agencies ministries. Nigeria can generate 10 million Jobs and over N100 trillion with full compliance with policy implementation. This will help to mitigate the impact of the impending recession. The President must take charge and ensure vigorous implementation.
The story about diversification of the economy is an old argument going back 30 years and in fact, the Nigerian economy is actually diverse but the problem is lack of government consistency which has meant that although we have diversity, no revenue flows out. We can only succeed if the twin administrative tools of power of focus and discipline of execution are applied. This presentation is made from the point of view of a development lawyer. It is up to the economists to draw what they can to mitigate the impending recession.
Telecoms sector remains resilient as broadband subscriptions climb
Broadband penetration grew to 41.3% in June 2020 from 33.31% in June 2019 and 40.1% in May.
Despite the adverse impact of the global pandemic on various sectors in the economy, the Nigerian telecoms sector has remained resilient. According to recent data on key industry fundamentals published by the Nigerian Communications Commission (NCC), the total number of broadband subscriptions grew 23.9% y/y and by 2.8% m/m in June 2020 to 78.8m subscriptions.
Similarly, broadband penetration grew to 41.3% in June 2020 from 33.31% in June 2019 and 40.1% in May. In addition, the number of internet subscribers continued to grow in June 2020, up 1.8% m/m and 17.2% y/y to 143.7m subscribers. We believe the m/m uptick in broadband penetration could be due to gradual reopening of the economy.
We recall that subscriptions declined on a m/m basis in April but showed recovery in May & June, reflecting the resilience of the sector. Industry players in the telecommunications sector continue to invest heavily in internet infrastructure in a bid to improve 4G LTE coverage across the country. Heightened competition among industry players for market share has also forced bundle prices lower, making internet usage very attractive to the average Nigerian.
With the advent of the global pandemic, we believe the growing use of digital channels for daily routine activities ranging from telecommuting, entertainment and social engagement bodes well for continued growth in internet penetration. This will be further supported by increasing smartphone penetration, favourable country demographics and a fledgling social media culture. Nevertheless, we believe the sector still requires more investment to bring it at par with more developed climes. With internet penetration still below 50% (39.58% as at April 2020), we think significant potential exists for telecom and internet service providers in Nigeria.
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CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.
COVID-19 and its impact on the cement industry
Our outlook for the cement industry is mixed due to a plethora of factors…
The impact of the restrictive measures put in place during the second quarter to contain the global pandemic was apparent in the financial performance of two of the major players in the cement industry (Dangote Cement and Lafarge) as Revenue was pressured. Specifically, the industry leader, Dangote Cement recorded a decline of 15% in Sales volume in its Nigerian Operations while Lafarge reported a decline of 10%. Notably, the CBN Manufacturing PMI showed that demand for new orders in the cement subsector slowed to 63.6 points at the end of Q2 from 70 points in Q1.
In our view, the lockdown in the month of April in three key states across the federation (Lagos, FCT and Ogun) coupled with heavy rainfall in June led to the decline in the industry’s sales volumes during Q2. Furthermore, we think the increased level of government attention on the healthcare sector amidst revenue challenges led to the suspension of most construction projects across the nation. Meanwhile, we highlight that the FG reduced the amount budgeted for capital expenditure by 20% in the revised 2020 budget following the downturn in oil prices which undermined oil revenue. Based on the recent presentation made by the Minister of Finance on budget implementation, the sum of N253.3bn has been spent on CAPEX as at end of May, which pales in comparison to the pro-rated revised budgeted capital spending of N816.70bn and translates to a performance ratio of 31%.
Looking ahead, our outlook for the cement industry is mixed due to a plethora of factors ranging from subdued private investment in gross fixed capital formation, rising inflationary pressures on essential food items (which could dampen the quest for capital goods such as housing), increased energy costs due to the devaluation in the local cuurency amidst heightened competition in the industry that may limit industry players from hiking prices to preserve margins. Although, we expect pressure on volume growth to persist in the short term until there is a significant pick up in economic activities, we note that the relaxation of lockdown measures and the low interest rate environment are positive factors that will support the earnings of industry players.
CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.
The “new normal” in business and economy
In the new normal, business owners are faced with overwhelming, competing challenges.
As the COVID-19 pandemic continues to ravage the world, leaving citizens of the world a new world order, businesses need to navigate their financial and operational obligations. They are also expected to meet the needs of their greatest assets – customers and suppliers.
The crises may have paved way for uncertainties, but it has also created opportunities for sectors to emerge and grow, while some will fall and vanish if not properly managed and strategized as the companies who will stand firm in this era will be those that implemented risk management as part of their business strategy.
While this crisis is first and foremost a public health issue, which has claimed the lives of thousands of people worldwide and still counting, the economic would no doubt be overwhelming and is likely to create major economic meltdown in both the formal and informal sectors
The train must be primed to chug along now! In the new normal, business owners are faced with overwhelming, competing challenges. They are surrounded by treacherous waters now darkly infested with COVID-19 sharks. Still, they must continue to dive into the deep end of the global pandemic.
A business’s success depends in part on the economic systems of the countries where it is located and where it sells its products. A nation’s economic system is the combination of policies, laws, and choices made by its government to establish the systems that determine what goods and services are produced and how they are allocated. The resources of a person, a firm, or a nation are limited. Hence, economics is the study of choices—what people, firms, or nations choose from among the available resources. Every economy is concerned with what types and amounts of goods and services should be produced, how they should be produced, and for whom. These decisions are made by the marketplace, the government, or both. In the United States, the government and the free-market system together guide the economy.
Business owners therefore should have their priorities clearly mapped out; providing support and being a backbone to their people, customers and suppliers. They must achieve all this, whilst simultaneously addressing supply chain disruptions, maintaining stable profit margins, aligning their businesses with evolving demand and changes and identifying potential pitfalls and new growth trends.
Businesses in the new normal require a new mindset to recover from the crises, thereby identifying, analyzing and addressing effective strategies that would help the business return to normality and grow. This is the time to build organizational relationships with strategic partners for proper execution of effective strategies.
Management personnel and stakeholders are quickly turning their attention to the ‘next’; that moment of unpredictable and probably muted economic recovery with newly identified threats and opportunities. This is a new era defined by fast-changing initiatives to shift the cultural norms, societal beliefs and values, such as renewed brand purpose.
Leaders, corporate and political, are faced with the urgency to reopen their businesses.
To bridge the gap of uncertainty, reopening would require a series of ‘reinventive’ thinking. The pandemic offers a big opportunity to have companies invest in areas they wish they’d paid more attention to before the crisis. Now, to be more digital, data-driven, and in the cloud; to adopt a variable cost structure rather than fixed, to find its root in e-commerce and security are no longer deferrable agendas.
Consequent to the pandemic, organizations globally are experiencing an unfamiliar change in their workflow processes and harnessing their workforces optimally. Companies are yet to fully understand and determine how working remote working will help achieve corporate objectives beyond the survival hump. Profitability and business models are being cautiously reviewed. Teams and workforces try to function and perform in line with expected deliverables whilst struggling to cope with even more sombre personal and existential challenges in the new normal.
Organizations, teams and workforces need new and bespoke fitting plans today. They need to formulate strategies and drive policies that can position them advantageously to work out and around the emerging challenges as the state of global health and economic unfolds. All stakeholders have critical roles to play in developing and establishing systematic approaches that promote shared workforce resilience, flexibility and intelligence.
Similarly, the ongoing COVID-19 pandemic has changed customers, employees, citizens and humans’ experiences, attitudes and behavior forever. The norms of behavioral consumer psychology are deviating from the expected curves. Results, though displaying expected changes, are creating sweaty anxiety for boardroom decisions. The crisis has caused a fundamental change in human-human interactions and behavior. In the new world order, companies would necessarily need to review and redesign operational flow and operating models. These changes would impact greatly on design, communication, running expenses, remunerations, investments etc. The definitions of that people need and want has been reshaped and businesses need to blend into the new, emerging ecosystem so they can properly reposition for sustainability and profitability. The global pandemic has created uncertainties and forced companies to reevaluate and reinvent how business operations units are leveraged. It has redefined how digital platforms can be used in supporting and ensuring continuity in the business through and beyond the crisis.
The state of the economy affects both people and businesses. How you spend your money (or save it) is a personal economic decision. Whether you continue in school and whether you work part-time are also economic decisions. Every business also operates within the economy. Based on their economic expectations, businesses decide what products to produce, how to price them, how many people to employ, how much to pay these employees, how much to expand the business, and so on.
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The crisis has fundamentally changed supply chain management economics and dynamics; we are in uncharted waters. Routes to market are evolving which would inevitably kick some companies off the market and make some others tether on balance. In response to the pandemic, leaders have been mandated to increase their adoption of value chain transformation to help outrun uncertainty. For those who are able to successfully navigate to the other side of this new normal, it becomes imperative to establish strategies for greater resilience and apply lessons learnt to create systems and models that would better prepare companies and stakeholders for further future disruptions.