Naira Devaluation: Manufacturers Bemoan Losses, Eye Local Content
THE continued devaluation of the Naira has taken a toll on the manufacturing sector, where profit has been scaled down tremendously due to high exchange rate. The continued devaluation of the Naira constitutes a drain because most production inputs are imported.
Many companies have expressed displeasure over the high rate of exchange, saying the situation has reduced their profit margin, as they depend on raw materials from foreign countries.
For Instance, John Holts recently said that devaluation is hurting its profit. The company is now seeking investment in businesses that are less import dependent.
The company’s operating profit reduced by 18.50 percent to N1.63b in 2015, from N2b in the previous year, according to reports. The situation is forcing manufacturers to seek alternative sources for their raw materials and stakeholders said the best option for them, in the circumstance, is to look inward for local raw materials.
There may be some raw materials substitutes available, but the quantity may not be sufficient for industrial use. If all the starch companies in Nigeria were producing, cassava would become so expensive that it would be insufficient for both domestic and industrial use. A lot of the local substitutes would have to be developed and these will take some time
The President, Manufacturers Association of Nigeria (MAN), Frank Udemba Jacobs, painted a gloomy future of the manufacturing sector, if the Naira continued its free fall in value against other international currencies, especially the Dollar.
According to him, many companies would soon exhaust their stock of raw materials, and won’t have any other option than to close shop, when there are no more raw materials for production
“The recent CBN policy took manufacturers by surprise. We understand the challenges the nation is facing in terms of the dwindling oil price in the international oil market and the attendant forex scarcity. The issue is that the CBN took a hurried decision without minding the consequences on the sector, as well as on job creation, job losses and the social consequences.
“Some manufacturers will run out of raw materials or other inputs, especially those using imported raw materials and unless the situation changes, such manufacturers may be forced to close shop. For those who cannot source their raw materials locally and whose raw materials are exhausted, they may have to close shop. We hope it would not come to that inevitable end, as the policy is being modified.”
According to Udemba, it has become inevitable for manufacturers to source their manufacturing inputs locally to minimise cost of production.
“The Association has advised manufacturers to look inwards, even before the introduction of the CBN policy. This is because it is the sustainable way to go. We should be self-reliant or at least near that in local sourcing of raw materials, even in technology development. In the immediate, some companies, which do not have local alternatives, may have to close shop unfortunately, because it would take some time to develop local alternatives, which are not readily available and some of them may take upwards of five years or more to develop. And if one considers that even agricultural raw materials take time to mature and be processed into raw material, you will understand the predicament.
To produce the needed raw materials locally, the MAN President advocated the introduction of Backward Integration policy, which would reincarnate Import Substitution Policy strategy, as the two policies were enshrined for the same purpose.
“The policies were designed to drive development of locally available raw materials and agricultural products to increase the productive capacities of the industrial sector, especially the manufacturing sub-sector in order to eliminate the importation of commodities, where the country has a comparative advantage. It is on record that the Backward Integration policy has already been successfully implemented in some sectors.
“The policy was implemented in some sectors and it provided the needed panacea for regenerating those sectors. The success story of the Cement sub-sector is an important reference point to the transformation that Backward Integration provides. The effects of the policy on the sector was almost magical and overwhelming, such that cement production increased from a mere 2000 metric tonnes per year 2000 to between 28 and 32 million metric tonnes today, following the implementation of the Backward Integration policy in the sector. Huge employment opportunities were consequently generated and Nigeria became a net exporter of cement. The policy was also successful in the sugar sector,” he said.
On the role of government in the over all development of raw materials needed for manufacturing, he said, “a number of things can be done by the government. Recently, efforts have been made by the Federal Government towards repositioning the mining and steel sub-sectors in order to strengthen the drive towards speedy industrialisation. Already, 44 solid minerals have been identified with proven reserves sufficient to support large-scale midstream and downstream industrial activities. Iron ore happens to be one of the solid minerals, which has been found with proven reserves of over 3 billion tonnes spread across the Iron Ore bearing belt of Kogi and Nasarawa among others. Iron Ore constitutes about 60 per cent of raw materials for steel production.
Following the implementation of the policy in the sector, investors’ confidence has improved, as the inventory of investors in the Nigerian Mining sector has risen from the paltry 560 in 2005 to over 6000 in 2014. In line with the foregoing, it is obvious that the policy can be replicated in several other sub-sectors with similar success. It should be emphasised that the successful replication of the policy in the various sub-sectors of the economy will usher in huge benefits to the country in terms of the following: Conservation of foreign exchange, employment generation, wealth creation, poverty reduction, economic diversification, human capital development, creation of a pool of SME entrepreneurs, as well as the establishment of high sectors’ input-output interaction,” he said.
Explaining the expected role of the government in industrial development and promotion of manufacturing, the MAN’s president said government would need to encourage the manufacturing sector with tax holiday and other incentives, besides the formulation of the right policies to improve patronage of local products.
“There may be some raw materials substitutes available, but the quantity may not be sufficient for industrial use. If all the starch companies in Nigeria were producing, cassava would become so expensive that it would be insufficient for both domestic and industrial use. A lot of the local substitutes would have to be developed and these will take some time. That is the essence of allowing manufacturers some time. Ideally, the proper thing to do is to encourage investors in the various sectors, be it solid minerals or agriculture for them to go into processing of raw materials, which they will sell to manufacturers. Let us not falsely believe that a manufacturer will leave his core business to go into cocoa cultivation, for example, in order to grow the cocoa beans that he would use for his cocoa beverage”.
The President, National Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Bassey Edem, urged manufacturers to look inward for raw materials instead of depending on foreign imputes for manufacturing.
“We have a lot of raw materials that we can exploit, so manufacturers should look inward. Only few would be affected by lack of local alternatives. It is time for manufacturers to look inward and diversify, because our refineries are not working, and we have to import almost everything, which does not encourage growth. It does not mean that you should not import. You can do so if you have your forex,” he explained.
Lamenting the overdependence on foreign raw materials for local manufacturing, Edem said, “We were importing materials for cement, even when we had the lime stones and other items needed to make cement. Manufacturers would want to import oil rather than produce oil from palm trees that are available locally. Dangote decided to explore the cement sector on his own, and today it is a success,” he said.
He said although government is in support of manufacturers, who develop their raw materials locally, it should also encourage manufacturers that are willing and show interest in developing their raw materials to come on board.
“For materials that cannot be sourced locally, government should assist by allowing them, for the time being, to import. The country is broke and everyone must realise it and find a way to overcome the challenges. Manufacturers should also look at incentives and tap into them. There are intervention funds that they can make use of. If they start working effectively, government would start doing things for them. Government should give tax holidays.”
Edem also urged manufacturers to embark on research, so as to develop alternative raw materials for their products.
“Manufacturers can also collaborate with the research institutes to conduct research into alternatives that can help their businesses grow. The ministry of science and technology houses all research— rubber and oil palm among them. Their research findings are for industrialists. A former minister was talking about cassava bread, but there was a disconnect, because there was no industry to produce the bread from cassava. I sympathise with manufacturers, but there are some of them, who are not prepared to develop available raw materials.”
The Director General, Lagos Chamber of Commerce and Industry (LCCI) said the raw materials couldn’t be produced locally overnight.
“Domestic alternatives for raw materials cannot be derived overnight. We are talking about specific materials with specifications. Packaging companies are in a fix because some of their materials cannot be derived locally. Some businesses are shutting down, while others will change their line of businesses,” he said.
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1 Comments
Car assembling in Nigeria under Jonathan was a repeat of economic misadventure of 1970’s in 2013.
Nigeria has no capacity to produce Cars with local inputs.
It is senseless for Nigeria to promote Car assembling with little or no local inputs yet again, while neglecting adding value to 100% Primary products for jobs creations through its value chain.
Fish, Rice, Tomatoes farming, Cattle/goat Ranching & Leader processing + value chains with 100% local inputs are more important than Car assembling with 10 – 20% Nigeria labour as the only inputs. Even the fuel [diesel] for assembling the Cars in Nigeria are imported.
We will review and take appropriate action.