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For manufacturing sector, recession continues

workers-in-a-factory

Workers in a factory

The manufacturing sector, which fell from a positive outlook to negative during the 2016 recession, rose briefly in the first quarter of 2017, aided by some policy initiatives. However, it plunged back to a negative position in the third quarter of 2017. ANNA OKON takes a look at the situation

The story of the rise and fall of the Nigerian manufacturing sector in the last two years has been well documented by the National Bureau of Statistics.

According to the NBS data, the first positive growth for the sector since 2016 was 1.36 per cent, recorded in the first quarter of 2017.

The performance however dipped a bit in the second quarter of 2017 to 0.64 per cent and nosedived to -2.85 per cent in the third quarter.

 Difficult period

2016 was a particularly tough period for manufacturing in Nigeria.

“It was the lowest point for the sector,” says the Managing Director of Coleman Wires and the Head of the Electrical and Electronics Sub-sectoral Group of the Manufacturers Association of Nigeria, Mr. George Onofowokan.

Faced with the reality of the dwindling foreign reserves (which had dropped from $30bn in the fourth quarter of 2015 to about $29bn in the first quarter of 2016) occasioned by the decline in the price of crude oil (Nigeria’s major foreign exchange earner) from a high of $110 to less than $50 per barrel, the Central Bank of Nigeria in February restricted importers of some 41 items from access to foreign exchange through the interbank forex window. This, it said, was to conserve scare forex.

The Nigerian manufacturing sector is about 85 per cent dependent on imported raw materials. As a result, the restriction of 41 imports from access to forex through the official exchange window proved devastating to the operators.

According to them, most of their raw materials are included on the list. They sought a review of the list to exclude vital raw materials but the CBN ignored their plea.

The situation was compounded by the Nigerian economy which had slipped into a recession in early 2016 (with the GDP growth contracting by 2.06 per cent between April and June) and the devaluation of the naira. The recession lasted for five consecutive quarters.

Thereafter, the fortunes of manufacturers plummeted and massive factory closures and job cuts followed.

John Aluya, an importer of glass dust used for making car windshields had about 500 workers in his employ.

“I have just the last stock of glass dust to produce with and after that I may have to shut down,” he told our correspondent in an April interview.

Aluya later shut down and sent all his employees home.

He was not the only person to suffer the ban on glass and glassware; the pharmaceutical industry also took a hit from the ban because all the containers for drugs and vials for laboratory operations fell into the list of 41 items.

According to an economic researcher from MAN, Mr. Ambrose Oruche, that ban alone cost the pharmaceutical manufacturing sector 8,000 jobs.

Jackson Williams, a father of three who worked as a technical worker in the refrigerator repair unit of Samsung lost his job because the entire unit was shut down for lack of fresh supplies of products. He and all other employees in that unit lost their jobs.

Onfowokan said in June, about 1,000 job losses were recorded in three companies of the electrical and electronics sector.

“One firm had 247 workers and they had to disengage 220 of them because they could no longer produce,” he said.

The CBN’s Purchasing Managers Index for August 2016 captured the performance of the sector during this trying period.

The PMI, an indicator of the economic health of the manufacturing sector, declined to 42.1 index points in August 2016, compared to 44.1 in July. 2015.

 15 out of the 16 subsectors recorded sharp decline.

The NBS reported that 3.5 million Nigerians lost their jobs at the end of 2016. The unemployment rate increased to 11.549 million (14.2 per cent), the highest since 2009 when unemployment rate rose to 19.70 per cent in the fourth quarter.

Also, 16,808 job losses were recorded in the manufacturing sector during the same period, according MAN Economic Survey.

The Coleman MD traced the woes of the sector to the immediate aftermath of the 2015 elections when President Muhammadu Buhari was sworn in on May 29, 2015 and he did not appoint his cabinet until September, five months after inauguration.

“The manufacturing sector started seeing a setback when there was a delayed reaction to decision making by the new government.

“Within the period of recession, there was liquidity crunch by the banks which did not have liquidity to fund working capital and systematically, the biggest impact on manufacturing during recession and the devaluation of the currency was that the value of working capital to run any business reduced to less than half.”

 Finding solution

Experts said the recession was a wakeup call for Nigeria and the manufacturing sector in particular. For instance, they noted that it was around this period that terms like backward integration and local content became very popular.

The Minister of State for Agriculture, Senator Heineken Lokpobiri, stressed the need for Nigeria to grow its food, saying that the nation’s food import bill, which stood at $22bn annually, was no longer sustainable in view of the dwindling resources.

In a bid to end the recession, the Federal Government, after due consultation with stakeholders, had embarked on a number of measures such as strategic adjustments in forex management policy, complementary fiscal policies, the ease of doing business project, three landmark Executive Orders, resource-based industrialisation guidelines, Economic Recovery and Growth Plan and adoption of the Nigeria Industrial revolution plan.

In line with these policies, the government drove a campaign to boost local content in all sectors and promote made-in-Nigeria products.

It established an industrial advisory council to attend to the needs of industries and encouraged the private sector to embark on backward integration.

The EGRP launched in April was meant to achieve economic diversification through agriculture, energy and the Micro, Small and Medium Enterprises-led growth in industry, manufacturing and key services.

Also, the three Executive Orders signed into law by the Vice President, Professor Yemi Osinbajo, in May were aimed at increasing the patronage of locally manufactured goods and removing all bureaucratic bottlenecks that could stifle growth of businesses in Nigeria.

Seeking to mitigate the impact of the forex challenge on the manufacturing sector, the CBN introduced 60 per cent preferential forex allocation to manufacturers, which it later jettisoned.

It also introduced $20,000 quarterly special forex allocation to the Micro, Small and Medium Enterprises, established the exporters and investors forex window to address the concerns of exporters about exchange rate and make dollar available to businesses.

Exporters were allowed to exchange their dollars for a higher amount than the official exchange rate and an amount that was closer to the black market rate at the investors and exporters special window.

Following series of appeals by manufacturers, the CBN also reviewed the list of 41 restricted items to remove vital raw materials.

It lifted the ban on the Export Expansion Grant, an incentive for exports suspended in August 2013 amidst allegations of widespread abuse.

 The government amended the local procurement laws such that agencies of government were mandated to patronise local products, in line with its “buy Naija to grow naira” campaign.

Policy impact

The campaigns and policy decisions made huge impact.

The government had set up the Presidential Enabling Business Council, headed by Osinbajo to tackle issues relating to ease of doing business.

The outcome of the efforts of this council was the improvement in the Ease of Doing Business ranking of Nigeria by the World Bank, with the country moving from 169 to 145th position on the ranking.

The introduction of the Investors & Exporters forex window as well as other interventions restored the stability of the forex market and relatively stabilised the exchange rate around N365/$ for a long time.

Most manufacturers, unable to import, found alternative sources of raw materials locally.

Guinness Nigeria Plc announced that it had increased its local sourcing of raw materials from 43 to 75 per cent.

The Managing Director/Chief Executive Officer, Peter Ndegwa, attributed the 131 per cent increase in operating profit of the firm in 2017 to this decision.

The positive side of recession, according to Onofowokan, is that for the first time Nigeria looked into solving backward integration seriously from the commitment of the private sector.

Onofowokan whose factories in Arepo and Sagamu have over 80 per cent installed production capacity, processing 60,000 metric tonnes of copper and 40,000 metric tonnes of aluminium per annum said the situation forced backward integration on his firm, making it to  increase local sourcing of raw materials from 10 per cent to 80 per cent.

“The situation compelled firms to establish factories in Nigeria solely for the purpose of supplying raw materials for the cable industry. There are two firms doing that and a third one is coming up.”

This reduction in import dependency, Onofowokan said, had saved the cable manufacturing industry $10m a month.

The President, MAN, Dr. Frank Jacobs, said capacity utilisation by all manufacturing subsectors increased from 44.3 per cent in the first half of 2016 to 59.18 per cent in the second half of 2016 and in the first half of 2017.

“In addition, some of the companies that closed shops resumed operations; employees laid off were called back; local raw materials utilisation rate increased significantly; and the perception of business promoters on the economy improved,” he said.

By September 2017, the NBS announced that the nation was out of recession with a 0.55 per cent GDP growth. At this time, there had been some increase in oil prices and relative peace restored in the Niger Delta, owing to constructive stakeholders’ engagement. Nigeria’s oil production became stable and increasing as incidence of pipeline bombing ceased.

The recession encouraged local production of rice. And according to the Minister of Agriculture and Rural Development, Chief Audu Ogbeh, the country is now very close to achieving self-sufficiency in rice production.

 Falling again

The growth of the sector was positive until the end of the second quarter of 2017 when it suddenly changed. The report of its performance in the third quarter indicated that the growth declined to -2.85 per cent from 0.64 per cent recorded in the second quarter of 2017.

The sector’s contribution to the GDP that was 9.31 per cent at the beginning of the year also fell to 8.81 per cent in the third quarter of 2017.

Stakeholders have advanced various reasons for this fall. According to them, a lot needs to be done to sustain productivity in the sector through improvement in the operating environment which is still challenged by poor infrastructure, multiple taxation, high cost of funding, inadequate power supply and high electricity tariffs.

The country is also still groaning under the weight of high inflation, which has limited the purchasing power of Nigerians. For this reason, imported goods are still cheaper and more patronised.

The General Manager, Operations, Amo Farm Sieberer Hatchery Limited, Oloruntoba Emmanuel, confirmed to our correspondent that even in the agricultural sector, imported produce sold cheaper than local ones and Nigerians mostly bought the imported items.

He said while an imported tonne of corn, for instance, sold for N110,000, the Nigerian version sold for N130,000.

 According to the Executive Secretary, Agricultural Research Council of Nigeria, Baba Abubakar, Nigeria is still the largest importer of America’s hard red and white wheat, spending N635bn annually on this venture.

He observed that the country still imported rice, sugar and fish, spending N356bn, N217bn, and N97bn, respectively on those three items.

In the third quarter report released on Monday December 11, the NBS revealed that the value of imported agricultural goods stood at N232.2bn, making it 0.05 per cent higher than N232.1bn recorded in Q2, and 16.91 per cent higher than the value recorded in Q3 2016.

Correspondingly, the value of exported agricultural goods stood at N21.47bn, making it 38.43 per cent lower than the N29.71bn recorded in Q2, 2017 but 25.29 per cent higher than the value recorded for the third quarter, 2016.

Manufactured goods exports, valued at N50.13bn, were 62.68 per cent lower than the N1.24tn recorded in Q2, but 22.98 per cent higher than the value recorded in Q3 2016.

According to the NBS, manufactured goods imports in the third quarter, valued at N1.2tn, were 4.08 per cent higher than the N1.1tn recorded in the second quarter and 2.79 per cent lower than the value documented for the third quarter of 2016.

Due to the power challenge, operators in the manufacturing sector also said they made more profits importing their goods than manufacturing locally.

The Chairman of Orange Drugs, Tony Ezenna, who recently stopped importing his homecare products and started manufacturing locally, said it was cheaper to import.

Another small business owner and the Chief Executive Officer, Cheery Little Soles, a children’s shoe making firm, Onosen Ekelemu, said with import tariffs and other duties combined, she found it cheaper to produce in China and ship the products back to Nigeria.

 Possible remedies

Analysts said that for the sector to sustain its growth, the government needed to address the challenges still facing it.

Jacobs said the government must recapitalise development finance institutions in the country such as the Bank of Industry and Bank of Agriculture to tackle the issue of access to funding by manufacturers.

He also called for immediate implementation of all the policies that were created to ease business operations in the country.

He advised that the Federal Ministry of Finance, the CBN and the Federal Ministry of Budget and National Planning to work together to strengthen the synergy between monetary and fiscal policies.

Jacobs called for increased incentives and support for the sector and an upscale of the various intervention funds with other windows created to make funds available to the SME sector.

He said the Executive Order on patronage of made-in-Nigeria goods should be enforced.

The Director-General of the Lagos Chamber of Commerce and Industry, Mr. Muda Yusuf, said that there was a need to stem smuggling and dumping of foreign products in the country.

He called for the strengthening of the institutions manning the nation’s borders, noting, “The borders are porous, and the institutions of government charged with managing these borders and ports are very weak.”

Yusuf blamed the persistent challenges of the manufacturing sector on the instability and inconsistency in government policies, adding that it heightened the policy and political risks faced by manufacturing firms.

He also said that the quality of regulatory governance was far from being satisfactory. The activities of some industry regulators rather than eased the plight of manufacturers sometimes compounded it, he added.

“There are often delays in product registration, high cost of regulation, excessive documentation and transparency issues,” he said.

He suggested that the government needed to do something about the high cost of logistics for the sector occasioned by bad roads, weak rail transportation system and absence of inland waterways, which “increase the haulage cost as well as other distribution costs for manufacturers.”

Other analysts have suggested effective raw materials development and distribution to meet the needs of the manufacturing sector as a way of reducing overdependence on imports and enhancing growth of local industries.

The Director-General, Raw Materials Research and Development Council, Dr. Hussaini Ibrahim, emphasised the need for the country’s research institutes to develop research  papers on raw materials that could be of benefit to the manufacturing sector.

Also, the Director, Bio-resources Technology Development, Federal Ministry of Science and Technology, Abayomi Oguntade, said that commercial researches by Nigerian institutions should provide knowledge on raw materials and products classification where individual industries could utilise and which research and development institutions should relate to.

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