LCCI decries high interest rate
By Omoh Gabriel, Business Editor
LAGOS — Lagos Chamber of Commerce and Industry, LCCI, yesterday, decried the high level of interest rate of between 16-25 per cent in the country, citing it as a constraint to credit delivery to the economy in the first quarter of 2012.
In the Chamber’s review of the performance of the Nigerian economy in first quarter of 2012, Director General of the body of businessmen in Lagos, Mr Yusuf Mudal, said the body’s banking sector members identified a number of constraints to credit delivery to the economy.
The members, he said, cited tight monetary policy which is affecting liquidity and delivery of credit; Cash Reserve Ratio (CRR) of eight per cent; Liquidity Ratio (LR) of 30 per cent and Monetary Policy Rate (MPR) of 12 per cent as major constraints to liquidity and consequently delivery of affordable credit to the economy.
According to him, “many businesses suffered the increasing difficulty of access to credit and high cost of fund. Rates are between 16-25 per cent. This gives clear advantage to offshore investors; many banks demand high collateral cover, which is sometimes as high as 150per cent; credit conditions by banks are too strict for many SMEs; high cost of government borrowing, as reflected in the yield on treasury bills and Federal Government bonds, worsened the credit crisis through the crowding out effects on the private sector and erosion of liquidity in the banks.
High operating cost in banking operation
“The high operating cost in banking operation in the country is affecting profit margins and that the state of the economy and infrastructure condition had adverse affect on the quality of loan assets just as the Central Bank of Nigeria, CBN, prescribed provisioning level for loans have become too high and is affecting lending by banks.”
Mudal said his members said that loss of deposits to Federal Government Bonds and Treasury Bills because of the relatively better returns and compliance with IFRS prescribes increases in provisioning levels for loans and threshold for collateral cover are reducing liquidity and restraining lending by banks to the economy.
He said the policy implication is that the CBN may have to relax the tight monetary policy stance to encourage banks to boost credit delivery to the economy.
But the CBN said it was pursuing tight monetary policy to curb rising inflation which in the month of April stood at 12.9 per cent.
He said: “In pursuance of its public policy advocacy mandate and the monitoring of the business environment, the Lagos Chamber of Commerce and Industry (LCCI) instituted the periodic evidence-based Business Environment Report.
“The purpose is to periodically assess the investment climate and highlight the implications for government policy. The report is the outcome of feedback from members of the Chamber and the wider business community in Lagos on investment climate issues.
“A couple of the issues cut across all sectors with economy-wide implications and impact; others are sector specific. The report provides a basis for policy reviews and reforms in the context of national economic management. Lagos being the commercial nerve centre of the country, the outcome of this study would, to a large extent, reflect the experience in other parts of the country.
Issues emerged from the study
“Four major issues emerged from the study as cutting across sectors of the economy: Power supply constraint and resultant high energy cost; Security situation and its implications for business confidence and investors’ perception; weak consumer demand reflecting in general declines in sales; fuel subsidy removal, resultant protests, impact on operating costs and disruptions in the economy.
According to the study conducted by the Chamber, “there was an evident deterioration in power supply in the first quarter which took its toll on businesses in the Lagos area and other parts of the country. The partial removal of subsidy made the impact more severe, especially for Small and Medium Enterprises SMEs that use smaller capacity electricity generators. The summary of the implications for business were sharp increase in operating cost due to high cost of diesel and PMS; competitive disadvantage for local producers and manufacturers; erosion of profit margins, sub-optimal capacity utilization, business sustainability challenges.
The security situation in the country the study observed “assumed disturbing dimensions impacting on the investment environment leading to declining investors’ confidence across the broad spectrum of domestic, foreign and prospective investors in the economy; negative impact on image and perception of the country in the global community; escalation of risk of doing business in some parts; relocation of businesses away from the troubled spots in the country; some organisations reviewed their security budgets upwards in the light of developments in the country; and significant setback for the tourism sector in the country”.
The Chamber’s report said that “The partial removal of subsidy on petrol had implications for businesses in the first quarter of 2012. “The January protests paralysed the economy with huge losses to business and the economy; cost of fuelling operational vehicles by firms increased by about 40 per cent. This has implications for profit margin. Other product segments suffered drops in sales as firms and households spend more on fuel. Many organisations were compelled to review transport allowances for their workforce which meant additional operational cost with implications for bottom-line; Petrol retail outlets experienced an average of 20% drop in sales; Inflationary impact across the economy, especially on consumer goods”.
According to Lagos Chamber,”Doing business with government and its agencies could be a real nightmare for the private sector”. The key areas of concern it said are corruption and extortion that is prevalent in government contracts and procurement processes; bureaucracy and the inherent challenges; lack of project continuity; late payment for work done stating that in some cases payments are not even made at all and that document certification and approvals, including the processing of investment incentives are often characterised by extortion.
It said that “The manufacturing sector is one of the most vulnerable in the Nigerian economy because of competitiveness issues. Its contribution to GDP remains very low, at less than 5 per cent. The usual challenges of the sector persisted: High energy cost remain top on the list of the challenges facing manufacturing; Market access is now an even bigger challenge for most manufacturing firms. The influx of Asian goods into the Nigerian market poses a major risk to the survival of many manufacturing enterprises; Rampant cases of faking, counterfeiting, and dumping of substandard products. Credit access and cost remains an issue with many investors in the sector. Fuel subsidy removal increased operating cost”.
It said that its members in the agricultural sector commended the passion and drive of the current Minister of Agriculture. However, there are concerns in Land acquisition and perfection of land titles; Access to credit; Weak agricultural insurance scheme. Access to incentives is difficult and sometimes fraught with corruption.
It also said that Operators in the freight forwarding business identified Rampant and Arbitrary Valuation of Cargo by the Nigeria Customs Service, sometimes disregarding all supporting documents. This result in indiscriminate issuance of debit notes to importers and extortion. Excessive focus of the customs on revenue generation to the detriment of trade facilitation; many terminal operators have capacity problems leading to non-provision of adequate plants at the port terminals in Lagos. Most often, importers make private arrangements to position their cargo for examination and loading; Collection of Wharf Landing fees on the roads create traffic problem around the ports; High demurrage charges by shipping companies Access to the ports could be a nightmare because of the traffic situation on the Oshodi-Apapa Expressway, especially the indiscriminate parking of trucks on the highway.
It said that Terminal operators should be closely monitored to ensure delivery on their mandates as concessionaires. The BPE has a vital responsibility in this regard; Exercise of discretionary powers by valuation officers of the Customs should be checked. Role of Nigerian Customs Service as a facilitator of trade should be duly recognised; Area Controllers of Custom should be adequately empowered to exercise full authority on activities in their command.
It further said though an economy needs a measure of regulation for good performance, too many regulatory agencies could be counterproductive.
The key issues identified by private sector players in the economy were that too many regulatory agencies in the economy, some with overlapping functions; The agencies are often more interested in revenue generation than on the real regulatory mandate; Charges of many of the agencies are prohibitive; Government should adequately fund the agencies to reduce the burden on the private sector.
Businesses should not be saddled with the responsibility of funding these agencies.