MUDA YUSUF: US-China Trade War Has Numerous Implications on Nigeria’s Economy

Muda Yusuf, who is the Director General of the Lagos Chamber of Commerce and Industry (LCCI), is a seasoned economist and respected voice among top operators in Nigeria’s economy. In this interview with Olaseni Durojaiye, Yusuf bares his mind on local and international economic issues, particularly the trade war between the United States and China, the recent diplomatic shuttle to the country from European countries, economic development and funding of critical sectors of the economy. Excerpts

How do you see the trade crisis between the United States of America and China impact African  and more importantly on Nigeria’s economy?

The trade war between United States of America and the Peoples Republic of China has numerous implications for the Nigerian economy, some negative and others positive. There are three major impact points: Impact on the global economy; tariffs on Chinese exports to the United States and then impact of Foreign Direct Investments (FDIs) China and United States are the two largest economies in the world; therefore, a trade war between these two economies is a war between two global economic giants, which is why such a war would impact the global economy negatively.  There is a relationship between the tempo

of global trade and global economic growth; when there is a slowdown in trade, global economic growth will be negatively impacted.  When this happens, other major economic variables will be affected. A slowdown in the global economy could result in lower demand for commodities which may impact oil price, foreign exchange earnings and foreign reserves.

The second likely impact is positive. The tariffs on Chinese products imported to the United States will create supply gaps in the US market. Chinese imports will become more expensive and this will make imports from other parts of the world into the US competitive vis-a-vis import from China. Export from countries not affected by the US Tariff hike will therefore become more competitive in the United States.

Within the context of the African Growth and Opportunities Act, this situation presents new opportunities for Nigerian export in the United States market. It remains for us to as a country develop the capacity to take advantage of this opportunity.

The third impact point is with respect to Foreign Direct Investments (FDIs) from China.  The current scenario would trigger migration of investment from China to countries not affected by the US import tariff hike. Currently, China is a major hub for export to the United States of America. With the trade war, many investors in China, whose main export market is United States may begin to seek new locations for their investments. This offers new opportunities for such countries to offer alternative destinations for such investors.

However, our ability to take this advantage depends on the quality of our investment environment.

What is your take on the recent CBN funding facility for the real sector? How do you think it can be well utilised by the sector?

Times like these calls for prioritisation in favour of stimulation of investment and growth in the real sector and other sectors of the economy.  This means prioritising for job creation and poverty reduction, which are cardinal programs of the present administration.

Funding is critical to the realisation of these objectives.  The logic is that low interest rate will stimulate investment, impact positively on growth, create more jobs, increase income, and boost output.

The creation of a single digit interest rate window through the issuance of Commercial Papers by the large corporates, especially in the real sector, is laudable.  It is gratifying that this window also offers long term facility of up to seven years tenure.  This is salutary, and we commend the CBN for the move.  We also welcome the decision to introduce a “differentiated dynamic cash reserves requirements [CRR] regime to direct cheap long-term bank credit at 9 per cent with a minimum tenure of seven years and two years moratorium to employment elastic sectors of the economy.”

The implication of this is that banks that lend to sectors that readily create jobs will get a corresponding CRR concession. This is a welcome development and we applaud it. We laud this move as it is an innovative way of supporting growth in the economy, while minimising risk to stability of the macro economic conditions.

However, there is a need for the apex bank to have a broader view of the economy as sectors other than the real sector have tremendous impact on the economy.  They deserve as much support as the real sector.  Thus, we propose an economy wide view.

Can you expatiate on this?

Take the services sector for example. The service sector contributes significantly to the Gross Domestic Product of the country which makes it a key sector too, and has the capacity to contribute more if the desired support is provided.  The sector complements productivity and performance in the real sector.  For instance, logistics, transportation, ICT construction, distributive trade, education, health, and energy sectors are critical to the value chain development of manufacturing, agriculture, and solid minerals.  There should be a holistic view of the economy.  The service sector currently accounts for 55 per cent of the nation’s GDP, over 60 per cent of revenue and 70 per cent of employment.

There is therefore a need for policy makers to change the perception of sectors outside of the manufacturing and agriculture. They require no less support as has been shown the real sector.

There has been a high level diplomatic shuttle among a couple of countries from western Europe, the last was the visit of the British Prime Minister Theresa May to the country in what ways is the Lagos Chamber of Commerce and Industry exploring investment opportunities inherent in these visits?

The spate of diplomatic shuttle, especially from the western world is an indication of the perception of opportunities in Africa, into which the western world is seeking to tap. It is an opportunity for a renewal of bilateral ties between Nigeria and the visiting European countries. The post Brexit challenges is a major driver for new partnerships by the United Kingdom. Besides, the historical ties between Nigeria and UK naturally present opportunities for a robust trade and economic ties between Nigeria and UK.

Similarly, the current global trade war and attendant disruption in the global economy is also a compelling factor for countries to develop new partnerships and to consolidate on the existing ones. The truth is that, opportunities are diminishing in the mature economies, while the potential in Africa remains largely untapped.

How has the LCCI been able to facilitate the enactment of bills that could bills that could foster the growth of commerce and industry in the country?

The National Assembly has been supportive in passing bills that could enhance the investment environment. The assembly held series of engagements with the Organised Private Sector to identify regulations and laws inhibiting business. The outcome of these consultations was the passing of the CAMA Amendment Bill this year.

However, the frequent summons of the private sector chieftains to public hearings by the National Assembly was a major distraction to the business community. The passage of the Petroleum Industry Bill was another commendable activity by the Assembly. The LCCI, working with other OPS bodies, made this possible.

Has there been any improvement in Nigeria’s the business climate in the last three years?

The business climate has witnessed some improvements in the last few years, especially with respect to processes and procedures of some agencies of government. We have observed improvements in immigration processes and processes for business registration. Online processes have been adopted by some of these institutions.

The Presidential Enabling Business Environment Council (PEBEC) has been driving series of reforms to fix investment climate issues in the economy. We have seen some impact with NAFDAC and SON. However, challenges of infrastructure are still very profound. Energy cost and logistics costs are still very high and affecting the cost of doing business across all sectors. The Apapa gridlock remains a major nightmare for business if you take into cognisance the importance of the ports in Apapa and the huge revenue potential in the maritime industry.

Nigeria has recorded some improvements in the ease of doing business index. How is this positively impacting the nation’s economy?

It was commendable that Nigeria moved up by 24 steps from 169 to 145 on the World Bank ranking of Ease of Doing Business a year ago. These improvements in ranking had a positive impact on the perception of the country and economy by investors, especially foreign investors.

Some aspects of the investments climate, especially in the area of processes and procedures recorded some improvements. There were also improvements in some efforts to improve credit delivery through the credit registry and the use of mobile assets as collateral for loans by the Small Medium Enterprises (SMEs).

However, the fundamental issues of infrastructure, security situation in some parts of the country and the cost of credit remain major constraints to business. The methodology used by the World Bank for the ranking was also an issue. Some critical elements of the business environment were not captured in the World Bank template, these include infrastructure, security, conditions of reports and corruption. The World Bank template is generic and not designed to take account of the peculiarities of the Nigerian conditions. On our part, the Lagos Chamber of Commerce and Industry has drawn the attention of the World Bank to this shortcoming.

What is your assessment of the Central Bank of Nigeria on the Investors and Exporters (I&E) foreign exchange window?

The I and E window was an excellent initiative by the Central Bank of Nigeria to create a market environment for foreign exchange transactions. The rates are market driven and the window inspires a great deal of confidence. 

It was a major stabilizing factor in the Nigeria foreign exchange market. It complimented the periodic intervention model of the Central Bank of Nigeria in the foreign exchange market. It has also had a remarkable impact of foreign exchange in flows economy.

What policy measures that could help grow the economy would the LCCI suggest to the managers of the nation’s economy given the opportunity?

In order to reverse the declining trend in GDP Growth, the chamber recommends as follows: The need to sustain the momentum of ease of doing business programme of the government in order to bring down the cost of operations of investors in the economy. 

The state of infrastructure has continued to take a toll on investment across all sectors. However, the impact was more pronounced on manufacturing and

Agriculture Sector. Governments at all levels should therefore redouble their efforts to improve infrastructure. This will also reduce risk of investment in these key sectors.

There is optimism in some quarters that the new CBN policy of single-digit lending will significantly help the economy; do you share this optimism as well?

Again talking about funding, the chamber notes the recent move of the CBN to improve lending to the real sector through the differentiated CRR window. However, we recommend that the differentiated CRR window should be extended to other sectors of the economy including the service sector. We believe that the approach to solving the problem of the economy should be holistic.

It is imperative to ensure an investment friendly tax policy. In same manner we note that the regulatory environment for business should be aligned to the Ease of Doing Business agenda of the government. 

Again, the state of the Apapa gridlock is not business-friendly and we urge that the Apapa gridlock should be addressed as a matter of urgency and lastly, a call for a fast track the reforms in the oil and gas sector in order to unlock the huge and amazing potential in the sector.

A section of the chamber’s members sometime ago were advocating a review of the nation’s auto policy, has their request been met?

The Automotive policy is a legacy policy passed to the present administration by the Jonathan administration.  The policy has put the cost of vehicles beyond reach of most citizens and even corporate bodies.  It has an economy wide negative impact with far reaching consequences.  There is a need to act quickly to reverse the unsavory situation. The automobile sector was hit by the double shock of over 100 percent currency depreciation and a hike in tariff from 22 per cent to 70 per cent, in the case of new cars, whereas there is very little that can be done about the currency depreciation, a great deal can be done about the auto policy, which is a creation of government.

The auto policy was an import substitution strategy to reduce importation of vehicles and boost the capacity of domestic vehicle assembly plants. But the vehicle assemblers were as dependent on imports as the importers of vehicles. This is not in consonance with the objective of import substitution strategy which thrives better in the context of high domestic value addition.  It is in this setting that the economy could benefit from the inherent values of import substitution which includes backward integration, multiplier effects, conservation of foreign exchange, job creation and reduction of import bills.

But five years into the implementation of the auto policy not much progress has been made, even though over 40 licenses have been issued for vehicle assembly plants. The affordable vehicles promised at the inception of the policy are yet to be seen. If anything, the economy had suffered incalculable consequences and shocks as the cost of vehicles reached levels that were unprecedented in the history of the country. Virtually all aspects of our economic and social lives had been adversely impacted by the situation.  This is because over 90% of the country’s freight and human movements are done by road, which implies heavy dependence on cars, commercial buses and trucks.

Manufacturers and other real sector investors suffer from high cost of delivery vehicles, sharp increases in haulage cost because of the high cost of trucks; school buses have become unaffordable by many institutions; many hospitals cannot afford new ambulances; many corporate organizations have drastically cut down on their fleet etc.

Car ownership is now completely beyond the majority of the middle class.  These unintended consequences and collateral effects on the economy and welfare of citizens are immeasurable.

We have witnessed an increase in the price of vehicles by between 100 to 400 per cent.  A new car of 1.8-litre engine capacity now costs as high as N18 million; a new car of 2-litre engine capacity now cost as high as N20 million; a 3-litre new Japanese car costs as high as N30 million; a 30-seater bus cost about N45 million, an18-seater bus cost N29 million.  Not many investors and the citizens have the capacity to

absorb these outrageous prices.  Even high end corporate organisations are now buying used vehicles for their organisations.  The implication of the scenario for operational costs of organisations is worrisome.

This scenario is most inappropriate for an economy that is heavily dependent on road transportation. Other implications of the Auto Policy for the economy include the following.

You mentioned earlier that the impact of the policy transcends the automobile sector, could you please expatiate?

Impact on the cost of goods and services as cost of vehicle procurement remains high largely because of the high import tariff (duty and levy) and this has caused an increase in smuggling resulting from the high import duty and levy as well as the huge duty

differential with our neighboring countries. It has also affected the maritime industry. Nigeria continues to lose maritime businesses to neighboring countries as more vehicle imports meant for Nigeria are diverted to neighboring countries, this is detrimental to most investors in the automobile sector in Nigeria as high cost of vehicles creates affordability problems, low sales and massive erosion of profit margins, loss of jobs in the nations maritime and allied sector following the sharp drop in vehicle imports and huge loss of customs revenue as vehicle imports drop and smuggling increases.

The truth is it created opportunities for corruption and extortion by customs operatives because of compliance issues and the enormous incentives to smuggle. The challenge of high cost of transportation which affects all sectors of the economy is inclusive and erosion of political capital of the ruling party and present government.

From your perspective, what is the way forward?

The auto policy should be immediately reviewed in the light of the downsides of the policy, some of which I highlighted earlier. Import levy of 35 per cent on new vehicles should be scrapped, leaving only the import duty of 35 per cent.  Import duty on commercial vehicles should be reviewed downwards to 20 per cent. Import duty on used cars should be reviewed to 20 per cent. CKD and SKD should all attract zero duty.

Government should give further tax concessions and waivers to the assembly plants in the spirit of the auto policy, other incentives for assembly plants in respect of machineries for assembly plants and tyre industries should be retained as contained in the Automotive policy.

However, similar incentives should have been extended to the local production of vehicle spare parts. Of course you’re aware that we have always advocated patronage of locally assembled vehicles by the government and its agencies, government needs to vigorously encourage this and even enforce it.

If these recommendations are adopted, there would be a great relief to the private sector from the logistics perspective; more jobs will be restored in the automobile business sector; maritime sector activities will also receive a boost; car assembly plant will be better off with a zero percent duty on SKD; the welfare effect on citizens will be positive. 

Even the government will benefit in terms of political capital as the middle class will have better access to vehicle ownership; the transportation sector will benefit tremendously and smuggling of vehicles will reduce drastically while Customs revenue from vehicle imports will improve considerably.