Real sector’s dwindling fortunes and a nation’s growing army of dependants

Beyond graduate unemployment, a specter hovers – there is a growing army of dependants that have risen as a result of loss of jobs by their benefactors from the shutdown of operations or sharp decline in activities due to harsh operating environment. The real sector is believed to hold the ace in addressing this concern, but can it rise to the task, especially at this time? FEMI ADEKOYA writes.

The reality of the situation in which Nigeria finds itself has raised more fears amidst low expectations, both among operators in the real sector and consumers.

For the real sector however, it is an unusual burden to which they are trying to adjust, as they have to cope with the challenges of rising costs of production in a state of near economic stagnation while facing the prospects of being the base by which the government hopes to obtain tax revenue to finance the economy.

For consumers, it is time to prioritise spending as inflation and reduced income continue to shape purchase decisions.

Although, some stakeholders believe that the present unemployment figures by the Federal Government are artificial as jobs can be created when the value-chain of most commodities are developed, the road to value-creation is less travelled, as real sector operators reconsider their decisions of investing in the economy.

With many operators shutting down operations, downsizing has remained an alternative being considered in order to avoid labour crisis.

Indeed, results of the latest ‘Household Economy Survey’ by Philips Consulting showed that the prevailing economic situation in the country has resulted in detrimental effect on the economic security of most citizens and households.

According to the report, the severe drop in crude oil prices, decline in government revenue, devaluation of the Naira and surging inflation rates, in addition to the country’s high poverty (70 per cent) and unemployment (12.1per cent) rates have had a detrimental effect on the economic security of most citizens and households.

The survey, which assesses the socio-economic state of Nigerian households to determine the proportion of vulnerable households in the country, revealed that over half, 51 per cent of its 5,747 respondents considered their households to be either mildly, moderately or severely food insecure, while over 31 per cent of respondents stated that their households had experienced food insecurity for a few months within the past year.

The report showed that food was also rated as the highest household expenditure by over half (53 per cent) of respondents, far ahead of other expenditures such as shelter (15 per cent) and transportation (10 per cent).

The current inflation rate of over 16per cent and the sharp increase in the prices of imported food (due to the difficulties experienced by importers in securing foreign exchange) have had a large negative effect on consumers, affecting their access to different food items.

Already, recent market survey showed that the rise in consumer price index, fuel price and the harsh economic climate has affected the prices of consumer goods by over 50 per cent.

The nationwide survey, which was carried out between May and June 2016, with a focus on assessing the following four main areas of household economic stability: food security; health and education; household finance (income and expenditure); and household assets, defined food security as the physical and economic access to adequate amounts of safe and nutritious food.

To address unemployment and rise in dependents, the Bank of Industry (BoI), noted that there are jobs for the teeming unemployed youths in the country, if value-addition of various commodities is properly exploited and encouraged through a gradual shift from exportation of raw materials.

Indeed, the Development Finance Institution (DFI), noted that Nigeria must add value to its natural resource endowments, stating that the 774 local government areas in the country have natural resource endowments to be exploited.

BoI’s Acting Managing Director, Waheed Olagunju, said the major difference between the rich and poor nations of the world is their level of industrialisation, saying that industrialisation is a multidisciplinary process where everybody has a role to play.

He explained that the multiplier effect of investment in the agricultural sector remains one of the highest, adding that most of the raw materials used in the manufacturing sector are sourced from agric value-chain.

He said: “Nigeria must add value to its natural resource endowments. I want to say here that the huge unemployment rate in Nigeria is artificial. If we start adding value to our natural resources, we will not have enough manpower to operate in the Nigerian economy. The 774 local government areas have natural resource endowments lying fallow. If we start adding value to them, we would stimulate primary production and processing, meet our local needs and even export. We will not be depending on oil prices which we have no control.

“We need to propagate commodity-based industrialisation. We do not need rocket science to transform our economy. Other oil producing countries have diversified their economies. There is need to increase the contribution of the manufacturing sector to our Gross Domestic Product (GDP) to double digits. The only way we can achieve inclusive growth is if we embark on commodity-based industrialisation strategy.”

However, uneasy lies the head that wears the crown as the real sector, while dealing with operational challenges and rising consumer purchasing indices, continue to suffer capacity utilisation decline as the nation’s manufacturing sector dropped further to about 30 per cent from its low record of about 50 per cent.

Describing the situation in the real sector, President of Manufacturers Association of Nigeria (MAN), Dr. Frank Jacobs, stated that real sector operators are struggling to survive and run their operations.

Indeed, many firms have continued to grapple with input cost pressure and weak consumer purchasing power, while earnings outlook for the second half of 2016 remains dim.

Indeed, companies like Nestlé Nigeria Plc, Nigerian Breweries Plc, Dangote Cement Plc, and Lafarge Africa, in the first half of the year, suffered combined profit losses to the tune of N51.86 billion, while there are indications that other unlisted equities may have incurred more losses during the period.

A review of unaudited financial reports of many of the firms for the first half of 2016, revealed a struggle between balancing rising input cost pressures and passing the inflationary pressures on already constrained consumers by raising prices of some products during the period.

Some of the input cost pressures being encountered by many manufacturers border on foreign exchange losses on dollar loans, the inability to access foreign exchange, the high cost of production as well as poor electricity supply and tariff hike.

Others are prolonged gas supply shortages across Nigeria, which forced companies to rely on the more expensive backup – low pour fuel oil (LPFO), monetary policies and constrained consumer purchasing power.

For instance, Nestlé Nigeria Plc reported a 94 per cent drop in profit after tax for the second quarter ended June 30, 2016, representing N535.809 million for the quarter against a profit of N8.887 billion recorded a year earlier. However, its revenue stood at N80.442 billion during the period under review up from N65.924 billion reported in 2015, representing a 22 per cent growth.

According to the reports filed with the Nigerian Stock Exchange (NSE), Dangote Cement Plc’s profit after tax for the period under review stands at N106.3 billion representing a decline of three per cent from N123.1 billion declared a year earlier. The company attributed the loss to foreign-exchange constraints in the country, which prompted it to reconsider the pace of its expansion and now believes a five-year building programme is more appropriate.

Following a tax provision that fell to N6.48 billion in 2016 half year, Nigerian Breweries Plc’s Profit After Tax (PAT) stood at N19.07 billion from N21.48 billion in the corresponding period of 2015.

The company’s profit margins fell in HY1 2016 compared with HY1 2015, reflecting weak consumers’ spending power, rising inflation, high input costs, foreign exchange losses, the difficulty in sourcing foreign exchange and stiff competition.

For Lafarge’s Q2 2016 results, its after-tax loss narrowed to N24.3 billion, although Lafarge had issued a profit warning, which stated that it expected Q2 2016 earnings to be materially impacted by N28 billion unrealised foreign exchange loss.

The losses arise from forex denominated loans consisting of shareholder loans of $310 million and external loans of $85 million.

While Lafarge was able to refinance most of its naira debt via its N60 billion bond issue, it has not been able to refinance the forex component, even as it also brought in some forex loans of UNICEM into the Lafarge books.

Besides, the latest monthly survey of the Statistics Department of the Central Bank of Nigeria (CBN) shows a sustained decline in activities in the manufacturing sector as the Purchasing Managers Index (PMI), again recorded declining levels of production, new orders, employment and raw material inventories, in the buildup to the release of the second quarter Gross Domestic Product (GDP).

While Nigeria has no dependency programmes to address growing concerns of consumers, there is need to revive the real sector to create needed jobs for economic survival of the populace.