How weakening Naira wanes manufacturers’ competitiveness
AN increase in manufacturing activity benefits an economy’s industrial sector as it represents a significant source of demand for goods and services in other sectors of the economy, while playing pivotal role in supporting government’s employment generation scheme.
Ideally, a competitive manufacturing sector becomes a foreign exchange revenue earner for the country due to its export potential.
Presently, Nigeria’s balance of payments situation is determined primarily by developments in the world oil market, a situation that has necessitated the rationing of foreign exchange to different sectors based on need of such sectors.
Amongst a range of stringent measures to protect the naira and shore up the nation’s forex reserves, the CBN ordered stoppage of cash deposit of foreign currencies and also blocked use of naira debit and credit cards abroad, and transactions requiring payments in foreign currencies.
In order to avoid further depletion of reserves, the CBN reviewed its former stance by unveiling a number of countervailing actions including the prioritisation of the most critical needs for foreign exchange.
Specifically, the central bank’s highly limited supply of foreign exchange for matured letters of credit from commercial banks; for the importation of petroleum products; for importation of critical raw materials, plants, and equipment, and payments for school fees, business and personal travelling allowances, and related expenses, became priorities.
To address the shortfall in the country’s foreign exchange earnings, the Manufacturers Association of Nigeria (MAN) has urged the Federal Government to introduce counter-purchase strategies for locally manufactured goods as well as incentives for non-oil exporters.
Indeed, counter-purchase strategy is being increasingly viewed by firms and nations as an excellent mechanism to gain entry into new markets by creating parallel business transactions that link a sales contract with an agreement to purchase goods or services as a means of reducing the flow of convertible currency.
The President, Manufacturers Association of Nigeria (MAN), Dr. Frank Jacobs, said the discontinuation of forex supplies to BDCs was a positive step for real sector players.
“It is difficult to understand why, in the first instance, these outfits should depend on official allocation of forex by the CBN for their survival. Foreign exchange allocated to the BDC as well as from other sources should be channelled to the productive sector of the economy especially manufacturing, for the importation of essential input and machinery that are not locally available as well as to the social welfare segment of the society like hospitals, schools among others,” Jacobs said.
Jacobs also urged manufacturers to explore opportunities in sourcing raw materials locally in order to address production challenges.
He noted that local sourcing of raw materials as an alternative for foreign inputs for local production will further help to reduce pressure on the demand for foreign exchange in the country.
“Given the challenges manufacturers are experiencing currently, there is a need for manufacturers to pay greater attention to local sourcing of raw materials and to tune-up to government agenda of backward integration.
“This action is indicative of the policy orientation of government and its aversion towards the importation of otherwise locally available inputs and items. This means that the time for the increased local sourcing of our raw materials has come. MAN is in support of this proposition and going forward, local sourcing of raw materials should be our first consideration,” he added.
For instance, following its inability to access foreign exchange under the old foreign exchange policy regime as well as the gloomy forecast for 2016, DAG Motorcycles Industries Nigeria Limited, also known as Bajaj, has cut back on some of its operations and downsized its workforce.
According to the firm, the move became necessary to forestall challenges with management of rising production costs and gloomy forecast for the 2016 financial year.
Specifically, the firm stated that the lingering inaccessibility to the Central Bank of Nigeria’s foreign exchange window under the just-ended policy regime forced it to disengage the services of its outsourcing contractor for its production line, Ashton Consulting Limited, even though the effect of the reviewed policy is yet to be appraised by the operator.
Reacting to concerns by some of the employees of its contractor, Company Secretary and Legal Services administrator of DAG Motorcycles, Ademuyiwa Abe explained that the company, whose capacity utilisation level enabled it to produce 1000 units of motorcycles monthly, was hit by the forex crisis with its production capacity dropping by over 50 per cent.
He explained that the company was left with no other option than to terminate the appointment of the contractor as cost of importing Complete Knocked Down (CKDs) and subsequent production cost had become unfavourable for the company to compete in the local market.
“We have been around for some few years now assembling motorcycles. The company brings in Complete Knock Down (CKD) to assemble here in Nigeria, but because of the nature of the business of local assembling, what the company has been doing is to outsource its labour force.
“Ashton Consulting Limited which supplies the workforce are also in charge of paying their salaries and other entitlements. The motorcycle company only discusses with the consultant. The consultant is just to supply the labourers that will do the assembling. But in the last few months of last year, there was restriction of foreign exchange by the Central Bank of Nigeria (CBN), so most of the times there were no foreign exchange to bring in the CKD, not just the CKD, but other items required for assembling. Since there was no more foreign exchange, the situation began really bad that we had no choice to tell our contractors to close down for a while and if the situation improves and CBN lifts the ban, we will call on them to recruit new or existing workforce.
Similarly, to guard against any currency and transaction risks as well as prevent hedging, especially in the face of currency fluctuations, sugar refiners within the country on Monday, discontinued credit facilities to their customers.
With the Nigerian sugar industry still largely dependent on imported raw sugar, indications are that the present credit scheme cannot be sustained by the refiners.
According to a statement issued by the management of BUA Sugar Refinery (BSR) to its customers, the management of BSR said that while the official exchange rate had remained stable, significant currency and transaction risks still exists for customers who collect sugar on credit.
This measure, according to the statement, will however not affect the company’s operations and sugar deliveries will continue to be made against verified payments.
Experts believed that now may be a good time for an international business to start exporting as a way to take advantage of the weak domestic currency value.
For exporters working in a weak currency, the question isn’t whether there are opportunities, but rather which opportunities will serve their businesses best. By using strategies that grow relationships with customers, exporters can take advantage of the short-term situation while positioning their international businesses for long-term success.
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6 Comments
Assembling CKD’s is not manufacturing and entities engaged in this should not have access to any benefit allocated for manufacturers. The Buhari administration and indeed any future administration must hold the line on who can be called a manufacturer and get the support they need to thrive. Nigeria cannot afford the to subsidize foreign manufacturers with it’s hard earned forex.
That said, it is highly disruptive to put these policies in place without preplanning and adequate notice given to these assembly plants to source locally. A weak currency is typically good for the export manufacturers as the products become comparatively cheaper abroad but if the business is strictly an assembly of CKD’s, the benefits of local manufacture is lost.
The Buhari administration can provide an out for these group of businesses
1. Require a specific minimum percentage of their product must the exported to pay for their forex requirements. Nigeria cannot afford to keep cuddling foreign manufacturers masquerading as local manufacturers.
2. A product cannot be labeled Made in Nigeria without at least 50% local content to start with and can gradually be raised to 85% over 25yrs, excluding labor.
3. The administration must do everything within its ability to help open up foreign markets for Nigeria value added good and products. The Buhari administration must take advantage of the business opportunities afforded by ECOWAS and must active encourage expansion and greater integration of the zone business activities. That is a task the Buhari admin must must demand from all foreign missions. Their job as liaisons for Nigerians and their businesses must be taken seriously. They are not just cultural attaches, they are salespersons for Nigerians and Nigerian businesses, time the act like it. Maintaining these missions take a considerable investment in foreign exchange and we should therefore make sure the investments are worth it.
God Bless Nigeria.
well said.
Assemblying CKDs is a very good starting point for a country that has a plan. Ours is country that has no plan. It is our own duty to reduce the foreign content of CKDs. The chinese attract the western companies and gradually reduce the foreign supply by producing the same CKDs to standard using local resources. Tell me how General Motors for example will bring the complete manufacture of their vehicles to you. If you have a plan you attract them first to com and assemble, then you convince them you can supply them with certain parts of their prescribed quality competitively. Over time you may even achieve 100% manufacture. It is even a good deal for the foreign company.
Our unfortunate problem is lack of plan to succeed.
Nigeria learned nothing from the previous failed CKD of the 70’s. Peugeot and Volkswagen come to mind. Those steppingstones were laid over 30yrs ago, we just keep forgetting to weed the space in between steps as we add more stones to make a bridge. CKD’s cost more for Nigerians because they now have to pay twice for the labour. First time in the home country and second time in Nigeria. Before anymore such project should be approved, there must be a time limit to attain 50% local content and must start with at least 20% local content excluding labor. It doesn’t take a genius to do upholstery
BTW, when Ford and GM went into China, they went in not with CKD but with manufacturing and locally sourced content because the Chinese government demanded it. If they see value in selling into Nigeria, they will acquiesce. When Ford opened a plant in China, in 2012, it became a big campaign issue as the Republicans accused Obama administration tax policies for driving American policies overseas. For of course denied this and stated the move into China was an expansion into China and will not affect the local production. Any person with gray matter knows that while it may be an expansion, that fewer vehicles will be manufactured in the USA as is manufactured in China.
When Toyota expanded into Indonesia, early 70’s, they started with a very significant local content all panel (foundry) and upholstery started out completely locally manufactured.
So it can be done with a capable and patriotic negotiators at the desk for Nigeria.
One of the best moves by CBN was to ban forex for BDC and for those 41 items. Nigerian’s needs to start looking internally for its finished goods and raw material. The only way we can increase the value of the naira, is to reduce importation. however the major problem is that CBN, Nigeria government and agencies are not doing a good job of communicating to Nigerian’s the goals and desire. There has yet to be a clear and constant education to the Nigeria people about the source of forex and how that source affect the value of the naira. policy to ban 41 item is good, however effort has to be made to increase the demand and supply of those locally produced goods. we need serious leaders, willing to work and think outside the box. our government needs to face the fact that oil prices are not going up any time soon, and they can’t wait till it hit zero before they act. if you are not generating as much revenue, you need to reduce your expenses.
A good starting point is tariffs imposed on imports and tax incentives for local exporters. Companies that fiancé their forex need through value added product export should be incentivized. Manufacturers should be given tax breaks in proportion to their local content so that those who support the country most, get the most benefit from the country.
We will review and take appropriate action.