Chamber hints of rising inflationary rate in 2021

Yusuf: LCCI DG

The Lagos Chamber of Commerce and Industry (LCCI) says inflation rate will rise in 2021.

The chamber made the assertion in its Economic Review for 2020 and Outlook for 2021 made available to newsmen on Sunday in Lagos.

Its Director-General, Dr Muda Yusuf, attributed the projected inflation outlook for the incoming year to the combination of food supply shocks, heightened insecurity in major food-producing states, foreign exchange policies, illiquidity and higher energy costs.

“We, however, believe a broad-based harmonisation of fiscal and monetary policies towards addressing the identified structural constraints will significantly help to moderate inflationary pressure in  the medium term,’’ he stated.

On sectorial review and outlook, the LCCI’s D-G said performance was largely weak across sectors in the third quarter of 2020 because of lingering effects of COVID-19 disruptions.

Yusuf stated that the trend would likely persist into the last quarter of 2020 and the first quarter of 2021 as the economy gradually recovers from the recession.

He noted that a resurgence of COVID-19 pandemic would cause another disruption in activities in the oil and non-oil sectors.

“We expect Information, Communication Technology, financial institutions, and agriculture to drive growth in the non-oil sector in the short-term while the country’s commitment to Organisation of Petroleum Exporting Countries (OPEC) agreement is expected to dampen recovery prospects of the oil sector,’’ he stated.

Sector Q1-2020 Q2-2020 Q3-2020
Oil Sector 5.06% -6.63% -13.89%
Non-Oil Sector 1.55% -6.05% -2.51%
Agriculture 2.20% 1.58% 1.39%
Manufacturing 0.43% -8.78% -1.51%
Trade -2.82% -16.59% -12.12%
ICT 9.71% 18.10% 14.56%
Financial & Insurance 20.79% 18.49% 3.21%
Construction 1.69% -31.77% -2.84%
Arts, Entertainment & Recreation 1.53% -8.93% -4.67%
Real Estate -4.75% -21.99% -13.4%
Transportation & Storage 2.82% -49.23% -3.45%

Source: NBS, LCCI Research

On Agriculture, the LCCI’s D-G said he foresaw the CBN sustaining its intervention in the sector in year 2021 in a bid to boost domestic food production and minimise food supply gap.

“While the ban on importation of rice, poultry and other agricultural commodities still subsists amid border reopening, there is risk of resurgence of smuggling of agricultural products into the country considering the porous nature of Nigeria’s land borders.

“This, combined with the commencement of Africa Continental Free Trade Area (AfCFTA), could see Nigeria being a destination for imported food products in the absence of adequate border monitoring measures.

“Additionally, heightened security concerns around the country, especially in the northern part and resurgence in herder-farmer conflict in the Middle Belt, the southwest and southeast, if unaddressed, will hamper local food production in the near term.

“Nonetheless, we expect a modest growth performance in year 2021,’’ he said.

As outlook for the manufacturing sector, Yusuf said the reopening of the land borders should provide succour to the sector even as the kick-off of AfCFTA serves as an avenue for manufacturers to penetrate new African markets.

He noted that critical challenges currently beguiling the sector alongside the new competitiveness pressure foisted by the AfCFTA might dampen the recovery prospects of the sector in year 2021.

“We expect the CBN to sustain its intervention efforts in the manufacturing sector as part of measures to boost economic recovery.

“We see the CBN maintaining policies that support credit extension to the real economy.

“The low interest environment in the money market favours big manufacturing players in terms of raising cheap capital, but the business environment will remain challenging for manufacturing SMEs.

“In our view, credit flows to the manufacturing sector will fail to achieve desired outcomes without putting in place measures to address structural, bottlenecks in the ports and customs processes and other policy challenges to productivity.

“Thus, we see growth of the manufacturing sector being subdued in the near to medium term,’’ he said.

Yusuf said the banking industry was expected to sustain positive growth trajectory in Q4-2020 amid the numerous regulatory limitations.

“We expect CBN to maintain its regulatory surveillance in the industry in ensuring the industry is financially sound amid evolving covid-19 disruptions.

“Resurgence of COVID-19 pandemic, oil price volatility sluggish economic recovery and lingering external pressure are major downside risks to the growth prospects of the banking sector in year 2021.

“Loan-to-Deposit-Ratio policies drove the impressive performance in Q1-2020 by 24 per cent and Q2-2020 by 28.41 per cent.

“Momentum eased in Q3-2020 (6.8 per cent) as banks became more reluctant in providing credit to business given weak macroeconomic conditions.

“Nevertheless, banking industry remained financially sound with Capital Adequacy, Non-Performing Loan Ratio and Liquidity Ratio at 15.5 per cent, 5.73 per cent and 35.6 per cent as of end-October 2020, respectively,’’ he said.

The LCCI’s D-G said the oil sector would further contract in Q4-2020 in the light of lower production in compliance to OPEC+ agreement.

“We note OPEC+ has agreed to ease supply cut by 0.5 million barrels per day starting from Jan. 1, 2021 due to sluggish recovery in fuel demand, much lower than 2.0 million barrels per day earlier planned.

“Crude oil production will likely be lower in year 2021 as OPEC+ sustains efforts to prevent oil glut.

“We project that OPEC+ will be cautious in relaxing output reduction given the uncertainties around COVID-19 pandemic and global oil demand.

“Thus, we expect oil and gas sector growth to be subdued in year 2021 on the continued implementation of OPEC+ Declaration of Cooperation and weak oil price outlook.

“Also, increasing preference for renewable energy globally will put downward pressure on crude oil demand and prices. We are not optimistic of a significant growth performance in oil industry in year 2021,’’ he said.

He said that considering the dim outlook for revenue in the face of weak economic fundamentals, government would most likely underperform its revenue projections with attendant impact on fiscal deficit and debt portfolio.

“Budget deficit for year 2021 is expected to remain elevated above the projected N5.2 trillion and this poses a risk to Nigeria’s fiscal sustainability.

“We believe the Federal Government will be inclined towards securing concessionary borrowings with low interest rate and long maturity profile in the global market, rather than raising Eurobonds, especially now that the country is faced with foreign exchange scarcity,’’ he said.