Manufacturers have had their productivity and competitiveness levels reduced by inclement environment and rising production cost. But the prevailing macro-economic indicators, particularly the plunge in oil price and the devaluation of the naira, have worsened the business climate for them, prompting analysts to predict more turbulent times in the new year,reports Assistant Editor Chikodi Okereocha
The manufacturing sector’s outlook for this year is gloomy. The prevailing macro-economic indicators portray a sector heading for more turbulence. Economic analysts and members of the Organised Private Sector (OPS), are jittery over the implications of the current plunge in oil price and devaluation of the naira against the backdrop of high lending rate of between 25 and 30 per cent, inflation rate of over eight per cent, and adoption of the Economic Community of West African States (ECOWAS) Common External Tariff (CET), among others.
“If we are concluding 2014 on a faltering note because of falling crude oil price and devalued naira, we should all be ready for a challenging 2015,” First Deputy National President of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Chief Bassey Edem said.
The NACCIMA chief lamented that the high interbank exchange rate of N185 to the dollar and the pegging of the Monetary Policy Rate (MPR) 13 per cent have pushed up production cost, forcing manufacturers to spend more on the importation raw materials.
Edem, who spoke last week at a news briefing in Lagos, said the macroeconomic fundamentals were more unstable than they were in the first half of last year, a development he noted, has serious implications on the progress of the real sector.
Identifying the ECOWAS CET as another major challenge the local business will grapple with, he said: “This (ECOWAS CET) is another challenge to our growing industries that are currently battling with the devaluation of the naira amongst other challenges.”
Renowned economist and industrialist Henry Boyo agreed with the Edem position. He said: “You can’t have an industrial growth in this kind of environment with a CET that exposes local industries and products to unequal competition.”
The ECOWAS CET, when implemented, will allow goods from member states into Nigeria without the imposition of any tax, import duty or levy.
Edem, who noted that NACCIMA appreciates the need for the ECOWAS CET, expressed the association’s concerned about the possibility of exposing the nation’s borders to the influx of goods from the West African region when the ECOWAS CET becomes operational this month.
“The need to ensure compliance with all protocol signed by ECOWAS to eliminate dumping of goods in the region becomes of great importance if our growing industries are to survive the implementation of ECOWAS CET and for the realisation of the Nigeria Industrial Revolution Plan (NIRP),” he advised.
Boyo and Edem have cause for worry over the ECOWAS CET.
Already, the rising production cost has been heavy on most manufacturers, partly because they spend a lot of money to import their raw materials. Economist and Finance Analyst, Dr. Alaba Olusemore, noted that most manufacturers depend on foreign inputs, and with the soaring exchange rate, the cost of inputs will soar.
Olusemore, who is the Managing Consultant, Nesbet Consulting, a Lagos-based management and finance consultancy firm, said the challenge to manufacturers is two-fold
“First, when they borrow to import raw materials, it will be at higher interest rates. Secondly, with the naira devalued, they will have to pay more naira for each unit of goods they import,” he told The Nation.
Expressing the fear that many manufacturers may not be able to foot their import bills in this year, Olusemore said those who will do, will likely have shrinking profit margins and that Small and Medium Enterprises (SMEs) will suffer more.
He noted that the high production cost will trigger a hike in the prices of consumer goods, and depending on the price elasticity of demand for each manufacturer’s products, aggregate demand may shrink in the short run, as there could be consumer resistance. Those to be worst hit are those on fixed income, who will be left with lower disposable income, thereby, making them poorer in relative terms.
According to Olumemore, manufacturers are already seeing the immediate effects of the prevailing economic crisis with the increase in the MPR.
He said: “Obviously, lending rates in banks will go up. Access to bank credit will therefore, be tougher for business owners who rely on short term bank credit to meet short term funding gaps.
“Manufacturers and traders who do not have any choice borrowing would pass the increase in cost to the ultimate consumers. This is the end of the year; we should expect that the general price levels will go up.”
He further warned that the decision of the Central Bank of Nigeria (CBN) to devalue the naira, raise interest rate and increase cash reserve requirements (CRR) because of oil price shock will conspire to fuel inflationary trends in the domestic economy.
“Government at all levels are now likely to have ‘nice’ excuses for not executing tangible capital projects, as allocations to the three tiers of government will decline; government will resort to short term borrowing at an expensive rate,” he said.
The CBN had at the end of the Monetary Policy Committee (MPC) meeting last month announced a 500 basis-points hike in the CRR on private sector deposits to 20 per cent from 15 per cent, devalued the naira by eight per cent, and raised lending rates by 100 basis points to 13 per cent. Dr. Olusemore predicted that the devaluation will further push up the cost of importing petroleum products.
Besides, there are chances that government may remove the subsidy after the general elections next year, and the consequences of removing subsidy, he said, would be social, political and economic.
He, therefore, advised:”There is need to fix the local refineries or give people the opportunity to establish one,” or “Why should Nigerians go to other countries to establish refineries?”
Olusemore therefore, made a case for tax incentives for those who choose to refine crude locally, insisting that the more Nigeria export crude and import refined petroleum, the more there will always be gaps that need to be financed through subsidy.
A nation in the throes
of importation
Despite the country’s endowed raw materials and rich material resources it remains in the web of an import-dependent raw materials economy. The abundance of raw materials locally has so far failed to reverse the trend as between 80 and 90 per cent of the materials used are sourced from abroad. The situation, which experts describe as the ‘import syndrome’ where manufacturers rely heavily on imports rather than source materials locally, is said to be digging a hole in the federal purse, resulting to an annual capital flight of N1 trillion.
It is also a pain in the neck of manufacturers who agonise and groan under persistent high production cost from rising cost of imported raw materials due to the exchange rate. The increasing production cost is said to be responsible for the high cost of goods produced locally compared to imported ones.
Nigerian’s preference for imported goods at the expense of locally produced materials has forced many local industries out the landscape.
Chairman of DN Meyer Plc, Sir Remi Omotoso, noted that reversing the nation’s import dependent raw materials economy would stop Nigeria from creating employment for other people offshore.
“If we are producing the raw materials here, people will be employed in those outfits manufacturing those raw materials. They will also be paying income tax and a lot of benefits will accrue to government,” he told The Nation in a chat.
Omotoso, who noted that a lot of materials used in the production ofgoods are available locally, urged the Ministry of Industry, Trade and Investment to facilitate its provision.
Sir Omotoso pointed out that after satisfying her local needs, Nigeria may even end up exporting to other countries.
He said: “If we are compelled to rely on our own internal resources, I can assure you that those who are importing will begin to see the need to develop local substitute for imports. You must not expect the manufacturers themselves to be the developers of these raw materials, it’s not going to work, there must be other people along the value chain who can fill in that gap.”
He added that Nigeria’s army of unemployed youths would be gainfully engaged from a network of industries that will be engaged in converting raw materials from their primary forms to intermediate and final products needed by the industries.
There is a snag
Notwithstanding the availability of the basic raw materials to feed the industries locally, experts say that they are not available in sufficient quantity and quality. Some manufacturerstold The Nation on the condition of anonymity, that most of the available materials remain unusable and require some form upgrade.
The value addition is done mostly by SMEs because they take the materials from the unusable form to the next intermediate stage. It is the intermediate raw material that industries require. But because of the low capacity of the SMEs to add value to available raw materials, coupled with the lack of access to capital to set up processing facilities, process technology and techniques, and spare parts, among others, they have not been able to fill the gap. And going by the current economic fundamentals, SMEs may be up against the wall accessing fund from banks next year.
Banks will also reel
The outlook for banks, and by extension, manufacturers is everything but inspiring. Ordinarily, manufacturers should approach the banks for credit facility at friendly-interest rate. But if forecast by global rating agency, Fitch Ratings, for Nigerian banks in 2015 is anything to go by, then manufacturers are indeed, in for serious trouble, because of the oil price shock and the resulting policy moves.
Fitch Ratings, in its latest report, predicted a negative sector outlook for Nigerian banks. Apart from the sliding world oil prices, Fitch said recent policy actions by the CBN to devalue the naira, raise interest rates and increase reserve requirements (CRR), will lead to the deterioration of banks’ profitability, asset quality and capital ratios in 2015. “We are forecasting bank profitability, asset quality and capital ratios to deteriorate in 2015,’’ Fitch said.
A sector grappling with
huge gap in infrastructure
For manufacturers, poor electricity supply remained a major problem. For instance, the Director-General, Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, said the power situation remained a major problem for businesses across all sectors. He said the rising energy cost remains a major threat to sustainability, as the expenditure on diesel and other fuelhas continued to increase despite the power sector privatisation. According to him, the profit margin of most manufacturers cannot improve due partly to rising cost of alternative power supply.
The NACCIMA chief disclosed that most SMEs spend considerable amount of money for power never supplied.
He said: “Manufacturers, especially SMEs, still have major challenges such as the worsening power situation, lack of access to credit,influx of fake and substandard products, and regulatory infractions among others. He said with interest rates hovering between 20 and 30 per cent, not many businesses can generate turnover to match the cost.”
But poor electricity supply has been identified as the most critical challenge facing manufacturers. Although, small-scale operators would be more affected in the coming year, as they would not be able to sustain their alternative power source, large scale manufacturers will also be hit by the erratic electricity supply.
For instance, the Production Manager of Fan Milk Nigeria Plc, Mr. Linus Oyena, said his company spends more than 40 per cent of its production cost on diesel. While noting that poor electricity supply affects the level of production, sales and supply, which forces many companies in Nigeria to fold up, he said: “When power goes off, waste materials, manpower, time and so many things are wasted. At the end of the day, you discover that you are not making profit.”
Chairman, electronics and electrical sectorial group of Manufacturers Association of Nigeria (MAN), Mr. Reginald Odiah, gave a graphic detail of the huge toll irregular power supply is taking on his men.
According to him, on the average, they spend about N2 billion per week on self-power generation. This, he told The Nation, translates to over N73 billion annually or N365 billion in five years. He said such outrageous cost is proof that the inefficiency of the energy sector in Nigeria is a major setback to private investment and by extension, a hindrance to the overall economic growth and development of the nation.
Mr. Odiah, who is also Managing Director/Chief Executive Officer, Bennett Industries Limited, disclosed that although, members of MAN require about 3,000 Megawatts (MW) of electricity for optimal performance, less than 1, 000 MW gets to the Association. Yet, the manufacturers pay electricity consumption bills amounting to over N120 million monthly.
He recalled that in December 2013, power supply dipped by 450 MW from the peak generation of 4,517 MW, where most parts of the country experienced fluctuation. As of today, most manufacturing firms run in-house power plants full-time during production to avoid unexpected outage. He lamented that such outages could damage machines, tools, raw materials, man-hour loses and disruption to production processes.
The Nation learnt that power alone takes up to between 35 per cent and 40 per cent of manufacturers production cost. Over 75 per cent of the electricity needs of manufacturers are said to be generated in-house, leaving only about 25 per cent to the unbundled Power Holding Company of Nigeria (PHCN)Plc, What this means is that manufacturers must factor in the element of in-house plant from the start. Because of this and other infrastructural deficiencies, it is hardly surprising why Nigeria is remains the most expensive country to do business of manufacturing in. Cost of manufacturing in Nigeria is said to be about nine times that of China, four times that of South Africa and about two times that of Ghana. Because of the rising energy cost, most manufacturing firms in Nigeria have had to contend with falling profit margin, which remains a major threat to the sustainability of businesses.
The insecurity in the Northeast and the commercial kidnapping in the Southsouth and Sounteast, is also taking huge toll on manufacturers’ profit margin. Yusuf decried the security situation and noted that it has assumed a global and disturbing dimension as prospective investors think twice before bringing in investment.
He also said the economy of many of the affected states is on the verge of collapse with grave implication for investments and job losses. Yusuf spoke while explaining the outcome of an evidence-based account of experiences of members of the Chamber and the larger business community on investment climate in the second quarter business report.
Yusuf said the challenges of the operating environment for business rose in the second quarter across all sectors, and there were concerns over weak consumer demand, reflecting on the downturn in the economy. He noted that the hospitality business in the volatile states has been paralysed, many operators, especially SMEs, were relocating to other states with the attendant challenges.
He also disclosed that many firms have lost about 30 per cent of their sales, as they could no longer access most part of the northern market.
“Our report shows that manufacturing firms, sourcing raw materials from the North, are facing serious challenges, while projects funded by banks in the affected states are now at risk,” Yusuf said.
According to Yusuf, a serious perception problem has been created for the country, as many bank branches have been closed, while sales representatives of many companies have fled the affected states. Many projects under construction in the North have also been abandoned.
And fiscal buffers
come crashing
Governor Adams Oshiomhole of Edo State, last weekend, raised the alarm that $30 billion dollars was missing from the Excess Crude Account (ECA), an allegation that was vehemently dismissed by the Finance Minister, Dr Ngozi Okonjo-Iweala, through her media aide, Mr. Paul Nwabuikwu. But the exchange between the minister and the governor has brought to the fore the controversy surrounding the nation’s fiscal buffers particularly the ECA and the external reserves, said to be depleting in recent times.
The ECA in which the country saves accruals above the oil benchmark has been depleting, thus putting the economy under threat. It has been drawn down from $11.5 billion at the end of 2013 to $2 billion, a sharp decline that made the country more vulnerable than it was in the past. Similarly, the external reserves currently stand at about $34.6 billion.
But does the decline of the fiscal buffers have implications for the manufacturing sector?
Obiora Akabogu, a Lagos-based lawyer and public affairs analyst said yes. He expressed concerns that the decline to such disturbing levels could erode foreign investors’ confidence in the nation’s economy.
His words: “This would discourage foreign investors as their confidence in Nigeria would seriously decline. Already, there is donor fatigue because our foreign development partners now lack confidence in our fiscal system. Besides, foreign investors are now shifting attention to more economically stable countries such as Ghana, South Africa, and even Benin Republic.”
He recalled that since the inception of the democratic dispensation in 1999, successive administrations have repeatedly urged Nigerians to tighten their belts and brace for the never-ending economic reforms.”When will the belt tightening seize?” he asked.
