2023: Year of Daunting Fiscal, Monetary Policies for Industrialists
Although fiscal and monetary policies are among the major tools to strengthen a country’s industrial sector, Dike Onwuamaeze writes that they constituted major setbacks to Nigeria industrial growth in 2023
2023 was a year Nigerian industrialists would remember with a scare. The reason for this is not farfetched. It was a year that pronouncements from the fiscal and monetary authorities in the country created serious hiccups that altered the fortunes of Nigerian industrialists in varying negative degrees.
Right from the first day of 2023, the Nigerian economy was reeling under the serve impact of the Central Bank of Nigeria’s (CBN) policy to redesign the Naira, which is Nigeria’s local currency. The purported reasons for this ill-fated gamble included the need to address hoarding of banknotes by the public, guard against currency counterfeiting, align the country’s currency management with global best practice, curb insecurity and promote price stability, financial inclusion and a cashless economy.
But its implementation turned out a nightmare for the entire Nigerian population because of the severe shortage of cash it caused. Commenting on the impact of the currency redesign on the economy, the Nigeria Economic Summit Group (NESG) said in its February 2023 report titled, “Naira Redesign Policy: Caught in the Web,” that took a toll on Nigerian economy, which suffered from a significant decline in the volume and value of cash in circulation.
The NESG said: “To beat the Jan 31, 2023, deadline for the old notes, people rushed to banks to deposit these notes. As of mid-December 2022, only 500 million pieces of redesigned notes estimated at N390.3 billion had been made available by the CBN. Meanwhile, the redesigned notes should amount to N2.9 trillion in circulation to match the currency absorbed from circulation. This resulted in a shortfall of N2.5 trillion, translating into an 86 percent decline in total currency in circulation in three months.”
The impact of the cash crunch on the manufacturing sector was summed up in the “2023 Manufacturers Association of Nigeria (MAN) Half Yearly Review of the Economy.” The review said that unsold inventory off finished products in the manufacturing sector saw a significant increase to N271.96 billion during the first half of 2023, as compared to N187.08 billion recorded in the corresponding period of 2022.
“This indicates a substantial rise of N84.88 billion or 45.4 percent over this timeframe,” the report said, adding that, “this increase in inventory can be attributed to a weakened purchasing power of the consumers, brought about by diminishing real household income resulting from the ongoing escalation of inflationary pressures, compounded by the scarcity of Naira in the first quarter of the year and the aftermath of the subsidy removal.”
The review further stated that capacity utilisation in the manufacturing sector in the first half of 2023, year-on-year, declined to 56.5 percent from 57.9 per cent recorded in the corresponding half of 2022. This indicated a reduction of 1.4 percentage points in the last year. It said that the Nigerian economic environment was clouded by election activities in second half of 2022 resulting in uncertainties in the economy.
“This coupled with the immediate impact of the Naira redesign policy which was announced in October of 2022 and required that economic agents including manufacturers thread with caution. The dampening effects on the manufacturers’ confidence hence reflected in the manufacturing sector’s indicators including the capacity utilisation in the period,” the review said.
Other policy pronouncements that rocked the industrial sector were President Bola Ahmed Tinubu’s decision to remove petrol subsidies and his directives to the CBN to unify the country’s official exchange market and commence a reform that would align it with market determined rates. These policies with farfetched implications were delivered during his presidential inaugural address without adequate consultations that would have think through their potential effects on the economy.
What industrialists experienced as a result of these policy shifts was aptly stated by the Chief Executive Officer of Guinness Nigeria Plc, Mr. John Musunga. According to him, Guinness Nigeria was cruising home to present a profitable financial statement to its shareholders when President Tinubu, in his presidential inaugural address on May 29, unilaterally made a statement that had serious implications for businesses in the country.
Musunga said: “When the President Tinubu announced new policies that resulted in currency devaluation, we were carrying huge foreign exchange exposure that we have to revalue, which removed us from very healthy profit position that we were going to report in June. If that announcement had been made on July 1, we would have made quite a bit of profit. But because it was made on May 29 and our year closes in June, we made N19 billion loss because of that revaluation.
“We do not want to carry forward that kind of exposure whereby we increase our foreign exchange exposure in our balance sheet and in our profit and loss account.”
Apart from Guinness, manufacturing firms like the Dangote Groups, Cadbury Nigeria Plc, and others that had foreign exchange exposures found their fortunes considerably altered to their own disadvantage.
The corollary was that some manufacturing firms, especially the multinational organisations, began to press the exit button from Nigeria few months after the presidential directives. These included the Procter and Gamble and GlaxoSmithKline (GSK), a British multinational pharmaceutical company that announced plans to exit Nigeria, after 51 years of operation in Nigeria.
The GSK Nigeria Plc said in an official statement signed by its company secretary, Mr. Frederick Ichekwai: “In our published Q2 results we disclosed that the GSK UK Group has informed GlaxoSmithKline Consumer Nigeria Plc of its strategic intent to cease commercialisation of its prescription medicines and vaccines in Nigeria through the GSK local operating companies and transition to a third-party direct distribution model for its pharmaceutical products.
“The Haleon Group has also separately informed the board of its intent to terminate its distribution agreement in the coming months and to appoint a third-party distributor in Nigeria for the supply of its consumer healthcare products.”
“The Board of GlaxoSmithKline Consumer Nigeria Plc has concluded that there is no alternative but to cease operations.
“Today we are briefing our employees whom we will treat fairly, respectfully and with care, meeting all applicable legal and consultation requirements,” the company said.
Barely four months after the GSK took the decision to exit the Nigerian market, Procter & Gamble (P&G), another multinational firm, shut down its production lines and commenced the exportation of its products into Nigeria.
This was announced by the Chief Financial Officer of P&G, Mr. Andre Schulten, at the Morgan Stanley Global Consumer & Retail Conference when he stated specifically that, “we have announced that we will turn Nigeria into an import-only market, effectively dissolving our footprint on the ground in Nigeria and reverting to an import-only model.”
Schulten, attributed the P&G’s decision to the prevailing foreign exchange rate situation in the country, saying that Nigeria and Argentina were difficult to do business in because of macroeconomic environment. He stated that, “the other reality that arises in some of these markets is that it gets increasingly difficult to operate and create U.S dollar value. So when you think about places like Nigeria and Argentina, it is difficult for us to operate because of the macroeconomic environment.”
The President of MAN, Mr. Francis Meshioye, observed that the idea of throwing policies like subsidy removal and a free float of the exchange rate within a short space of time could drag back the economy without any hope of recovery.
Meshioye said that currently the cost of manufacturing is daily rising owing to scarce and unavailable manufacturing inputs and have continued to shrink the sector’s profitability and threaten its existence.
He said: “More worrisome is the fact that the sector that should propel job creation, productivity, and economic growth is enmeshed with series of challenges that constantly limit its contribution to the GDP.
“Such challenges as epileptic power supply, insecurity, inadequate infrastructure, shortage of foreign exchange and Naira’s depreciation are prevailing issues that are impacting negatively on the sector.”
He noted that a comprehensive and concerted effort should be deployed by the government to remove the binding constraints that are limiting local production to enable Nigerian manufacturers compete effectively and attract foreign investment.
Meshioye stated that the association has taken due notice of Tinubu’s policy pronouncements and observed that some bold policy actions, including the removal of fuel subsidy and introduction of managed float of the exchange rate elicited the commendation of most economic actors and stakeholders. “The fallout of those measures have equally thrown up some policy imperatives that should be addressed in order for the economy to rebound and for the citizenry to appreciate and reap the long-term benefits of the various reform measures,” he said.
Consequently, a Professor of Economics and Policy, Professor Akpan Hogan Ekpo, has called on Tinubu to jettison some of economic policies like the liberalization of Nigeria’s foreign exchange market. “You cannot open the FX market the way the government has done. Once they did that the so called I&E Window increased to nearly N900 per dollar while the street rate climbed above N1200 to the dollar. So the inflation pass through via the exchange market will continue and that will bring more hardship to the citizens.
“No country develops based on generators driven economy. The power sector is still epileptic. The companies are leaving the country because the cost of business is very high. All these things cannot change in the next two to three years if Nigeria does not change its economic philosophy of trickledown economics and reliance on market forces, which will not help us now. What we need now is the visible hands of the government to get us out of this crisis which it is even difficult to define.
“The government is emphasising too much on revenue whereas research has shown that tax revenue whether it is 80 per cent of the GDP will not help you grow. It is non-tax revenue that will help. In our context, the cost of governance is too high. It has to reduce the cost of governance.”
One of the areas the devaluation of the naira is having severe implication for the manufacturing sector is the determination of custom exchange rate for imported materials. Recently, the central bank increased the customs exchange rate from N783 to N952/$. An Economist and Founder of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, believe that this would worsen the already prohibitive production and operating costs for businesses in the country. It would also inflict more pains on the citizens, erode profit margins, reduce purchasing power and put the survival of businesses at an elevated risk.
Yusuf noted that before the latest increase, the CBN had on June 24, 2023, adjusted the exchange rate from N422.30/$ to N589/$. On July 6, it was re-adjusted to N770.88/$, and again on November 14, it was re-adjusted to N783.174/$, and now reviewed to N951.941/$.
He stated that, “The persistent currency depreciation is making access to intermediate products very difficult for manufacturers, energy cost remains very high, purchasing power is weak, investors’ confidence is declining and consumer confidence is on the downward trend.
“This is not a good time for the CBN to increase the exchange rate for the computation of import duty and the clearing of cargo by importers. This review will impact the cost of all imports, including raw materials for manufacturers, pharmaceutical products, machineries, energy products, petroleum products and many more. This will make a bad situation worse for investors in the economy. It will worsen the misery of the citizens amid an excruciating inflationary condition.
“The CPPE strongly appeals to the CBN and the Coordinating Minister of the Economy to review the increase. Trade policy measures should not be subjected to the full vagaries of the philosophy of market forces.”
