GLOBAL financial services giant KPMG has revealed that there are seven fault lines which currently run through the Nigerian economy that may distort the growth distort growth over the next decade.
Speaking yesterday at the Nigerian-South Africa Chamber of commerce council’s breakfast forum in Lagos, Olusegun Zaccheaus, the associate director, strategy and economics, management consulting, KPMG Nigeria, explained that the economy failed to record any strong meaningful growth in the just-concluded decade due to several structural issues. He added that the seven fault lines in the economy include external dependence, fiscal unsustainability, unorthodox monetary policy strategy, volatility uncertainty complexity and ambiguity (Vuca) policy environment, low productivity, low consumption power and a weak social-economic link.
According to KPMG, Nigeria depends on external sources for fiscal revenue, foreign exchange inflows, deficit funding and capital flows. Specifically, KMPG emphasised that there is an over-reliance of the Nigerian economy on external borrowing, oil price and foreign capital flows, hence, any commodity shock that comes from the global economy will have severe implications on the country.
While providing further insights on the economy, Mr Zaccheaus revealed that Nigeria’s debt profile has grown significantly compared with the fluctuating trend witnessed in revenue influx over the past years. KPMG noted that with the overly ambitious revenue target in the 2020 budget, Nigeria’s debt stock is expected to hit a new high, further dragging the country into a lingering debt problem.
Although, KPMG acknowledged that Nigeria has one of the lowest debt-to-gross domestic product (GDP) ratios in Africa, the country has one of the lowest revenue-to-GDP ratios among Africa’s largest economies. Analysing Nigeria’s monetary policy environments, Mr Zaccheaus stated that the Central Bank of Nigeria (CBN) has achieved some level of progress from its policies including stabilizing the foreign exchange market, improving liquidity and improved foreign portfolio investment.
According to KPMG, Nigeria’s exchange rate has been stable since 2017 and this is traceable to the CBN strategy to defend the naira at the expense of the country’s reserves. KPMG disclosed that the CBN intervened in the foreign exchange market in 2019 by injecting $39bn into various windows to keep the naira stable at the prevailing market rates.
Despite this, key underlying issues still exist. Some of the issues highlighted by KPMG include the foreign exchange supply gap, continued depletion in external reserves, expensive open market operation instruments and overvaluation of the naira.
On the issue of increase in loan-to-deposit ratio to 65%, KPMG noted that the policy initiative indeed raised credit to the private sector by N2trn at the end of 2019 but Nigeria still ranks the bottom of the credit pyramid when compared with countries like China, India, Brazil, Indonesia and South Africa. While putting the country’s policy environment in perspective, KPMG described it as volatile, uncertain, complex and ambiguous.
Analyzing the uncertain landscape of the economy, KPMG stated that the uncertainty which surrounds the Nigerian economy limits decision-making capabilities. Some examples listed include the sudden border closure and the ban of motorcycle taxis known as Okada in some states.
On the other hand, the complex environment reflects in multiple taxation, stamp duty, increase in electricity tariffs and so on. This ambiguous landscape is characterised by the exchange rate systems which has made the economy unattractive for foreign direct investment.
Mr Zaccheaus added that low productivity is a critical problem limiting economic potential of individuals and firms in Nigeria. He disclosed that Nigeria’s productivity level has been trending below the country’s GDP, as labour productivity continues to slope to the negative region.
Lastly, KPMG stated that the social wheel of pressure is spinning, as 31% of the youth-led labour force is unemployed, meaning the key engine for Nigeria’s growth remains grossly underutilised.
It also noted that corruption remains endemic, the healthcare sector is at a low ebb, the number of out-of-school children remain high amidst insecurity, there are mortality rate concerns and all this will result in more skilled youths migrating to other countries.
While concluding, KPMG stated that for corporates to guide against the fault lines in Nigeria, there must be headroom for shocks. Other strategies listed for corporates include hedging, strategic agility, regulatory compliance, creating alternative scenarios, investing for upsides and achieving minimum scale for survival in the industry.