For Real sector, An Unreal Year

For the sectoral groups in the real sector, 2016 may go down in history as the most tasking year. The out-going year witnessed an upsurge in the advocacy and stakeholders’ engagements of the Manufacturers Association of Nigeria (MAN). MAN engaged governments at all levels, including Ministries, Agencies and Departments (MDAs) and regulatory authorities, on issues affecting the real sector and the economy.
From lack of access to the official foreign exchange (forex) market by manufacturers to agitation for settlement of outstanding claims on Export Expansion Grant (EEG) after genuine claims were certified, and increase in electricity tariff without commensurate increase in quality and quantity of power supply for industrial use, among others, it was quite challenging for industrialists.
The increased tempo of MAN’s advocacy and engagements was all it could do to save the sector from total collapse. Although, the performance of the real sector, which comprised manufacturing and agriculture, has, over the years, been everything but sterling due to a plethora of business environment-related issues, it assumed threatening dimension last year, further reduced its performance to a disturbing level. For instance, while Nigeria’s real sector contribution to Gross Domestic Product (GDP) currently stands at 9.5 per cent, those of the United States (US) and China stand at 35.6 per cent and 49.5 per cent, respectively. Malaysia boasts of 45 per cent real sector contribution to her GDP.
For manufacturers and other real sector operators, high cost of production was the culprit. They blamed it on local and foreign investors’ apathy in investing in Nigeria, closure of factories and migration of the few surviving ones to greener pastures, which resulted in job losses, with attendant insecurity and rising crimes. Because of rising energy cost, for instance, most manufacturing firms in Nigeria contended with falling profit margin last year. Shrinking margin was one of the major threats to business sustainability and manufacturers’ global competitiveness.
According to the Chairman, Economic Policy Committee (EPC) of MAN, Reginald Ike Odiah, manufacturers spend an estimated N500 billion annually for running and maintaining their in-house power plants. The sector as a whole operated on more than 70 per cent of energy it generated, using generators. And operating these generators greatly increased the cost of manufacturing goods. For much of last year, MAN President, Dr. Frank Udemba Jacobs, lamented that manufacturers were paying for electricity not consumed.
Other factors that undermined the performance of the real sector last year included increase in the prices of petroleum products used by industries, multiple taxation, unabated smuggling and inadequate access to finance, both locally and abroad. Corruption was also a major factor, even though the President Muhammadu Buhari administration stepped up the anti-graft war. The alleged unwholesome practice by Nigerian franchisers of gas, who created bottlenecks in the supply chain and pricing, was also a pain in the neck for real sector operators.
Global crisis and its unsavoury local consequences
If developments in the real sector in 2016 were challenging, those at the global scene were devastating. From mid-June 2014 when global oil prices started crashing, operators in various sectors of the economy have never slept with both eyes closed.
For instance, from over $120 per barrel in December 2013, oil price fell to around $60 per barrel in December 2014. By December 2015, it crashed to about $32 per barrel. Again, by January 19, 2016, the price of Brent crude, which is the world benchmark price, crashed to below $28 per barrel, the lowest in 12 years. As at Thursday, December 15, 2016, oil price was $49.74 per barrel.
The effects of the crash of oil price started manifesting as soon as the present administration came on board on May 29, 2015. The crisis, which continued in 2016, induced a sharp drop from the Federation Account, necessitating a huge financial bailout for some state governments. At the last count, 27 out of 36 states were broke and unable to pay salaries.
Because of the import-dependent nature of the economy, the slide in oil prices in the international market caused an unprecedented slide in the value of the naira. And the development necessitated the need for a policy intervention to defend the value of the naira and protect the nation’s foreign reserves in the midst of dwindling revenue from oil.
The Central Bank of Nigeria (CBN) uses the foreign reserves to defend the naira, but the reserves have been badly depleted as a result of sharp fall in oil revenue. Industry watchers say CBN policy of defending the naira has failed, and there was need for the apex bank to allow the naira rate be determined by market forces. The apex bank did just that when it came out with a new flexible, market-driven forex policy.
Before the new forex regime, more than 200 out of the over 2,000 manufacturing firms in the country were on the verge of closing shop due to lack of raw materials to continue production.
While about 100 operators in the general goods sector indicated their readiness to shut down when they run out of raw materials, 120 operators in the pharmaceutical manufacturing sector were said to be down to two months’ supply of raw materials after they were unable to restock. Also, in the food and beverage sector, only few of the 80 operators remained in business.
The high mortality rate in the industrial sector was blamed on CBN’s June 2015 monetary policy that barred importers of 41 items that can be sourced locally from accessing its official forex window. The policy threw the real sector operators, particularly manufacturers, into confusion. Those who needed the raw materials and products were restricted from the forex market as their primary products in the manufacturing process were adversely affected.
However, in removing the 41 items from accessing its forex window, the CBN’s good intention was not in doubt. For one, the apex bank believed that those items could easily be produced in Nigeria rather than spend the country’s reserves on importing them. The CBN also said the policy was aimed at encouraging local production of such items, which in turn would create jobs.
But organised private sector (OPS) members thought otherwise, with Lagos Chamber of Commerce and Industry (LCCI) for instance, insisting that the policy would have dire consequences for the economy if not reviewed and possibly reversed.
The LCCI immediate past President, Mr. Remi Bello, for instance, frowned at the inclusion of what he called “intermediate products” in the list of the 41 items excluded from the forex market.
He also queried the CBN for not engaging the private sector before coming up with the policy. He noted that as key stakeholders in the economy their opinion and input should have been sought as main drivers of the economy.
However, the Federal Government waded in to avert the impending collapse of more companies by creating a 60 per cent special forex allocation window for manufacturers. Through the CBN, it directed all authorised dealers to set aside at least 60 per cent of their forex purchase from all sources for manufacturers.
While commending government’s preferential forex allocation to manufacturers, Jacobs recently called on the government to continue the search for viable options of making forex available for manufacturers, as some of them are still having challenges with the intervention.
“The challenge, as always, is how to enforce the directive. This is always our default line. Good policies, good intentions, good pronouncements and launching ceremonies, but after that the Nigerian factor steps in,” industrialist and Managing Consultant, Starteam Consult, Mazi Sam Ohuabunwa, said.
He said the CBN must watch the backs of the banks and analyse their monthly returns and publications on forex utilisation, while manufacturers on their part, should set up a mechanism to monitor weekly allocations and provide feedback to the CBN and Nigerians.
Yes to EEG, no to EPA
During the year under review, MAN also appealed to government to gradually settle all outstanding claims on the Export Expansion Grant (EEG) after certifying the genuine claims of manufacturers. The Association argued that resolving the stalemate in the EEG will restore investors’ confidence, generate forex and also encourage employment through non-oil exports.
MAN also advised the government against signing the controversial European Union (EU) Economic Partnership Agreement (EPA) as currently crafted. According to Jacobs, it runs counter to Nigeria’s industrialisation objectives.
He pointed out, for instance, that because of the nation’s acute infrastructure challenges Nigeria cannot compete with the developed economies or their products because of differences in the operating environment and cost of funds. He was emphatic that signing the agreement will heavily disadvantage local manufacturers and harm the economy.
What future for the real sector?
Despite the poor performance of the sector last year, the consensus is that the sector remains Nigeria’s hope of diversifying the economy and steering it out of the current crippling recession, if its potential is fully exploited and utilised.
The belief is that the sharp decline in oil prices should force a strategic rethink in favour of manufacturing and agriculture, which hold better prospects of boosting the economy and creating jobs.
For that to happen in the coming year, experts say there is need for the Federal Government to step up its art in closing the nation’s huge infrastructure gap, while ensuring a stable macroeconomic environment through robust fiscal and monetary policies.
Other actions tipped as having the capacity to turn things around for the sector and the economy in the coming year include the sustenance of the anti-corruption drive, and strengthening national security and revamping human capital development, among others.
Interestingly, most, if not all of these strategic policy actions are captured in the Nigerian Industrial Revolution Plan (NIRP), which was why operators and stakeholders were pushing that the plan be carried to its logical conclusion if Nigeria must realise her Vsion 20:2020, which envisaged the manufacturing sector to be globally competitive, tightly integrated and contributing no less than 25 per to GDP.
The NIRP aimed to raise overall manufacturing competitiveness through improved industrial infrastructure, power prioritisation, reduced borrowing cost, access to finance, skills training, improved investment climate, better product standards, innovation and technology and promotion of local patronage of “Made in Nigeria” goods – all areas seen as major hurdles for the manufacturing sector.



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