– Manufacturing: Still Haunted by Old DevilsTHISDAYLIVE – THISDAY Newspapers
In spite of the recovery of the Nigerian manufacturing sector to its pre-COVID-19 productivity, the sector as shown in a report by MAN is still haunted by its age long besetting challenges, writes Dike Onwuamaeze
Stakeholders in the Nigerian manufacturing sector heaved a sigh of relief when the sector bounced back to its pre COVID-19 pandemic performance. One of the reports, which emanated from the Manufacturers Association of Nigeria (MAN) said that the manufacturing sector’s aggregate index recorded 52.9 points in the second quarter of the 2021 above the 49.1 points it achieved in the second quarter of the year.
It said: “On account of the improved economic tranquility, aggregate MCCI increased to 52.9 points in the second quarter of 2021 from 49.1 points recorded in the first quarter of the year. That was the first time the index value would reach and exceeded the 50 neutral points since the first quarter of 2020 when it recorded 44.4 points, thus, suggesting that the macroeconomic ambience improved in the second quarter of 2021.”
CHALLENGES OF MANUFACTURERS
Nevertheless, the MAN’s Manufacturers CEO Confidence Index (MCCI) also showed that the old devils that have been hamstringing the country’s industrial sector are still assailing the competitiveness of the Nigerian manufacturing sector.
Like Abraham Maslow’s hierarchy of human needs, the MAN arranged in hierarchical order the bottlenecks militating against the manufacturing sector in the country, which included lack of forex, multiple taxes and levies by government agencies, high cost of electricity and high electricity tarrifs, girdlock at the national ports and high cost of transportation.
Others are lack of credit facilities/high lending rate, high cost of raw materials, low sales/low government patronage, high cost of production, poor infrastructure, insecurity, increasing in smuggling of textile materials into the country and unfavorable trade policy. The list also included shortage of skilled labour and frequent change in government policies.
For instance, production and distribution costs increased by 21 per cent in the second quarter of 2021; capacity utilisation declined by eight per cent; volume of production also declined by eight per cent.
Similarly, manufacturing investment declined by 15 per cent in the second quarter of 2021; employment declined by nine per cent; sales volume also witnessed a decline of eight per cent in the second quarter of the year while cost of shipping increased by 20 per cent in the second quarter of the year.
Although myriads of challenges were identified, the MAN stated that poor access to foreign exchange for importation raw materials and machines that are unavailable locally ranked first among the challenges.
It said: “Difficulty in sourcing FX for importation of raw-materials and machines that are not locally available has been a critical challenge to the manufacturing in Nigeria. Since the onset of COVID-19 pandemic in the early quarter of 2020, the severity of FX challenge has intensified, particularly as the value of the Naira deteriorated. Unfortunately, even with gradual return to normalcy of business activities and the increasing recovery of FX earning as crude oil prices improved, acute shortage of FX persisted.
“In addition, the Central Bank of Nigeria (CBN) has consistently intervened in the FX market but the result has been negligible, particularly in the second quarter of 2021. Consequently, 52 per cent of manufacturers interviewed during the fieldwork for the second quarter MCCI, disagreed that the rate at which FX was sourced has improved. Thirty per cent of all manufactures interviewed were not sure while only 18 per cent agreed that the rate has improved.
“On this account, therefore, it is critically important for the CBN to speed up the ongoing review of FX management procedures to ensure that available FX in the country is productively utilised.”
The MAN noted that the cost of funds in Nigeria, which is usually at double digit, has always been one of the core challenges of the manufacturing sector. This is because it tells directly on cost of production and the competitiveness of the sector.
An overwhelming majority, which was 76 per cent of manufacturers enumerated in the fieldwork of this report, disagreed that the rate at which commercial banks lend to manufacturers encouraged productivity in the manufacturing sector.
Only 13 per cent of those sampled agreed that the current lending rate encourages productivity in the sector while the remaining 11 per cent were not sure.
The MCCI stated that lending to the real and the manufacturing sectors have been dwindling over the years due to the increased presence of the government in the Nigerian money market through the issuance of treasury bills, bonds, Sukuk, etc. These have almost crowded out private sector borrowing in the domestic financial markets.
“It is, therefore, pertinent that government balances its participation at money market with the interest of the private sector,” the MCCI said.
The MAN advised that “it is, therefore, expedient for the CBN shall take-up a rigorous monetary management measures that would encourage reduction in lending rates on loans offered to the productive sector by the commercial banks. With the Monetary Policy Rate (MPR) standing currently at 11.5%, there may not be credible reason that the average lending rate to manufacturers by the banks is still as high 22 per cent as revealed by our survey of the sector.”
The report also numbered regulatory environment among the old devils besetting the industrial sector. Reponses from manufacturers showed that over-regulation of the manufacturing sector by government agencies still persisted in the quarter under review.
Majority of respondent, 95 per cent in all, agreed that multiple and overregulation by government agencies have depressing effect on manufacturing productivity.
Moreover, manufacturers suffered multiple regulations on a single manufacturing process occasioned by the agencies of the federal, state and local governments.
The manufacturers said that multiple taxes/levies charged by government agencies have discouraging effect on manufacturing production. Apart from the approved list of taxes and levies to be charged to companies as compiled by the Joint Tax Board (JTB), there are a large number of outside taxes, levies and fees that are charged to manufacturers by the revenue generating agencies of the government.
“It is therefore important for the Government to publish the list of taxes and levies compiled by the JTB and ensure that all charges to the manufacturing sector are legal.”
Unsold Manufactured Products
The inventory of unsold manufactured products slowed in the quarter under review based on the opinion of manufacturing CEOs. Thirty nine per cent of respondent disagreed that inventory of unsold manufactured products has reduced over the last three months, while another 39 per cent simply disagreed while 22 per cent of the respondents simply were not sure whether inventory of unsold manufactured products has reduced in the quarter under review.
During the entire year 2020, which marked the high-point of COVID-19 pandemic, aggregate consumption was at the lowest ebb due to loss of household and firm purchasing power resulting from unpaid salaries and contract sums. Moving forward, therefore, it important that government should provide a contingent buffer through appropriate saving to mitigate shortage of fund in similar periods as COVID-19.
It is also important to promote industrial development in the country to assimilate the unemployed Nigerians, particularly those displaced by the COVID-19 pandemic. Government should also improve purchasing power in the country by carrying out ardent monetary and exchange rate management so as to allow the persistent inflationary pressure to decelerate.
An Economist and Private Sector Advocate, Dr. Muda Yusuf, told THISDAY that the manufacturing sector has suffered considerable setback due to insufficient foreign exchange to support the reliance on high import of raw materials and machineries by the sector.
Yusuf noted that this has also become a major factor in the competitiveness of Nigerian industries that are still grappling with this shortcoming as the performance of the various sub sectors was largely dependent on the extent to which they could source their raw materials locally.
He said: “Despite the numerous policies and measures that have been articulated by successive governments, manufacturing contribution to GDP remains less than 10 per cent on average over this period. The sector has remained largely import dependent which has made it very vulnerable to external shocks, resulting also in the weak competitiveness of the sector.”
He averred that many manufacturing firms have low local value addition, weak backward integration, inadequate forward integration, and low job creation potentials. All of these have combined to weaken the impact of the sector on the economy and the development process.
The corollary, according to him, is that “many industries have become moribund, and their premises turned into worship centres, event centres, shopping malls or warehouses for imported finished goods.”
Yusuf added: “The Nigerian manufacturing sector is too dependent on import, which is a major shortcoming of the Nigerian manufacturing sector. The sector accounts for about three per cent of Nigeria’s foreign exchange earnings and over 30 per cent of the country’s import bill. This demonstrates that the sector is not properly aligned with the vision of self-reliance being promoted by the current government.
“Local value addition is still very low. The most sustainable segment of the manufacturing sector is the food and beverage industries and the cement industries where the local content is well over 60 per cent. This explains the competitive strength of these segments.”
Speaking in the same vein, the Director General of Nigeria Employers’ Consultative Association (NECA) Dr. Timothy Olawale, observed the need to address some fundamentals mitigating against the efficiency of the country’s manufacturing sector in order to improve export potentials in the manufacturing sector.
This could be addressed with the provision of friendly business environment, access to FX for productive activities, improved infrastructural facilities, most especially electricity, which constitutes about 40 per cent of production cost, and increasing insecurity in the country.
Olawale said: “To revive the potentials inherent in the country’s real sector, the need to develop policies and initiatives to support sectors with export potentials should be top priority for national development. Attracting investors with incentives and tax rebates would address the critical need.
“In order to improve the trade balance, the country should provide windows for repatriation of exports proceeds, most especially, the non-oil products and promote more backward integration programmes in reducing imports of goods and services, ordinarily, which should be sourced locally to reduce the demand on FX.”
Why is the manufacturing sector in decline in Nigeria? The Director General of the Nigerian Association of Chamber of Commerce, Industry, Mines and Agriculture (NACCIMA), Ambassador Ayo Olukanni, attributed the decline to factors like insecurity, inadequate basic infrastructures, socio-cultural problems, inability to raise capital.
“The fluctuation in securing forex to purchase raw materials affects production adversely. The inability to modernise production process is also taking its toll on the sector.
“Inadequate access to credit hampers manufacturing activities as producers cannot expand to the desired level. High lending rates scares our members to access these loans, fluctuations in prices of raw materials, smuggling in of similar goods produced in the country tends to affect our members interests.
“The manufacturing sector is fraught with power challenge as far as Nigeria is concerned. The epileptic power supply is a major reason why manufacturing is on the decline in the country. Improving electricity supply is an essential step in kick-starting the large-scale extraction and development of Nigeria’s solid mineral industry,” Olukanni said.