New CBN governor and real sector challenge

In a paper delivered at the inaugural memorial lecture of late Okefie Uzoaga at the University of Nigeria, Nsukka, on July 12, 2011, Sanusi Lamido Sanusi, recently suspended Central Bank of Nigeria’s (CBN) governor, defined the real sector as “where goods and services are produced through the combined utilisation of raw materials and other production factors such as labour, land and capital.’’ Economists generally agree that the real sector comprises agriculture, industry, building and construction, and services.

For the purpose of this analysis, focus will be on manufacturing, which forms the crux of the industrial sector.

Experts at the Lagos Chamber of Commerce and Industry (LCCI) recently carried out a research on the country’s business confidence levels in the first quarter of 2014. The research revealed that there was 6.6 percent drop in the confidence index. Of particular interest is the manufacturing sector, which recorded -10 percent negative levels. In the corresponding period in 2013, this sector reported -11 percent index and, by last quarter of 2013, recorded -2 percent.

The LCCI research showed reasons for the continuous negative report in the index as “manufacturers, especially the SMEs key challenges including sticky access to credit, influx of fake and substandard products, preferences on foreign manufactured goods, regulatory infractions and worsening public power supply.’’

Muda Yusuf, director-general, LCCI, told BusinessDay’s Real Sector Watch that the captive industry was undergoing competitive difficulties and needed a determined intervention.

“Currently, the Nigerian manufacturing sector suffers significant competitiveness issues which include high costs of funds and regulatory charges, ridiculous ports and other related charges and high cost of logistics amongst others,’’ he said, in an e-mail to BusinessDay.

The World Bank recently released “2014 Ease of Doing Business’’ report for Nigeria, where it was revealed that the country ranked 147 out of 189 countries analysed. This represents 9 points drop from 2013, where the country ranked 138.

In fact, there was an obvious drop in almost all the areas. The country dropped 8 points in starting a business, ranking 122 as against 114 in 2013.

On getting electricity, Nigeria ranked 185, 1 point away from 184 ranked in 2013.

On getting credit, the country dropped 2 points, ranking 13 rather than 11 reported in 2012. Analysts say this is a clear indication that the country’s business environment is becoming tougher.

During the third quarter of 2013, real GDP growth in the sector was recorded at 8.16 percent, up from 6.81 percent reported in the second quarter of 2013, and 7.78 percent recorded in the corresponding quarter of 2012, according to the country’s National Bureau of Statistics (NBS).

In spite of this growth, the sectoral contribution of manufacturing to the Gross Domestic Product (GDP) remains unimpressive. The total contribution of the sector to GDP in 2012 was 4.2 percent. In 2013, first quarter contribution was 1.14 percent; second quarter was 3.98 percent, while third quarter was 3.58 percent. Comparatively, a sector like agriculture recorded an impressive contribution of 39.21 percent in the whole of 2012, as well as 42 percent by the third quarter of 2013.

The implication of this is that activities in the manufacturing sector are limited and hampered by some militating factors, say stakeholders.

Analysts believe that one particular militating factor is high cost of funds as well as difficulty in accessing funds from financial institutions.

“Interest rate in some banks are up to 30 percent. How then can manufacturers in the SME category record profits, after providing their own energy needs, paying staff and taking care of other challenges?’’ asks Tunde Alban, an industry analyst in Abuja, in a chat.

Stakeholders say Godwin Emefiele, CBN governor designate, is expected to look for ways of making more funds available for manufacturers at cheap rates. There is also need to make some intervention funds more accessible for manufacturers, they add.

Moreover, analysts say the apex bank has been making more money available to the government or public sector than private, saying this remains an area to be looked into to create employment and achieve inclusive growth.

“Since 2009, credit to government had increased in leaps, squeezing out the private sector,’’ says Sheriffdeen Tella, professor of economics at Olabisi Onabanjo University.

“The above requires changes in monetary policy that must redirect lending to the private sector and medium- to long-term lending. Unless the orientation is changed the situation above will persist and the real sector, with industrial sector as a major stakeholder, will be worse for it, more so when the capital market is just emerging from world global crises,’’ he says.

Recently, the CBN rose from its Monetary Policy Committee (MPC) meeting with a resolve to increase the CRR on public sector deposits to 75 percent. Apart from forestalling future economic distortions in a pre-election year, the apex bank argues that the policy is meant to forestall recurring situations where the Federal Government gives free money to deposit money banks (DMBs), only for them to lend bank the same money at between 13 and 14 percent interest rates. It was also gathered that there was an effort to increase it to 100 percent before Sanusi’s suspension.

“Most domestic investors depend on banks for working capital. As long as you have tightening, it will affect cash available for investors,’’ he says, in an exclusive interview.

“We have been complaining that it is important to create jobs and stimulate growth. Let us acknowledge that the CBN is trying to keep inflation in check and control the exchange rate. But there has to be a balance preserving microeconomic balance and stimulating growth. The monetary policy, as it stands, is penalising domestic production,’’ Muda Yusuf states, implying that there is need to address the issue to make more money available for investment.