Manufacturers’ dilemma in managing rising production costs
Costs matter in different ways to different manufacturers in different climes. From Labour costs to energy costs, cost of raw materials and proximity to markets, manufacturers give a lot of considerations to costs that may affect their bottom-line. For the Nigerian real sector, the cost of production in an environment that is heavily dependent on importation for raw materials is a source of concern, considering the huge costs of accessing foreign exchange. FEMI ADEKOYA writes on how manufacturers continue to seek government’s intervention for sustainability in business.
COST is a key factor in manufacturing. It however comes in many forms and changes constantly. Alongside labour costs, there are also those for raw materials, energy, transport and much else besides. Currencies move too. In terms of access to markets, yesterday’s low-cost location may turn out to be tomorrow’s money-pit.
For the Nigerian real sector, production costs have remained more of a nightmare since the beginning of the year.
Within the last few months, activities within the real sector have witnessed a lot of anxiety bordering on the effects of exposure to foreign exchange markets, following the devaluation of the naira.
For some manufacturers who have a high inventory of raw materials preparatory to uncertainty that the elections may pose, it has been a smooth ride, while others have had to contend with the prevailing market rates of foreign exchange.
Already consumer prices are being affected by higher inflation arising from pressures on production, operating costs across sectors and a high cost of imports.
Despite warnings by the Manufacturers Association of Nigeria (MAN) to its members against exposure to the forex market, the move has become inevitable considering the need to avoid low capacity utilization of many factories.
Specifically, members of the association have begun to transfer the high production costs of locally made goods to consumers.
Indeed, the Lagos Chamber of Commerce and Industry (LCCI), in its economic review for 2014 and outlook for 2015 noted that the country’s inflation rate may cross the double-digit mark in the first half of 2015 as the combined austerity measures introduced by the government and tighter monetary policy of the Central Bank of Nigeria will put additional pressure on consumer prices.
It said, “A natural outcome of the depreciating exchange rate in an import-dependent economy is inflation. Cost-push inflation will begin to manifest in the next few weeks of 2015. This will be driven by high cost of production and high cost of imported finished goods”.
Worried by the effects of the recent actions of the Central Bank of Nigeria (CBN) to salvage the naira through the closure of the RDAS/WDAS foreign exchange window, on the real sector, the LCCI has sought relief from government to salvage earnings of the sector.
Specifically, some of the reliefs include the urgent provision of a refinancing facility as lifeline for investors in the economy, which have high foreign exchange exposure through a N200 billion facility to be provided at single digit interest rate and a 15-year tenure.
Furthermore, the LCCI stated that all critical raw materials and other imported inputs of manufacturing firms should henceforth attract zero import duty, while port charges should be waived for raw materials importation and machineries.
The chamber explained that the reliefs became necessary to mitigate measures and cushion the effect of the forex policy on investors with high foreign exchange exposure.
“Besides, many real sector investors are faced with numerous investment climate challenges which include high cost of fund, competition from unbridled smuggling and dumping of finished goods, counterfeiting and faking, high energy cost including electricity tariffs, high cost of regulatory compliance and high transactions costs at the ports.
“Following the revision of the guidelines and the exclusion of some transactions, this forex window was targeted at providing support for the real sector of the economy because of their strategic importance to the development process, job creation and inclusive growth.
“Many firms, especially manufacturers with high foreign exchange exposure have been thrown into loss positions as a consequence of the depreciation of the naira over the last couple of months and the eventual closure of the RDAS window. This is a major challenge currently being faced by many real sector operators, especially the medium and large firms.
“The ECOWAS Common External Tariff [CET] will soon come into force and would create new competition challenges for domestic firms. A combination of monetary and fiscal measures will need to be deployed to mitigate the pressure on the affected firms and save them from going under”, the LCCI explained.
Commending the action of the apex bank, the LCCI stated that the huge premium of over 20% was a major incentive for round tripping; corrupt practices in the management of the forex, speculative activities in the foreign exchange market and many other abuses.
“It was also a major source of uncertainty and volatility in the market. There were concerns about the lack of level playing field in the management of the RDAS window. In the light of all these, it is difficult to fault the decision of the CBN to close the RDAS window.
“Following the revision of the guidelines and the exclusion of some transactions, this forex window was targeted at providing support for the real sector of the economy because of their strategic importance to the development process, job creation and inclusive growth. They are therefore the first naturally victims of the closure, particularly the few that had access to this window”, the chamber added.
On its part, MAN Ikeja branch raised concerns over what it described as outrageous bills by distribution companies, especially after the recent increase in electricity tariff by distribution companies.
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