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Downtime in manufacturing: Worries as country decelerates into trading economy

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Last month, the President of African Development Bank (AfDB) Group, Dr. Akinwunmi Adesina, at the opening session of lender’s yearly general meeting, expressed worry that Nigeria and other African countries were de-industrialising.
    
This, according to him, is because between 2012 and 2018, Africa’s industrial value-added declined from $702b to $630b – a loss of $72b, adding that industrial value-added dropped sharply in countries with the largest industrial output thus: by 41 per cent in Nigeria, 26 per cent in South Africa, 64 per cent in Egypt, and 67 per cent in Algeria.
    
He expressed concerns that the deceleration of industrial output in Africa is at the heart of the continent’s massive youth unemployment, noting that 11 million youths enter the labour market each year, and only three million of them get jobs.

To create more quality and well-paying jobs, Africa, he said, must fast-track industrialisation.
  
Like other development agencies have noted, this narrative is not completely new, but what is worrisome is the preparedness of key actors to strive to change the status quo.
  
African countries including Nigeria, despite several industrial policies implemented by various policy makers within the pre-Structural Adjustment Programme (SAP) era such as Import Substitution Industrial Strategy (ISI), and the Export Promotion Strategy implemented in the post-SAP era, and the more recent Nigeria’s Industrial Revolution Plan (NIRP), have witnessed slow growth.
  
The developmental success of the East Asian Tigers also called the newly industrialiSed countries (NICs) has been attributed not to their natural resource endowment, but to the transformation of their manufacturing sector, which has further culminated into rapid economic growth for these countries.
 
The AfDB argues that Africa is truly blessed. From vast and yet untapped agricultural lands that currently account for 65 per cent of the arable land left in the world, to rich deposits of natural gas, oil, minerals and metals, the continent brims with natural resources potential.
   
However, Africa simply exports mainly raw and unprocessed commodities, therefore making most of its economies often subject to global commodity price volatilities.
  
Given the enormous role the manufacturing sector is expected to play in the industrialisation of the economy, the question then arises of whether the Nigerian manufacturing sector is playing its part as the driver of the much desired economic growth within the economy and why, if it is not?

Is Nigeria De-industrialising?

DATA obtained from the National Bureau of Statistics (NBS), indicate that non-oil exports grew by 34 per cent in 2010, exceeding imports in 2012 before declining sharply in 2013. Since then, it has continued to decline steadily.
   
With imports far outstripping exports, it became apparent that local production is unable to sustain the Nigerian populace, especially as the environments in which many manufacturing firms operate becomes harsher.
  
The year 2016 will be remembered in the country’s economic history as a challenging year, especially with the depreciation of the naira and its negative impact on the economy.

These challenges resulted in individuals and organisations seeking innovative ways to reduce costs and increase revenue.
 
Consequently, important economic players in the public sector, and in the manufacturing industry began to look inwards in a bid to explore avenues for development.
  
Specifically, monetary policies were deployed to promote import substitution as the first mechanism to check the dwindling naira in 2015.
   
The Central Bank of Nigeria (CBN) on May 3, 2015 excluded importers of 41 goods and services from accessing foreign exchange at the Nigerian foreign exchange markets, in order to encourage local production of these items.
  
The action according to the CBN was taken as part of efforts to sustain foreign exchange market stability, and ensure the efficient utilisation of foreign exchange, as well as, aid derivation of optimum benefits from goods and services imported into the country.
  
The apex bank noted that an average of $300m was being spent on 41 items on its restriction list from subsidised official foreign exchange window, thus making the apex bank expending an estimated $12.3b between January and May 2015 to subsidise importation of finished goods.    

The CBN’s Governor, Godwin Emefiele, who spoke on the foreign exchange policy then said: “The issue of those 41 items, unfortunately, is one that has been on my table.

But I think it is important that in the life of an economy, there is a need for us to take a look and ask ourselves: what really are we importing into this country?

When this thing started, we said: Why should we import rice? Why should we import toothpick? Why should we import palm oil?

At a point in this country, Nigeria was the largest producer and exporter of palm oil and we were controlling 40 per cent of the market share.

So, there is the need for us to say at this time when there is a scarcity of forex, it should be set aside for the import of items we cannot produce in this country.”
  
In the recent past, manufacturers have been experiencing mixed fortunes.

For instance, while local palm oil producers witnessed a surge in revenue and capacity utilisation, manufacturers affected by the 41 banned items had to step up efforts to source for materials locally.
   
According to statistics from local operators, even though 2016 was a challenging year for their operations, it recorded growth in local substitution that may positively affect reduction in the nation’s food import bill.
  
With improved access to forex, operators in the conglomerates sector also intensified alternative sourcing for critical raw materials for milk, sorghum, tomato, apparels, leather and wood, all of which were hitherto imported.

  
For instance, the Managing Director of Nigerian Breweries, Jordi Borrut Bel, said even though the operating environment is projected to remain challenging this financial year, alongside continued down-trading by consumers, the company will continue to improve on its value extraction from cassava and other commodities used as raw materials.
  
At a current sourcing level of about 50 per cent of its raw materials locally, the brewer is optimistic of achieving its 60 per cent target before 2020.
   
In terms of sourcing, local raw material utilisation increased to 65.70 per cent in 2017 from the 59.98 per cent recorded in the corresponding half of 2016, thereby indicating a 5.71 percentage point increase over the period.
  
Though local raw materials utilisation was on the increase across the sectors, Non-metallic Mineral Products Sectoral Group recorded the highest utilisation level at 70.5 per cent as against 60.08 per cent recorded in 2016, thereby indicating a 10.4 percentage point increase over the period.
  
In the Woods & Wood Products Sector, local raw-material utilisation increased to 70.1 per cent from the 58.75 per cent recorded in the corresponding half of 2016; thereby indicating 11.35 percentage point increase over the period.

It also increased by 1.49 percentage point when compared with 68.6 per cent recorded in the preceding half.

Local sourcing of raw materials in the sector averaged 69.4 per cent in 2017 as against 51.2 per cent recorded in 2016; thereby indicating 18.2 percentage point increase over the period.
  
Furthermore, the Chemical & Pharmaceutical Sector increased local raw-materials utilisation to 62.6 per cent in the second half of 2017 from 55.39 percent recorded in the corresponding half of 2016; thus indicating a 7.21 percentage point increase over the period.

Low Patronage, Parlous Infrastructure And High Interest Rates Dragging Manufacturing

LATEST data from the Manufacturers Association of Nigeria (MAN) showed that members’ inventory — unsold goods — totaled N321.12b in 2017 as against N90.43b recorded in 2016, thus, indicating N230.77 billion or 255.19 percent increase over the period.
 
Similarly, the outcome of the May 2018 Business Expectations Survey (BES) conducted by the CBN revealed that even though respondent firms expressed optimism that the macro economy remained positive, they identified insufficient power supply, unfavourable economic climate, high interest rate, unclear economic laws, financial problems, unfavourable political climate, and insufficient demand as the major factors constraining business activities.
 
Indeed, the increasing number of unsold goods by manufacturers is a reflection of lower purchasing power and portends job losses and lesser private sector capacity to create jobs this year.
  
Sectoral analysis shows that significant proportion of inventory of unsold manufactured goods was observed in the Basic Metal, Iron & Steel Fabricated Metal group (N31.39b or 19.4 per cent); Chemical and Pharmaceutical sector (N25.87 or 16.0 per cent): Food, Beverage and Tobacco (N20.7b or 12.8 per cent), and Domestic/Industrial Plastic, Rubber & Foam (N20.54b or 12.7 per cent).

  
In a chat with The Guardian, the Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, explained that the de-industrialisation witnessed in the country is as a result of a combination of several factors like low purchasing power, high unemployment, irregular payment of salaries both in the public and private sectors.
  
He added that improvement in forex liquidity is also a key factor as improvement in liquidity also increases the volume of imported goods that end up becoming competition for locally produced goods.
   
“As improved forex liquidity is impacting positively on manufacturers for their inputs, it is also increasing the importation of finished goods.

Rising energy costs are equally factored into production costs by manufacturers.

These variables end up affecting the sale of finished goods”, he added.
    
On her part, NACCIMA President, Iyalode Alaba Lawson, noted that despite the consecutive decline in inflation rate alongside a positive growth in the economy, the inflation rate remains high and steps must be taken to redress the imbalance, especially for a country like Nigeria.
 
In expressing worry at the rising inventory, Secretary of Retail Council of Nigeria, Alhaji Kunle Hamzat said: “When you hold too much inventory, you are tying down your capital.

The shelf life of the goods is also threatened in the stores and this translates to losses for the manufacturers.

All of these are a fall out of the state of the economy. When an economy is not properly stimulated to increase people’s buying power, this is what happens.”
 
MAN President, Dr. Frank Jacobs, had earlier stated that the rise in inventory is attributable to low purchasing power of consumers.

  
According to him, even though access to foreign exchange has improved, there is a gap that is still void, adding that local producers have a huge inventory of unsold stocks lying in their warehouses.
 
“If local manufacturers produce and cannot sell, there is nothing that can be done.

The disposable income of the average Nigerian has been eroded.

We are trusting that government will continue to work on reducing inflation and making forex available while policies to ease business dealings in Nigeria are effectively implemented,” he added.
  
Jacobs, however, urged government to offer effective and beneficial stimulus to interest rate sensitive sectors to further propel growth as the economy is still largely static and fragile and urgently requires stimulus.
  
He added that efforts should be made to consult with the Monetary Policy Committee to find ways and means of lowering interest rate to prevent the economy from being chocked and the rate of recovery being slowed down.

With average lending rate from commercial banks to the manufacturing sector peaking at 22.8 per cent in 2017, according to latest data from the MAN, operators are calling for government intervention in order for them to remain competitive.
   
“A survey of manufacturers by MAN shows that cost of lending to the manufacturing sector stood at 23.05 per cent in the second half of 2017, which is almost the same figure with 23.3 per cent recorded in the corresponding period of 2016.

However, it increased by 0.37 percentage point when compared with 22.65 per cent recorded in the preceding half,” MAN explained in its H2 2017 report.

 
The Minister of State for Industry, Trade and Investment, Hajia Aisha Abubakar had at a forum in Ogun State, said plans were underway to ensure that from first quarter 2018, government will begin implementation on the reduction of interest rate for local manufacturers in order to tackle issues of rising interest rate in the sector.
  
According to her, “As government, it is our responsibility to continue to provide an enabling environment to sectors where you are involved.

We will go back and look at the sectors and see what the aggregate is for that sector for us to be able to come up with the aggregate to bear in that sector.”
  
Also weighing on the issue, LCCI President, Babatunde Ruwase said: “With commercial bank lending rate at between 20-35 per cent, depending on the borrower and other factors such as acceptability of collateral, it is very difficult to successfully access fund by the private sector especially the SMEs.
  
“We note the efforts of government through CBN and the Bank of Industry (BOI) to extend intervention funds to operators.
  
“However, the range of beneficiaries and economic wide impact of government intervention funds remain very limited.

Investors in many sectors cannot finance projects profitably at an interest rate above 10 per cent. These sectors are majorly agriculture, real estate, solid minerals among others.”
 
Similarly, the LCCI noted that Nigeria’s gas pricing policy and high logistics cost have continued to negatively impact on production costs in the nation’s manufacturing sector.
  
On gas pricing, Ruwase explained that the pricing policy have been imposing a lot of burden on the manufacturing sector.
 
“It is inappropriate to charge in dollars for a product that is produced in Nigeria and sold in naira.

Energy cost is a major component of cost and a major factor in the competitiveness of firms in Nigeria.

We need to address the issue of gas pricing to support the non-oil sector of the economy and promote the realisation of the objectives of Economic Recovery and Growth Plan (ERGP).
 
“The government needs to support investment in gas infrastructure in order to bring down the price of gas to end users.

This will enhance the competitiveness of our industrial sector as well as other sectors of the economy,” he advocated.

  
He also called for improved regulatory framework in the economy, noting that the incidence of fake and substandard products as well as counterfeiting is on the increase.

 
 
 


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