Bridging monetary, trade policies to drive local manufacturing

Though manufacturing plays a vital role in providing intermediate inputs, finished goods, increasing foreign exchange earnings, positive spillover effects and employment opportunities for many economies, Nigeria’s industrial value remains low, showing continued dependence on imports. Is government living up to its promise of diversification and value-addition as well as creating an enabling environment that ought to spur industrial production? FEMI ADEKOYA writes on the burning issues to be addressed by the new Minister of Industry, Trade and Investment.

One of the key pillars of Nigeria’s Industrial Revolution Plan (NIRP) is the promotion of Resource-Based Industrialization. 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 ensures competitiveness and less vulnerability to shocks. It also promotes a better multiplier effect on the economy, better impact on the value chain, and better job creation prospects.

Getting Nigeria’s manufacturing sector to embrace this approach remains challenging due to inadequate and lack of policy frameworks that define the backward integration strategies to encourage operators to embrace the option as a viable alternative.

For those who have been able to embrace the option, challenges remain with little or no compensation, even as smuggling, competition from imported substandard goods among others, continue to discourage others.

According to the Central Bank of Nigeria (CBN), fiscal policies are government measures designed to influence the quantum and allocation of revenue and expenditure with the aim to achieve internal and external economic balance, as well as sustainable development.

For optimum results, fiscal policy must have a handshake with monetary policy to achieve the primary goal of welfare maximisation for the citizenry, which is facilitated by internal and external economic stability as well as sustainable development.

Despite EODB, symptoms remain
For manufacturers, however, despite government’s ease of doing business initiative, poor pace of productivity as a result of lingering challenges not limited to the multiplicity of regulation, poor access to power and the nation’s ports, remain.

According to the Manufacturers Association of Nigeria (MAN), the operating environment remains challenging and depresses productivity in the manufacturing sector.

Specifically, the operators cited poor electricity and gas supplies/non-reliability of gas supply/scarcity of diesel/high cost of LPG as the highest impediment to production in the country.

Indeed, the CEOs of manufacturing companies in Nigeria urged the government to improve basic infrastructures within strategic economic hubs nationwide, classify manufacturers as strategic users of gas, expand the roads leading to Lagos Ports and make other ports outside Lagos functional to reduce cargo traffic and stimulate economic activities in those locations.

They noted that port-related challenges at the Lagos ports still persist.

Majority of the CEOs (94%) interviewed in the second quarter 2019 of Manufacturers CEOs Confidence Index (MCCI) survey agreed that congestion at the ports significantly affects productivity negatively.

“This unpalatable issue manifest daily in form of delay in clearance of manufacturing inputs and machinery as well as high demurrage which increases the cost of production in the sector and often times slows down manufacturing operations.

“Contributory factors include inadequate space inside the ports, weak trade facilitation infrastructure, poor road network, and the associated traffic gridlock that all combined to limit operators’ access to the ports.

“While commending the Federal Government for recent efforts at improving the situation at the Lagos ports, the persistent gridlock indicates the need for holistic measures that would engender lasting solutions and improve seamless access and operations inside the ports”, they added.

Though a large percentage of respondents claimed that the level of local raw-materials sourcing has increased in the country, a greater proportion of those interviewed are still of the view that effort should be intensified to improve the development, sourcing and utilization of local raw materials.

“Government needs to promote private sector driven policies that would further enhance the capacity of relevant institutions to deliver on set mandates and improve the level of local sourcing of raw materials.

“Even though only 38 per cent of those interviewed agree that the level of local sourcing of manufacturing inputs has improved, the cumulative percentage of those that disagree (39 per cent) and those not sure (23 per cent), which is 62 per cent, signify that there still exists a larger room for improvement.

“Therefore, Government needs to properly fund the relevant institutions, initiate policies that will give priority attention to the development of local raw-materials in commercial quantities, create friendlier environment for investment on the value-chains of these materials and ensure that adequate forex is made available for importation of vital raw materials that are at the moment, not available locally”, MAN explained.

Of all the MAN CEOs interviewed, 46 percent disagree that the rate at which the sector sources foreign exchange (forex) has improved.

36 per cent however agreed while the other 18 percent are not sure that forex has improved.

The response, according to MAN, thus suggests the need for a production-focused forex policy and improvement in the quantum of forex available to the sector, particularly for the importation of machines, raw materials and other manufacturing inputs that are at the moment not available in the country.

In terms of inventory, 55 percent disagree that Inventory of unsold manufactured products in the country has reduced over the last three months; 21 percent agreed while the remaining 24 percent were not sure.

“The high level of disagreement among respondents indicates the need for Government to introduce disposable income enhancing fiscal policy measures that would be in sync with existing monetary policies. No doubt, this would boost the purchasing power of Nigerians and stimulate aggregate demand in the country”, they added.

To aid the growth of the real sector, the Lagos Chamber of Commerce and Industry (LCCI), urged the implementation of the executive order of the President on the patronage of locally produced goods, saying the order is a low hanging fruit that could be explored while the issue of high production cost is being addressed.

“There should be collaboration and coordination between the CBN, the Finance Ministry, Budget and Planning and Trade and Investment on trade policy issues.  The boundaries of monetary policy need to be properly defined. Exclusion of sectors from the forex market is not a monetary policy issue.  It is trade policy matter.

MAN’s President, Mansur Ahmed

“Monetary policy is about managing liquidity [or money supply] to influence the direction of credit, exchange rate and inflation. Trade policy formulation is not within the remit of the CBN. It is an inter-ministerial responsibility involving the Finance, Budget and Planning, Industry, Trade and Investment Ministries”, LCCI, Director-General, Muda Yusuf added.

Need for safeguard measures as AfCFTA beckons
If liberalisation under the African Continental Free Trade Area (AfCFTA) is not checked through safeguard measures, 4301 of 4779 total manufacturing tariff lines of 5%, 10% and 20% will be moved to 0% in the first five years, thus leading to the closure of virtually all manufacturing companies within the period.

The first impact of liberalization through tariff cuts, according to the Manufacturers Association of Nigeria (MAN), is the surge in imports of manufactured goods into the country, while other impacts are on the outputs, incomes, employment and investment of the manufacturing firms.

In principle the import surge is expected to reduce sales/output; the magnitude would be higher for competing manufactured goods. This implies that full liberalization from the onset moving 90% of tariff lines to zero percentwould have catastrophic implications for Nigeria.

MAN in its factsheet on AfCFTA titled, Enhancing Nigeria’s active participation in negotiating the AfCFTA, and made available to The Guardian, stated that in a scenario where 90% of tariff lines are liberalized within 5 years with 10% tariff lines exempted from liberalization, 4301 of 4779 total manufacturing tariff lines of 5%, 10% and 20% will be moved to 0% in the first five years.

MAN noted that such action will result in an immediate surge of imports of manufactured products into the country without allowing any room for necessary adjustments by the Government and industries, thus leading to a total collapse of output, investment and employment in the sector.