A robust manufacturing sector is fundamental to the diversification of the economy. But the sector, which is credited with the greatest capacity to create jobs, generate wealth and engender sustainable growth and revenue expansion, is at the crossroads. Fiscal and monetary policies and lack of infrastructure are taking a huge toll on manufacturing, with the fear that more companies may close shop, if steps are not urgently taken to stem the tide. Assistant Editor CHIKODI OKEREOCHA reports.
Despite their resolve to survive, manufacturers face bleak prospects. The challenging fiscal and monetary policy environment and lack of supportive infrastructure have continued to put tremendous pressure on businesses, resulting in declining productivity and competitiveness.
For instance, because of lack of infrastructure, particularly power, manufacturers spend an estimated N500 billion yearly to run and maintain their power plants, according to the Chairman, Economic Policy Committee (EPC) of Manufacturers Association of Nigeria (MAN), Reginald Ike Odiah, an engineer.
Odiah, who is Managing Director/Chief Executive Officer, Bennett Industries Limited, said the huge cost of providing alternative electricity is responsible for high production cost. He said it is also responsible for the low contribution by the real sector, especially manufacturing to the Gross Domestic Product (GDP).
For instance, while Nigeria’s real sector contribution to GDP stands at 9.5 per cent, those of United States of America (US) and China stand at 35.6 per cent and 49.5 per cent. “Manufacturing cost in Nigeria is twice that of Ghana, four times that of South Africa and Europe, and nine times that of China and Malaysia,” the industrialist said.
Odiah, who spoke at a forum organised by MAN in Lagos, also said the high cost of production is also the reason local and foreign investors lost interest in investing in the country, closure of factories and migration of the few surviving ones to greener pastures. He said this has resulted in job losses, with attendant insecurity and rising crimes.
Also, because of rising energy cost, most manufacturing firms in Nigeria are contending with falling profit margin, which remains a major threat to business sustainability and global competitiveness.
The President of MAN, Dr. Frank Jacobs, lamented that manufacturers are paying for electricity not consumed.
“In spite of the poor energy situation in the country, NERC has maintained increased electricity charges not considering its implication on the economy, especially the productive sector,” Jacobs said, adding that in spite of the high tariff from the Nigeria Electricity Regulatory Commission (NERC), manufacturers spend much on alternative energy sources for production.
The implication of this development, he said, was increase in the average cost of production in the sector, which lowers the competitiveness of locally produced goods against imported close substitutes. He urged the new government to streamline electricity tariff to reflect the actual consumption by the industries instead of the current use of estimated bills.
While the nation’s infrastructure deficiency, particularly electricity supply, continues to hurt manufacturers, sometimes forcing some of them to close shop, the prevailing macro-economic indicators also point to a sector irretrievably headed for collapse if nothing is done to stem the tide.
For instance, inflation rate is hovering around 20 per cent. Cost of funds is high, as much as 20 per cent, while the exchange rate remains unstable.Unemployment is worsening and economic growth rate is declining. And the crippling effects of these negative indicators have pushed not a few manufacturers to the panic mode.
“Cost of funding is a big issue. For most of them or generally in the economy, cost of funding is well over 20 per cent. And for the real sector operators, it is difficult to sustain a business at that level with that kind of corporate funding, especially when you realise again that you are facing competition from products that are coming from Asia that are very cheap,” says Director-General of Lagos Chambers of Commerce and Industry (LCCI), Mr. Muda Yusuf.
He blamed this for the high mortality rate of manufacturing firms especially at the medium and the small scale level. According to him, it is also responsible for why return on manufacturers’ investment is slow, while the turn-around is fewer.
An economist and industrialist Mr. Henry Boyo painted a disturbing picture of the manufacturing sector caused by the crippling effects of the nation’s fiscal and monetary policy framework. He warned: “Manufacturers are at the crossroads, where we may lose some of our members. We may lose 50 per cent of our members, if nothing is done fast to address the current monetary policy framework.”
While pointing out, for instance, that low rate of inflation, low cost of funds, reasonable exchange rate, and adequate power supply are four critical variables necessary for manufacturers’ survival, Boyo was emphasised that “inflation, which is hovering around 20 per cent, high cost of power and an exchange rate that is unreasonably unstable is hurting manufacturers”.
He was guest speaker at the “Business Luncheon for Managing Directors/CEOs” organised by the Ikeja branch of MAN in Lagos, last week. This year’s edition theme: “Manufacturing in a depressed economy. The way forward,” x-rayed the challenges facing manufacturers, particularly under the Foreign Exchange (forex) crisis and proffer solutions.
At the event, Boyo predicted that without a robust monetary policy to address the challenge of excess liquidity in the system, which is the main driver of the afore-mentioned four critical variables, the naira may fall to N500 to a dollar before the end of the year.
He explained that the unstable exchange rate, hike in interest rates, and inflationary pressure are a direct outcome of excess liquidity in the system and that the best way to address the problem is to liberalise the dollar.
Boyo said companies and government agencies whose earnings are in dollar should be issued with dollar certificates with which to approach banks.
He also wants their dollar earnings exchanged by banks at prevailing rate or at market determined rate, instead of the CBN hijacking the dollar earnings and printing naira equivalent, an approach he said constantly results in liquidity buildup.
“When this is done, the problem of excess liquidity would have been addressed to warrant decline in inflation rate. With inflation rate trending low, interest rate will fall sustainably. And external reserves could be conserved and built up sustainably. There will be no need for devaluation of the naira,” Boyo explained.
The industrialist insisted that the crisis of excess liquidity has done incalculable damage to the economy, because there is a strong nexus between the crisis of liquidity, rising inflation, exchange rate depreciation, weakening purchasing power and worsening poverty. He said CBN must stop its obnoxious payment policy if manufacturers must breathe a sigh of relief.
Also lamenting the negative impacts of CBN’s monetary policies on the manufacturing sector, Jacobs said the sector performed abysmally low in the second quarter of last year in terms of output and contribution to the GDP.
Citing figures from the National Bureau of Statistics (NBS), for instance, he said manufacturing real output grew by 3.82 per cent in the second quarter of last year, from 14.01 per cent of the corresponding period of 2014. This, according to him, indicates a 17.83 percentage point decline over the period.
Also, the manufacturing sector’s contribution to nominal GDP in the second quarter of last year fell to 9.29 per cent as against 9.77 per cent of the corresponding period of 2014; indicating 0.48 percentage point decline over the period. He lamented that all manufacturing indices have crashed, as capacity utilisation, production value and manufacturing investment have been declining.
Similarly, the Chairman, MAN, Apapa branch, Mr. Babatunde Odunayo, lamented that manufacturers were merely surviving following the implementation of certain fiscal and monetary policies.
“The sector is struggling to survive the very difficult monetary policy regime. Some manufacturing outfits have shut their operations; others are waiting for favourable policies to come up,” he said, at a seminar organised by the branch in Lagos, last week.
Before the June 15, 2016 flexible, market-driven Foreign Exchange (forex) regime announced by the CBN, more than 200 out of the over 2,000 manufacturing firms in the country were on the verge of closing shop due to the lack of raw materials to continue production, according to Jacobs.
While about 100 operators in the general goods sector indicated readiness to close shop when they run out of raw materials, 120 operators in the pharmaceutical manufacturing sector were said to be down to two months’ supply of raw materials after which they may be unable to restock. Also, in the food and beverage sector, only few of the 80 operators remained in business.
In June, last year, CBN’s monetary policy that barred importers of 41 items that can be sourced locally from having access to its official forex window threw manufacturers into confusion. Those who needed the raw materials and products restricted from the forex market as their primary products in the manufacturing process were adversely affected.
This was, perhaps, why most real sector operators, especially manufacturers, perceived the new market-driven forex regime as a welcome development. Their hope was that the policy will drive down the exchange rate of the naira to the dollar, spur economic growth and development, and encourage more Diaspora remittances, among others.
For instance, the National President, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Chief Bassey Edem, described the new forex regime as “a welcome development,” saying that it will further drive down the exchange rate of the naira to the dollar. It will also open the floodgate for influx of remittances by Nigerians abroad that have lots of dollars
He, however, told The Nation that consistency is key to the success of the policy. He however said at a meeting CBN had with members of the Organised Private Sector (OPS).
The CBN Governor Godwin Emefiele promised operators that the policy would not be dropped midway or reversed. He also said the CBN at the meeting informed the OPS that it would not back down on the import prohibition list unless OPS members show proof that any of the items on the list cannot be produced locally.
In removing the 41 items from access to its forex window, CBN’s good intention was not in doubt. For one, the apex bank believes that those items could easily be produced in Nigeria rather than spend the country’s reserves on importing them. The CBN also said the policy was aimed at encouraging local production of the items.
Because of the import-dependence of the economy, the slide in oil prices in the international market, which started mid-2014, caused an unprecedented slide in the value of the naira, a development that necessitated the need for a policy intervention to defend the value of the naira and protect the nation’s foreign reserves in the midst of dwindling revenue from oil.
The CBN always uses the foreign reserves to defend the naira, but the reserves have been badly depleted as a result of sharp fall in oil revenue. Industry watchers say CBN policy of defending the naira is failing, and there is need for the apex bank to allow the naira rate to be determined by market forces, which was what the apex bank did by coming out with the new forex policy.
However, while many manufacturers have hailed the policy, it remains to be seen how the government intends to address other institutional and infrastructure challenges holding the manufacturing sector down.
