Gloomy Cloud on Nigeria’s Manufacturing Horizon

The failed legal bid by manufacturers to stop the implementation of Band “A” electricity tariff in the face of high cost of credit and deteriorating value of naira is spreading concerns in the industrial sector, writes Dike Onwuamaeze

Last week’s defeat of a law suit brought by the Manufacturing Association of Nigeria (MAN) before a Federal High Court in Lagos, which challenged the implementation of over 300 per cent increase in electricity tariff, is spreading doom and gloom in the country’s industrial sector. In April 2024 the Nigerian Electricity Regulatory Commission (NERC) approved the hiking of electricity tariff for Band “A” customers, which included manufacturing firm, from N68 to N225 per kwhr. It later reviewed it downward in May from N225 to N206.8 per kwhr.   Following the NERC’s approval of the upward review of the electricity tariff, MAN petitioned the commission against the hike in tariff.  MAN also requested that due process should be followed before any increment could be approved by NERC.

While the petition was still pending before the NERC, the Discos started implementing the new tariff order for their Band “A” customers, which included manufacturing companies. This prompted MAN to approach the court to seek for an injunction restraining Discos from going ahead with the implementation of the new tariff order and that the Discos should continue to supply electricity to member companies of MAN at the existing tariff rate of N68 per kwhr pending the outcome of the petition before the NERC.

Preliminary objections

However, the Discos and NERC raised preliminary objections against the jurisdiction of the court to hear the matter on the grounds that the MAN had not totally explored the administrative remedies prescribed by the Electricity Act, vis-à-vis the 30-day period provided in the Act for NERC to respond to a petition, before coming to court.

They also raised objection along the line of abuse of court process since a similar action in which MAN was a party, is pending in the Kano Division of the Federal High Court.  

The suit was consequently struck out on October 7 by the Federal High Court, Lagos, which directed that the proceedings before the NERC should be exhausted before the court could be approached.

Notwithstanding that the court did not affirm the legality of the contested tariff review by the NERC, some members of MAN have been notified of their graduation to ‘Band A’ immediately after the judgment. In a particular case, the monthly bill of a medium scale industry was raised from N8 million to N30 million.

Operators in the manufacturing sector are currently apprehensive that current tariff regime would worsen their operational cost.  The MAN’s analysis on the implication of the Band “A” electricity tariff in April showed that a medium sized company using 700kw would need to pay about N1.4 billion per annum (700 x 225 x 24 x 365) for electricity.

The MAN claimed that in China, a similar medium sized company utilizing 700kw would pay a little over N24 million (700 x 94.14 x 24 x 365).  

It said: “In the United states of America (USA), United Kingdom, Germany, France, China, India, South Africa, Ghana and Benin Republic, prevailing electricity cost per kilowatt hour are $0.1545, $ 0.3063, $0.53,$0.0573,$0.076, $0.068, $0.0999, $0.123 and $0.195 respectively.

“The conversion values of the afore-mentioned electricity cost in Naira are N191.38, N379.41, N656.50, N70.98, N94.14, N84.23, N64.53, N152.36 and N125.95 respectively.

“Clearly, with the new tariff of N225/kwh, Nigeria now ranks third after Germany and United Kingdom on the list of countries with high electricity cost.”

MAN’s lamentation

The manufacturing association lamented that the “increase is coming on the heels of macroeconomic instability, infrastructure deficits, as well as other supply side constraints limiting the performance of the productive sector.

“Over 65 per cent of private businesses, especially manufacturing concerns and SMIs, may be forced to close down due to the high electricity tariff,” MAN said.

Apart from the high cost of electricity supply to industries, the avalanche of market oriented reforms that were unleashed by President Bola Tinubu’s administration since May 29, 2023 is not bringing any respite for the manufacturers. The core of Tinubu’s reform measure was the removal of petrol subsidy and the floating of the Naira in the foreign exchange market.

But there unintended consequences are having a telling impact on the fortunes of Nigerian industrialists. For instance, these reforms spiked the price of petrol from N200 per litre in May 2023 to N1,150 per litre currently while the exchange rate of the Naira depreciated significantly from N450 per dollar in May 2023 to N1,700, making the cost of imported raw material and servicing foreign exposures extremely difficult for businesses.  

Multinational manufacturing Exodus 

Commenting on the macroeconomic reality and its impact on the industrial sector, the Chartered Institute of Directors (CIoD) Nigeria attributed the wave of exodus of multinational manufacturing concerns from Nigeria to the deterioration in the exchange value of the Naira.   

These companies that have left Nigerian included household names like Procter & Gamble (P&G) and GlaxoSmithKline (GSK) to manufacturers like Kimberly-Clark, etc.  

The CIoD said: “This exodus is driven by a complex interplay of factors that make operations challenging. Obtaining foreign exchange (FX) is a significant hurdle for MNCs. The volatility in the exchange rate creates untold hardship for businesses.

“The lack of an easily accessible liquid FX market, where companies can easily buy and sell foreign currency at market rates, significantly hinders their operations.

“This makes it hard for them to repatriate profits in dollars or euros, impacting their global bottom line.”

It added that companies like P&G struggled to access dollars to import raw materials and repatriate profits, leading to their departure.

Unreliable power supply

Similarly, erratic and unreliable power supply is another chronic problem for Nigerian manufacturers as frequent outages disrupt production, increase reliance on expensive generators, and raise operational costs for MNCs.

“This lack of stable electricity makes it difficult to maintain efficient production lines and plan for the future. Manufacturers like Kimberly-Clark, which rely heavily on consistent power for production, might have found this energy situation untenable, leading to their exit,” the CIoD said.

Exasperated by the daunting Nigerian business environment, the President Lagos Chamber of Commerce and Industry (LCCI), Mr. Gabriel Idahosa, declared that Nigeria’s business environment is too tense for businesses to thrive. Idahosa also expressed concerns that businesses are at a crossroads with policy directions of the government and needed a positive national orientation to navigate the stormy waters they have found themselves today.

He, therefore, tasked the federal government to come plain to Nigerians and businesses on the direction of their policies and what near-term achievements are possible in order to build some level of certainty to support business planning and decisions.

Idahosa said: “With the CBN’s monetary policy rate at 27.25 percent (with allowance up to about 34 per cent), inflation elevated at 32.15 percent (August 2024), an exchange rate above N1620 per  Dollar, and an unemployment rate at 5.3 per cent, we run a business environment that is too tense for businesses to thrive. Since the inception of this administration, petrol prices have risen by about 430 percent to date.

“These indicators may worsen in the coming months due to a thriving speculative environment, harsh regulatory ecosystem, unguided controversies, persistent insecurity challenges, and weakening purchasing power that restrain demand for goods and services.”     

Pegging import duties

He also recommended pegging import duties at an exchange rate of N1000 per Dollar to provide much-needed fiscal stimulus. According to Idahosa, “a fixed rate would lower production costs, leading to increased output and job creation. It would also benefit the broader economy by fostering growth in related sectors like logistics and retail, ultimately supporting Nigeria’s economic stability and expansion.”

The tense business environment presented an overarching justification for the Chief Executive Officer of Centre for the Promotion of Private Enterprises (CPPE), Dr. Muda Yusuf, to call on the CBN to fine tune its monetary policy in order to support the real sectors of the economy, particularly the manufacturing and agriculture sectors.

Yusuf argued that part of the challenge of the market oriented economic reform is that it seemed “to penalise people who are in production, which is counterproductive.

“Some investments in bonds and treasury bills are tax free while tax people are busy chasing manufacturers all over the places.”

He said that it would be very hard for any business in the real sector, especially manufacturers and farmers, to thrive with an interest rate of over 34 per cent and currency depreciation that has moved from nearly N500 to Dollar in June 2023 to over N1,600 per dollar since the return to orthodox monetary policy.

According to him, the current monetary policy stance of the central bank is promoting speculative investors who are reaping good margins from investing in fixed income assets, Treasury Bill, etc. at the expense of investors in the real economy. 

Orthodox monetary policy

He said that the transition from unorthodox to orthodox monetary policy has caused shocks beyond what most business analysts have imagined.  

According to him, “today lending rate has gone up to over 34 per cent under the market driven monetary policy. No matter whether you are manufacturing or you are in agriculture or real estate etc. you cannot borrow under the current interest regime and make any sound return on investment. 

“Whether you are a manufacturer importing raw materials or a wealthy individual importing a limousine, both of you will be buying FX at the same rate. It is debatable if this model is the right thing?

“The impact is systemic across all sectors. It is worse for businesses that have foreign exposures. That is why most of these multinationals are leaving. Because when they convert their revenue to dollar it becomes peanuts. That is why they are leaving.  

“We need to structure the economy to reward people who are producing and creating jobs, who are generating multiplier effects for the economy.

“This is the problem some of us have with this monetary policy stands, especially the narrow view that the only way to bring down inflation is to continue to make it difficult for people to access credit.”