For every country, manufacturing is the growth engine. Despite all efforts to save the sector in Nigeria, it continues to bleed. Director-General of Lagos Chamber of Commerce and Industry (LCCI) Mr Muda Yusuf argues that the sector may become extinct if “effective and sustained protective measures”are not taken. In this interview with TOBA AGBOOLA, he shares his thoughts on the power sector reform, trade policy, unemployment, access to credit by businesses, among others.
WITH less than four weeks to the end of the year, how will you assess the economy? Has it been good for the private sector, especially those in manufacturing?
Economic growth trend, measured by the performance of the Gross Domestic Product (GDP), has been generally positive over the last two years, averaging about 6.5 per cent. This is good compared to growth conditions in most economies around the world. However, there remains a major concern about the weak impact of the growth performance on the private sector and the welfare of Nigerians.Virtually, all business segments lamented the harsh operating environment in recent years. The power situation deteriorated as we now have a relapse into a chronic power failure. The refineries are still underperforming; unemployment level is still high and cost of fund is still high. Sectors that posted good growth performances in 2013 were telecommunications, 31.8 per cent; hotel and restaurants, 12.2 per cent; solid minerals, 12.5 per cent; building and Construction, 12.6 per cent; real estate 12.4 per cent; and wholesale and retail trade, 9.6 per cent.
However, the contributions of most of the sectors to GDP are not significant. Respective contributions as at the third quarter of 2013 were as follows: telecommunications, eight per cent; solid minerals, 0.5 per cent; hotel and tourism, 0.6 per cent; building and construction, two per cent; real estate, 1.9 per cent. The character of growth explains the limited impact of growth performance on welfare of citizens. Local value addition and indigenous participation in many of the sectors is still very low.
What are your views about the operating environment?
The business environment is generally not conducive for manufacturing enterprise. This is why the risk of industrial investment is high and continues to increase. The various policy interventions have not had the desired impact on the sector. Unless there is an effective and sustained protection and support for the sector, it is only a matter of time for the sector to become extinct.
This scenario has played out in the tyre manufacturing, the textile industry, the assembly plants, the battery industry, the steel plants and many more. Manufacturing business is perhaps the most challenging in the economy today. The trend has grave implications for the economy. An economy dominated by buying and selling cannot boast of a bright future. Production is critical to economic progress, value addition and job creation.
It is impossible to have a vibrant manufacturing sector in the face of rampant dumping of cheap imports in the country. Some of these imports are landing at 50 per cent of the cost of products produced locally.
Manufacturers have to worry about high energy cost because the power improvement is yet to be sustained; they have to worry about high interest rate (20 per cent and above); they have to worry about a multitude of regulatory agencies making different demands on them; they have to worry about massive smuggling and under invoicing of imports and many more. The multinationals and other conglomerates in the sector may have the resilience to cope, but for most small and medium manufacturing enterprises (SMEs), it is a nightmare.
The stagnation of the manufacturing sector is one of the tragedies of the economy. Yet production is critical to an enduring economic and social stability. The way forward is to address the fundamental constraints to manufacturing competitiveness in the economy.
The manufacturing contribution to GDP is still less than five per cent and this has been the trend for over a decade. This of course reflects in the capacity of the sector to retain existing jobs and create new ones. The reality is that job losses in the sector have been on the increase over the years as productivity declined on the back of the harsh operating environment. However, the multinationals and conglomerates have shown some positive trend in performance and resilience, especially in the foods and beverage sector as well in the cement industry. Even then, they would do much better if the operating environment were better.
If the power sector reform delivers the desired outcome, the fortunes of the sector would definitely improve.
But the government made intervention by way of providing fund. Didn’t it have impact?
Yes, the manufacturing intervention fund of N200 billion had a positive impact on the few firms that benefited. It was a restructuring and refinancing facility which gave a significant relief to the firms and enhanced their cash flow. The interest rate was seven per cent and the tenure was 15 years. But the fund was evidently inadequate and has since been exhausted.
The Bank of Industry (BoI) played a notable role in funding industries; but the beneficiaries were few compared to the financing gap that exists in the industrial sector. Meanwhile, credit remains a major challenge for manufacturing enterprises. Access to credit is difficult and cost of credit is outrageous. The problem is particularly acute for the small, medium enterprises (SMEs). Policy inconsistency is also a major problem for industries. This is more pronounced in trade policy. Tariff is adjusted in ways that are inconsistent with the nation’s aspiration of rapid industrialisation. For instance, the collapse of the tyre industry was the outcome of inconsistent trade policy. The patronage of made in Nigeria products is more at the level of rhetoric than concrete actions. Yet an effective patronage policy could make a whole lot of difference in the fortunes of the manufacturing sector.
How about the government’s various policies and their implications for the economy?
I will first like to highlight some of the policies before discussing their implications.
The apex bank had expressed concern over what it called the dollarisation of the economy. We share the concern of the Central Bank of Nigeria (CBN), especially on the need to preserve the integrity of the naira. However in trying to deal with this situation, other problems appear to have been created. The naira suffered significant deprecation at the parallel market on the back of the new policy as the dollar sold for between N166 and N170. The parallel market premium also widened considerably. These conditions have potentially distortionary effects on the economy.
There’s a high risk of round-tripping in the foreign exchange market as the official and parallel market rates widened. There’s heightened risk of inflationary pressures as the exchange rate in the parallel market depreciates drastically. This is significant because the economy is characterised by a large informal sector that source foreign exchange mainly from the parallel market. There is a risk of over-regulation in the market which could create further distortions and breed corruption within the regulatory system. The challenge of excessive documentation and bureaucracy which will slow down the tempo of economic activities and create transparency problems. The recent review of the Cash Reserve Requirements (CRR) on public sector deposits from 12 per cent to 50 per cent would have profound effects on the money market, real economy as well as the stock market. It is a scenario that would profit some players in the economy and penalise others. The key areas of impact are as follows:
The policy action represents a further tightening of liquidity in the economy in furtherance of the CBN objectives of promoting price stability. We would see a further increase in interest rates which means an added pressure on the operating cost of investors in the economy. High interest rates will ultimately affect profit margins. The impact is not just on the real sector, but the broad spectrum of investors in the economy. We are therefore likely to see interest rates moving to new thresholds of between 25 and 30 per cent. If other charges are added, the cost of fund could be in excess of 30 per cent.
However, this development would be good news to depositors as interest rates on deposits would trend upwards. The scramble for funds by banks would push up deposit rates which would mean better returns for those placing funds with the banks and other financial institutions.
There is however the worry that this development may adversely affect the stock market. Typically, the gains of the money market are often the loss of stock market. As returns on investment in the money market improve, negative investors’ sentiments may be created in the stock market leading to a migration to the money market, especially by short term investors. This may have a dampening effect on stock prices.
Generally a tight liquidity situation often enhances the stability of naira exchange rate and the moderation of inflation. This is another possible gain of the new monetary policy regime.
What is the capacity utilisation rate in industries right now?
The overall average capacity utilisation in the manufacturing sector is about 46 per cent but the performance varies from sector to sector. But it is instructive that sectors with relatively high local value addition have better capacity utilisation because of the competitive advantage. Sectors that fall into this category include the cement industry and the food and beverage sectors. Industrialisation drive would be more effective if it leverages on local value addition. If only the oil and gas sector was well managed, tremendous industrial clusters would have been developed leveraging on the by-products of the refineries and the outputs of our petrochemical industries. The impact on the economy would be amasing.
What is the way out for manufacturers?
In order to avoid the collapse of what is left of the manufacturing sector, some immediate policy responses are imperative. Accordingly, the following policy options are proposed: strong commitment to the policy of patronage of domestically produced goods; import duty on raw materials, machineries and other vital input for manufacturing should be scrapped; value added tax (VAT) on raw materials and machineries should be scrapped; there should be generous tax allowances on infrastructure related expenditures.
How will you rate credit facilities to investors by banks?
The cost of fund in the economy is high and access to credit was even a more serious problem. The tight monetary policy stance of the CBN is a major factor affecting the credit conditions. Other areas of concern is that the collateral cover requirements by banks were beyond many investors. This impeded access to credit, slowed down the tempo of economic activities and undermined intermediation role of banks in the financial system. Also, government borrowing at a high cost of between 14 per cent and 16 per cent which is one of the highest globally was a major source of the credit problem in 2013. It created a disincentive to lend to entrepreneurs; put pressure on interest rates and increased the flow of funds from the banking system to the government coffers; a scenario which was clearly not healthy for the economy.
What are your views on the privatisation of the power sector and the proposed privatisation of the refineries?
First on the issue of PHCN privatisation, I want to say this is a work in progress that we can only wait for the outcome but with regards to the power sector in general. In the meantime, the power situation deteriorated in the last few months. Perhaps, the situation would have to get worse before getting better as the new owners find their bearings. They have to sort out issues of funding, gas availability, labour issues and others. This will take some time. We may have a crisis of expectations on our hands with regard to this matter. The improvement in power supply is not likely to come as fast as the public expects. Meanwhile, the situation continues to impact negatively on investment with increased expenditure on diesel and petrol by enterprises. This also comes with the consequences of declining productivity and competitiveness. On the proposed privatisation of refinery, what is of utmost importance is that we get the process right. We cannot continue to refine our crude oil outside the country. It is also clear that bureaucrats cannot effectively operate a refinery. What matters in an average bureaucracy is procedures, not results.
What is your take on fake and sub-standard products?
Fake and substandard goods remain a nightmare to manufacturers. It is important that regulatory and law enforcement agencies make it a priority to check this menace which has led to the loss of lives in certain instances. We need stiffer sanctions against perpetrators of this evil.
The rate of unemployment keeps increasing. What is your view on this and what is the way out?
The rate of unemployment in the economy is one of the highest in the world, at 24 per cent. Over 50 per cent of the youths in the urban areas are unemployed. It is a very disheartening situation for parents who had laboured and strained to invest in the education of these youths. The state of affairs has assumed the dimension of an economic and social crises. There is a relationship between rising criminality and unemployment. We should do something urgently to create jobs, and in this regard we propose that there should be increase support for SMEs and business start-up through capacity building and funding, encourage domestication of private and public sector spending in order to boost the multiplier effect of domestic spending on the economy, promotion of sectoral linkages in the economy so that all sectors could be mutually supportive. The agricultural sector has enormous job creation potentials and should therefore be given greater attention.
What are your expectations in 2014?
We hope for a better business environment in 2014. We hope for improvement in the productive capacity of the economy, the prosperity of enterprises and an improvement in the welfare of citizens. For this to be realised however, the constraints to productivity and efficiency must be tackled with better commitment and sincerity. It is only then that the frightening level of unemployment and poverty can be mitigated in 2014. A number of policy choices and actions are desirable to make this happen. These include commitment to improvement in the general cash flow in the economy. This is critical to stimulate the economy in 2014. The liquidity and cash flow situation in 2013 was a major challenge for many investors. Lending rates should be moderated and access to credit should be reasonably liberalised. Monetary and fiscal authorities need to make this happen next year.
New strategies should be adopted to deal with the security situation in the country. Security concerns heightened investment risk and depressed sales lats year. We hope for an improvement next year. The passage of the Petroleum Industry (Bill), preferably in the first quarter of the year, is desirable. This would unlock the potentials in the oil and gas sector. The passage of the bill would reduce the current uncertainties in the sector and eliminate the present stagnation of investment. We hope to see a better level of budget implementation in 2014. But one is concerned about the possible distractions that partisan politics would create as we move closer to 2015. The omens are not very good at this time.
What advice do you have for the government in 2014?
The Federal Government should consider the following steps in 2014: First, there should be deceleration of debt accumulation to protect the economy from the looming debt trap. We expect a moderation in public debt accumulation next year. Better disposition of public institutions towards investors and entrepreneurs. We hope to see a public sector that is driven by the true spirit of public service. This would enhance private sector development in the overall interest of the economy and the citizens. There should be a renewed commitment to fight corruption next year. Currently, the economy bleeds profusely from corruption and our expectation is that this bleeding will be moderated next year. This should happen through a combination of appropriate policy choices, deterrent sanctions for perpetrators and rewards for integrity.
Another is new momentum to address the huge infrastructure deficit in the economy. We desire a higher dedication to infrastructure improvement especially with regard to power, roads, and railways. Current reforms in the power sector should be sustained. We desire to see renewed commitment to patronage of locally produced goods by government agencies and institutions. Renewed commitment to local content policy, not just in oil and gas sector, but in other sectors of the economy should be prioritised. Indigenous participation is an important strategy to ensure inclusive economic growth. Better commitment to the improvement of infrastructures in order to enhance the productivity of enterprises in the economy.
Despite all the concerns about the state of our economy, I would say that our country offers tremendous opportunities for investors. We have the largest population in the African continent (estimated at 170 million); we have the largest black population in the world; ours is the second largest economy in Africa (with a GDP of over $300 billion); we have one of the highest growth rates in the world currently at 6.7 per cent; we account for over 50 per cent of the GDP of the West African sub-region; we are blessed with abundant natural resources (minerals and arable land) and our democratic structures are becoming firmly entrenched. What is missing is the capacity to harness these opportunities for our common good. I am confident that this will happen before long.
