A Forgetful Two Years of Manufacturing

Industries in the past two years of President Muhammadu Buhari’s administration have contended with a lot of issues, chief of which forex scarcity and epileptic power supply have forced several firms to relocate to neighbouring West African countries, writes Jonathan Eze with agency report

It was a dismal performance between 2015 and 2017 in the Industry sector of the economy as manufacturers were faced and blighted with several challenges, which affected them negatively.

The Central Bank of Nigeria (CBN) acknowledged this when it said that the industrial sector recorded a general decline in the years under review especially in 2016 as indicated by the Purchasing Managers Index (PMI). The PMI is an indicator of the economic health of the manufacturing sector.

The index stood below 50 index point in the months of January to November, 2016 which indicated decline in industrial production. The PMI is based on five major indicators – new orders, inventory levels, production, supplier deliveries, and the employment environment. Operators said that the sector was faced with myriads of challenges ranging from scarcity of foreign exchange, infrastructure deficits, high banking charges and lack of raw materials. About 272 firms were shut, while some reduced their production, staff strength and remuneration of workers.

President, Manufacturers Association of Nigeria (MAN), Frank Jacob said that industrial capacity utilisation hovered around 20 per cent in 2016. “More than half of the surviving firms are classified as ailing which posed serious threat to the survival of the manufacturing sector.

“The business environment was plagued by epileptic power supply, bad roads, high interest rate and high cost of energy which contributed to high cost of production and impediment to competitiveness of the sector,” Jacob said. A major challenge was the acute scarcity of foreign exchange which restricted the ability of manufacturers to import raw materials for production.

The apex bank had earlier maintained an official exchange rate with the bound of N197 to N199/USD from February 2015 to June 2016.
To address the problem of foreign exchange scarcity, the CBN introduced a new foreign exchange system and some monetary controls in June 2016.
Under the new flexible exchange rate system, the naira exchange rate to the dollar depreciated to the average of N320 in the official market and N485 in the parallel market during the year.

The CBN also banned 41 raw materials from getting foreign exchange for importation at the official segment of the foreign exchange market.
MAN, however, said that the new foreign exchange system worsened the plight of manufacturers as it led to a cumulative loss of N500billion for manufacturers in 2016.
To further address the foreign exchange crisis, the CBN, on August 22, directed banks to allocate 60 per cent of their foreign exchange sales to manufacturers for procurement of raw materials, plants and machineries. In spite of this directive, the problem of foreign exchange scarcity persisted.

Erisco Foods Limited, an indigenous tomato paste manufacturer, relocated its 150 million dollars tomato paste processing plant to China due to the same problem. It had a production capacity of 450,000 metric tons of tomato paste annually and had 22 brands with over 2,000 workers in Nigeria.

Eric Umeofia, the Chief Executive Officer, Erisco Foods, said that the company relocated to friendlier business environment after losing over N3.5 billion in Nigeria.
The Director-General, Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf said the inability of manufacturers to access foreign exchange at the interbank market impeded growth in the real sector.

He urged the federal government to ensure availability of more liquidity in the foreign exchange market to restore investors’ confidence in the economy. Industry experts also urged the CBN to review its policy on the 41 items restricted from the official foreign exchange market as it had stifled production and forced many firms out of business.

They advised the apex bank to redirect its policies towards stimulating the economy rather than tightening money supply. They said that monetary and fiscal policies should be coordinated for economic revival and growth. The experts also called for review of some monetary and fiscal policies that have hindered the growth of the manufacturing sector.
It has been a herculean task running any business in Nigeria, especially import-dependent manufacturing business.

Some companies could not access official forex allocation for over six months while others noted that some of the letters of credit opened as far back as the fourth quarter of 2015 were not funded by the banks.

However, there seems to be light at the end of the tunnel as a result of some dynamic intervention from the Central Bank of Nigeria. The CBN governor, Godwin Emefiele spoke about new policies that will change the trend. He said: “The whole essence of the new policy is to infuse dollar liquidity into the system and to ensure easy accessibility of end users. “In the past, we have had that people were not able to pay their school fees, people were not able to buy BTA and that is why they had to go to the black market or parallel market.

“Now that the CBN have come up with a policy that has returned this into the confines of the inter-bank market and that of the bank, we believe strongly that this will take the demand off the parallel market and we expect that the Naira will strengthen as this goes on.

“In essence, it means that people who have children overseas and those who have to pay school fees or want to travel don’t have to bother rush to BDCs to be buying money or to go parallel market.
“They can now source this easily from the banks and that for me, is a very big positive.’’

The CBN rolled out a new policy on foreign exchange aimed at easing access to foreign currencies for personal, business, travel, educational and medical purposes, among others. The CBN later provided $370.9m to 23 banks to meet the visible and invisible requests of customers. The CBN further directed all banks in the country to open foreign exchange retail outlets at major airports as soon as logistics allowed them.
The CBN also eliminated stiff conditions in applying for Basic Travel Allowances (BTA) in banks.

“We have tried as much as possible to simplify the access of this particular fund. “We all know that the issue of tax clearance has been an issue because not many people can produce their tax clearance and for those who can, some can also easily produce fake tax clearance and the process of verifying this is very difficult. “So the central bank has waved the issue of tax clearance provision in accessing these funds and all you need to do is basically your journey must originate from Nigeria, travelling out.

“You cannot leave overseas and buy BTA to travel. You must have a valid ticket to travel with and as a matter of fact you must have a bank account and BVN to recognise you as a bank account holder. “So we are very positive that banks being under the supervision of the CBN have no choice with this directive,” he added that the CBN, allocation of foreign exchange to develop the manufacturing, agric industralisation remains the apex bank’s priority.

The power sector posed its own challenge with epileptic power supply. About 70 per cent rise in cost of op¬erations was recorded as power generation, which rose to above 4.500MW, suddenly dropped to less than 1,200mega¬watts, resulting in load shedding by the power distribution com¬panies.

According to a report from the Manufacturers Association, of Nigeria (MAN), members companies spent N20.8 billion, monthly on power generation to run produc¬tion process.

Jacobs, added that the ripple effects of the pow¬er shortages and constant outages were numerous, ranging from cut down in production, job loss to outright closure or relocation to other countries by industries. He added that companies had to bear so much loss as the outage often occurs when goods are in the middle of production.
He said: “When you are pro¬ducing and power is taken unan¬nounced, goods in line of produc¬tion would be destroyed.”

As a result of this, Jacobs said many members of MAN have resorted to generating power privately and completely cut off their operations from the national grid.
“Most companies, like Coca Cola, Wempco, Nigeria Flour Mills and especially the multi na¬tionals self-generate their power. They don’t rely on the national grid. And for the last three years, our study showed that our mem¬bers spent averagely in a month, N20.8 billion, he said.

Corroborating this, the Direc¬tor General of the Nigeria Em¬ployers Consultative Association (NECA), Mr. Segun Oshinowo, said generating alternative power to run the manufacturing sector is expensive and invariably increas¬es the cost of production.
Oshinowo said as Nigerian companies operate in the global market, the consequence of in¬curring high cost on power gen¬eration undoubtedly would make the nation’s industries less com¬petitive.

His words: “The products which our companies would be churning out would be compet¬ing with others coming from abroad whose countries have good infrastructure. Definitely, the prices of those products com¬ing from outside will be cheaper, while ours will be higher and less competitive due to cost of production. The same goes for those companies exporting their products, it will still be less com-petitive and it’s really a serious problem.”