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High dependence on import makes manufacturing sector vulnerable

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Muda Yusuf, LCCI Boss.

Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, in this interview with FEMI ADEKOYA, said the country cannot be on sound economic footing when there is no progress on the industrial front. He added that the fact that the manufacturing sector provides over 80 per cent of its energy requirement is equally a major disincentive to manufacturing.

What are the major factors that precipitated the gradual fall of industrial production in the country, which has dipped nearly 50 per cent in the last six years?

The factors that are responsible for the decline of the manufacturing sectors are numerous and diverse, but can be basically be seen from two dimensions- structural issues and business environment issues.

From the structural perspective, a major weakness of the Nigerian manufacturing sector is the high dependence on imports.

This is the consequence of the Import Substitution Industrialisation Strategy adopted in the 1970s & 1980s.

It was a strategy that was driven and sustained by a strong currency, which made it easy for raw materials and other inputs to be imported.

This is a contrast to the industrialisation strategy of the colonial times and the period immediately after independence, which was a resource-based approach.

It is this inherent weakness in the structure and strategy that made the Nigerian manufacturing sector very vulnerable.

However, the segments of the sector that have a good measure of backward integration are less vulnerable to shocks.

The high dependence on import is responsible for profound shocks experienced in the sector when the economy went into recession and experienced sharp exchange rate depreciation.

The structural factor is therefore a very important one in the growth trajectory of the Nigerian industrial sector.

The manufacturing sector has profound competitiveness issues.

The sustainability of any business is driven by its competitiveness.

The environment for manufacturing has created a competitiveness problem for the sector. The first critical constraint is energy cost.

It is difficult to drive industrialisation without energy that is affordable and available.

Over 80 per cent of the energy requirement of the Nigerian manufacturing sector is provided by the firms themselves.

They operate generators powered either by diesel, petrol, gas or LPFO. These are very costly energy sources.

Diesel cost has been skyrocketing because of the increasing price of crude oil.

This happens because the price of diesel has been deregulated and our refineries are comatose. High oil price translates to high diesel cost.

Additionally, gas, which is an alternative energy source is also not different in cost from LPFO.

The cost of logistics is yet another critical challenge.

Raw materials need to be moved to the factories, and finished products need to be moved to the market.

All these movements are by road. The railway system is not functional, while the waterways are not an option for the movements of goods.

The roads are generally in a poor state thus, escalating the transportation cost and depressing the competitiveness of the sector.

Also, trucks used for haulage of goods and raw materials are powered by diesel.

With the high cost of diesel, high transportation cost becomes inevitable.

Cost of funds is yet another critical issue that the manufacturers are contending with.

Interest rates of between 25 to 30 per cent are too high to support any meaningful investment in the manufacturing sector.

Although we have some intervention funds, the financing gaps are too wide, and this cannot be filled by only intervention funds. I acknowledge that some manufacturing companies have taken advantage of the intervention funds and it has been impactful.

Other challenges that are in the sector include smuggling, dumping, counterfeiting, and poor local patronage of domestically produced goods.

The nation’s industrial production index growth peaked at an all-time high of 20.1 per cent in March 2011 compared to the present level of 3.3 per cent in 2017, while capacity utilisation equally witnessed the same trend.

Would you say the sector’s growth is at a comfortable position?

The growth is not yet at a comfortable threshold until all the issues highlighted above are substantially tackled. It will be difficult to record a growth outlook that will be sustainable in the short-term.

The good thing is that the present administration has adopted the Nigerian Industrial Evolution Plan (NIRP), as its policy plan to drive industrialisation.

One of the key pillars of the NIRP is the promotion of resource-based industrialisation.

This is a strategy that could bring manufacturing back to the path of sustainable growth.

Already, many resource-based industries are doing much better than those that are substantially dependent on imports.

The cement industry, food and beverage industry, and other agro-allied industries are key examples.

The resource-based approach will ensure competitiveness and less vulnerability to shocks.

It will also promote better multiplier effect on the economy; better impact on the value chain, and better job creation prospects.

Would you say that the narrowing industrial production has contributed to worsening the country’s economic growth?

There is a relationship between industrialisation and development. It is not a coincidence that most of the advanced economies are also industrialised economies.

Therefore, Nigeria cannot be said to be on an economically sound footing, when there is no progress on the industrial front.

The economy has suffered serious problems, including unemployment, and weak multiplier effect from existing economic activities.

There are also worries about economic diversification and poor technological know-how.

All of these are consequences of the weak industrialisation of the economy.

The summary is that weak industrial growth has caused a major setback for the economy in many ways.

There are weak inter-sectoral linkages, poor self-reliance on food production and poor technological penetration.

Some manufacturers have described Nigeria as an increasingly unattractive investment environment due to these challenges.

How effective are regulatory frameworks aimed at promoting ease of doing business and reducing regulatory hurdles?

Following the Ease of Doing Business programme, many of government’s regulatory institutions in the manufacturing sector have improved their orientation.

NAFDAC and SON have streamlined their procedures and processes for efficiency and also to accommodate small businesses.

However, the situation at the Lagos port still poses a great deal of challenge for investors.

It is imperative for the Nigeria Customs Service to look beyond the issues of meeting revenue generation targets.

They should do more to scale up their trade facilitation role to support investors in the economy.

Multiple taxation and bribe taking are an ever-present disincentive in the Nigerian business environment. How can these twin evils be tackled?
 
Multiple taxation is a big issue for many investors. The irony is that the burden of multiple taxation is more on the companies that are compliant and these are mainly from the formal sector operators.

Manufacturing firms are one of the biggest victims of multiple taxation, because manufacturing activities are very visible and large factories, many trucks, and sales outlets easily attract the tax authorities.

The tax authorities also erroneously believe that the size of business premises is an indication of the prosperity of the business.

This perhaps explains the excessive focus of the local, state and the federal tax authorities on industrialists.
 
The National Economic Council has repeatedly made pronouncements that the phenomenon of multiple taxation would be eliminated.

The Joint Tax Board has also made similar pronouncements repeatedly, but the problem has persisted and even goes beyond the conventional tax.

It is also about licensing fees, registration fees, renewal fees, inspection fees, environmental sanitation levy, import duty, borehole tax, land use charge, pollution tax, etc. The burden of this multitude of fees and levies are very high.

For example, telecom operators have complained that there are 30 different taxes and levies imposed on them.

These are some of the challenges that PEBEC should address.

We acknowledge the laudable efforts of PEBEC in the promotion of public private dialogue, streamlining business regulation and reducing bottlenecks at the immigration and passport office.

But a great deal still needs to be done in many other areas.

Considering the need for foreign direct investments, how can the economy be positioned to attract private investments and businesses?

The Nigerian economy needs a great deal of foreign and domestic capital.

However, foreign investment needs to be encouraged in areas where the economy would have the most impact.

These areas include manufacturing, technology and innovation, backward integration investment etc.

It is not appropriate to allow foreign investors to be competing in the domestic retail market.

Nigerians in commodity trading have complained of being crowded out by foreigners in the trading of commodities.

We should have a clear investment policy that would determine and define the scope for foreign investments.

It is imperative to encourage more foreign direct investment than portfolio investment.

Foreign direct investments are more enduring and often provide more value to the economy in terms of job creation, inclusiveness, backward integration etc.

No country opens its economy completely to foreign investors.

Infrastructural deficit has contributed immensely to not only the soaring cost of production, but also the reason some manufacturing firms exited the country. 

Why has addressing this challenge taken so long?

Current Infrastructure deficit is a consequence of many years of neglect and lack of investment.

The truth is that there is no quick fix in dealing with infrastructure.

Capital has to be mobilised and policies have to be in place to attract private sector capital.

It is also imperative to ensure investors’ confidence in order to attract the needed private sector capital.

Bankable infrastructure projects also need to be identified and presented to investors.

There are many dimensions to these issues, but the principal reason for the poor infrastructure is the poor level of investment in the sector over the last four decades.

This situation is reflected in the structure of yearly government budgets, where over eighty per cent of the budget is spent on recurrent expenditure.
 
There is also the phenomenon of corruption and wrong choice of priorities at all levels of government.

The political risk, exchange rate and security risks have discouraged investments in infrastructure.

This is because these are long-term projects, which require the confidence of investors over a long period of time.


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