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Economic diversification and self-reliance still a mirage

By Babajide Komolafe, Peter Egwuatu, Ifeayi Ugwuadu, Franklin Alli & Yinka Kolawole

The global economic recession, which started as global financial crisis reveals clearly  how underdeveloped and vulnerable is the Nigeria economy even after 49 years of independence.

Successive administrations have pursued the objectives of economic diversification and self reliance. The economy is however still a  mono-product. Crude oil exports accounts for 95 per cent of foreign exchange earnings and 80 per cent of budgetary revenue. Also, more than 50 per cent of industrial raw materials and significant amount of consumer goods are imported.

Consequently, the Nigerian economy continues to be vulnerability to development in the global economy and hence the severe impact of the recent global economic recession on every facet of the economy in the last 12 months. It impacted government revenues, foreign reserves,  banking sector, industries, capital market, insurance and mortgage sector.

Government Revenue
The global financial crises occasioned credit freeze which led to declining consumer and industrial demand in the developed countries. As a result demand for crude oil as well as crude oil price fell drastically. From $138.74 per barrel as at June 30th 2008 average price of Nigeria’s crude-Bonny light dropped to $61.14 per barrels by June 30th 2009.

As a result total federal collected revenue fell to N1.04 trillion from N1.88 trillion during the same period. Also instead of net foreign exchange inflow of $0.9 billion recorded by the Central Bank of Nigeria (CBN) as at June 30th 2008, the nation recorded net foreign exchange outflow of $3.69 billion as at June 30th 2009. Also reflecting the impact of the global economic recession the nation’s external reserve dropped from a high of $62 in the third quarter of 2008, to about $42 billion in first quarter of 2009.

Capital market
The severe impact of the recession is more reflected in the nation’s capital market with tales of woes by investors who watched helplessly as the value of their investments declined by more than 70 per cent from 2008 to 2009. With the financial crisis bitting harder and credit becoming scarce, foreign investors sold off their investment  en-masse on the stock exchange and this precipitated a rapid decline in share prices and market capitalisation.

Consequently, the The Nigerian Stock Exchange (NSE) All-Share Index (ASI) and market capitalisation fell from  66,371 points and N12.64 trillion on march 5th 2008 2008, to  31,182.45 points and N6.957 trillion as at December 31, 2008.

As at Tuesday September 29, 2009,  the All share Index had dropped further to  21,969 points while market capitalisation is at N5.108 trillion.

Banking Sector
But for the sharp decline in the crude oil price and the stock exchange, the Nigerian banking system would not have suffered much from the global economic recession. The first impact of the crisis on the sector was the withdrawal or reduction of credit lines to Nigerian banks by foreign banks thus resulting to scarcity of funds in the industry.

The greatest impact however came indirectly through loans granted by banks to oil sector companies and to investors for share purchase on the stock exchange. As crude oil prices decline oil companies incurred heavy losses and could not repay the loan borrowed from banks. Also as share prices fell on the stock exchange investors suffered heavy capital loss which eroded the value of investors and hence they could not repay the share purchase loan. This two factors led to severe scarcity of funds in the banking industry and huge non-performing loans.

The banking industry is believed to be  exposed to both sectors to the tune of N1.5 trillion. This is confirmed by the recent disclosure by the CBN that the five banks, whose chief executives were sacked had N941.3 billion exposure to the stock exchange, and oil and gas sector.

To address the controversy about the health of banks as a result non-performing loans occasioned by exposure to the two sectors, the CBN embarked on a audit of the 24 banks which had so far led to the sacking of five banks’ chief executives and the executive directors. Also the apex bank directed banks to make full provision of all non-performing loans. The result is sharp decline in the profit declared by banks and radical reduction in dividend to shareholders.

Insurance Sector
The global financial crisis emerged the single most impacting incident in worlds’ economies. Its effects will continue to determine how insurance functions in the years ahead. For instance, a significant factor in pricing risks is investment income. This critical item has been affected, thus leaving insurers with a situation where prices have to be firmed up.

The net effect is that as companies writedown losses of stock of  market operations, they will seek to firm up prices and therefore, increase outlay on insurance. Economies will have to adjust to possible increase in insurance expenditure resulting from increased vulnerability.

Since 1999, insurance gross premium income has grown over 500%. Bench-marking growth against 1999 is the best gauge as previous years showed sluggish and almost total disconnect of the sub-sector with the nation’s economy. From a little above N21 billion in 1999, industry output reached N164.5 billion in 2008. Insurance reforms begun in 2005 with a view to strengthening the sector succeeded only partially.

The recapitalisation ended in controversy with funds locked up at the Central Bank of Nigeria. As soon as the funds were ordered to be released, companies sought quick recovery of lost turnaround time through investment in the capital market. But this was soon hit by the near collapse of the market. Before the shock waves of the capital market, insurance stocks witnessed upsurge in investor confidence. Real and speculative potentials helped buoy the market. Early traders in insurance stocks made millions before the crash.

The systemic neglect of insurance for so many years stems from absence of policy direction at governmental level and lack muscle by players to push through their views in the public arena.

The Nigerian insurance market has been truly expanding in the last decade. Compulsory motor insurance has continued to generate the highest revenue for the market.  As such, three sets of compulsory insurance were pushed through in the Insurance Act 2003 to catalyse the growth of the market.

Viewed from the high stakes in the Nigerian economy and its less than 5% contribution to GDP, the insurance sector can safely be described as minnows.

Although the banking sub-sector had come under heavy pressure recently, its exponential growth in the past five years is incomparable to insurance. With a population of over 140 million people, if only 10% of the population has one form of cover priced at an average N500 per annum, this will translate to a healthy income of N7 billion on personal lines insurance. The mathematics could be upped and the figures will be really fantastic and easily achievable.

Total assets of insurance companies have grown dramatically over the past 15 years from a paltry N10 billion in 1993 to over N300 billion as at the end of 2008.  This is tremendous but pales against banking sector growth.

The real growth phase of the industry will come when market capacity is substantially grown. New products, information technology, a sound human resource base will be driving the new era. Insurance awareness, tight regulation and supervision and corporate governance will form the frame work for the expected growth.

Industrial Sector

At 49, Nigeria is fast declining from an industrialising country to a trading economy.
The devastating impact of the global financial crisis which hit the country in the second half of 2008, through the price of crude oil, which accounts for over 80 per cent of our foreign exchange earnings, ushered in spates of declining industrial activities. From food, beverages and tobacco sector to the textile, iron & steel, electrical & electronics, motor vehicles and assembly sector, etc., the story is the same – there is massive closure of industries and influx of manufactured goods from China, Europe Indonesia, and else economies into the country.

This trend, sector operators believe, means that the country is fast derailing from being an industrialising to being a trading nation.

According to the Manufacturers Association of Nigeria, between 2000 and 2008, 820 manufacturing companies have closed down.

According to MAN President, Alhaji Bashir Borodo, the reasons for the growing closure pattern in our industrial landscape, is tough operating environment that is characterised by unstable electricity, high interest and exchange rates, smuggling, high cost of Automotive Gas Oil (AGO), and Low Pour Fuel Oil (LPFO), to power their generators or boilers including multiple taxation and levies being slammed upon the manufacturers by the three tiers of governments.

Asides these problems, Borodo, observed that since the return of democracy in 1999, the country has witnessed the emergence of political entrepreneurs and predators who have acquired political influence to direct and control economic policy.

“In the process, they became predators, destroying the incipient industrial sector.  They are not pro-industry and have succeeded in destroying major industrial sub-sectors, particularly the textiles, tyres, paper and vegetable oil. There next target is the cement industry.

Their tactics are to influence government policy to allow unrestricted imports through waivers. Alternatively, they create strong cartels for smuggling under the watchful eyes of government agencies,” he said.


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