Issues that could define manufacturing sector in 2015

Vagaries in the crude oil market in 2014 dealt a big blow on Nigeria, which depends on petroleum for a huge chunk of its revenue and foreign exchange earnings.

The positive, however, is that it propped the Federal Government to pay closer attention to economic diversification, for which manufacturing features prominently. This, perhaps, informs why analysts believe 2015 will be a significant year for Nigeria’s manufacturing sector.

Real Sector Watch’s findings have shown that there are key issues that will either make or mar the sector this year. One of these is naira-to-dollar devaluation. Nigeria’s central bank announced devaluation to save the naira and economy, but this has made dollar costlier for local manufacturers that need it for the purchase of raw materials and machinery from abroad. Dollar-to-naira exchange rate is now $/N168 at the official market, and between $/N180 and $/N192 at inter-bank and parallel markets. Devaluation has hiked production costs while threatening job losses. It is also gradually reducing the competitiveness of local products in the global market, stakeholders say.

“As a result of the import dependent character of the economy, the sharp declines in exchange rate will naturally push up the operating cost of enterprises in the economy. Many firms are already feeling the heat across all sectors,” said Muda Yusuf, director-general, Lagos Chamber of Commerce and Industry (LCCI), in an e-mailed statement.

But more worrisome is the fact that manufacturers have now been barred by the central bank from accessing dollars through the Retail Dutch Auction Scheme (RDAS), thus pushing them into inter-bank and parallel markets where dollar is costlier. Stakeholders say this will further balloon production costs in the New Year and could reverse all the efforts made so far to steer the sector.

“Even raw materials and equipment for industrial use are being denied access to the RDAS window.  A great deal of uncertainty has been created in the foreign exchange market and this has greatly undermined the confidence of investors,” Remi Bello, president, LCCI, said, stressing that discretionary classification by CBN officials will create a confidence crisis, generate transparency concerns and create more problems for the economy.

Analysts also say there could be  imported inflation, which will lower sales of local products (resulting from reduced disposable incomes) and higher wage demands among manufacturing staff.

In a telephone chat with BusinessDay recently, the CBN had defended its position, asking the manufacturers to explore the inter-bank window and export more products.

“Manufacturers should export more to allow inflow of dollar rather than complaining. Let them bring dollars for us to sell,” Ibrahim Muazu, CBN’s director of corporate communications, said.

Apart from naira devaluation, the Common External Tariff (CET), billed to begin this month, is another key issue that will determine how far the country’s manufacturing sector can go. Fifteen ECOWAS countries recently agreed to begin full implementation of CET, which is a scheme that will usher in a common regional market and free trade zone across the sub-region. The word ‘common’ in CET means that tariff across the 15 member countries will now be uniform when the scheme begins.

Proponents of CET believe the regime will create spike in turnover, due to a larger domestic market involving over 350 million consumers in the sub-region, saying it has the capacity to boost member states’ industrial sector through higher economies of scale while leading to increased production and productivity.

But local manufacturers fear that the regime could threaten Nigeria’s manufacturing sector that is facing challenges owing to tough business environment.

A cross section of them also feel it could be a ploy by the European Commission to foist the Economic Partnership Agreement (EPA) on ECOWAS, an agreement which only Nigeria (out of all member states) is yet to fully consent to.

Manufacturers dismiss EPA as an agreement between two unequal halves – Europe and ECOWAS -, stressing that signing it could lead to closure of many manufacturing firms and lay-offs, as many local firms cannot yet compete with European companies.

According to Frank Jacobs, president, Manufacturers Association of Nigeria (MAN), both CET and EPA could throw up fresh challenges that will further complicate the current lacklustre performance of the manufacturing sector.

“No doubt, the Nigerian economy, particularly the manufacturing sector, would be challenged, as our markets would be flooded with products produced under favourable business environment at a price that our products may not be able to compete,” he said, during the annual general meeting of MAN Apapa branch

Moreover, the CBN’s decision to raise the Monetary Policy Rate (MPR) from 12 percent to 13 percent will likely make it more difficult for manufacturers to have access to credit facilities from banks and other financial institutions this year. High cost of funds has been a burning issue for the real sector players who stick their necks to borrow at interest hovering between 20 percent and 35 percent over the years.

“We wish to state that the recent increase in MPR from 12 percent to 13 percent will further endanger our ailing industrial sector, considering the current global outlook. Investors are worried that their businesses are at risk with the high lending rate in existence,” said Mohammed Badaru Abubakar, national president, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), in his 2014 economic review.

Multiplicity of government agencies collecting various forms of taxes and levies as well as duplication of offices among agencies such as the Standards Organisation of Nigeria (SON), National Agency for Food and Drug Administration and Control (NAFDAC), Consumer Protection Council (CPC), among others, will equally be on the front burner. Analysts say manufacturers could raise their voices over what they see as extortion from many of these agencies, some of which have questionable legal basis of existence.

The state of Nigerian ports located at Apapa, Lagos, and that of adjoining roads, have also slowed down delivery of raw materials at factories. Hence, there could be more attention on Nigerian ports which many see as the most expensive in the world.

Local manufacturers will equally direct their searchlight on the Nigeria Customs Services (NCS), which sees itself as revenue generating agency rather than non-oil export facilitator. Stakeholders say CET regime could expose how much interested the Customs is in promoting trade.

Furthermore, high cost of energy resulting from poor power supply will also come to the front burner this year. In fact, there will likely be more focus on the power supply to industrial zones, while there might be much more advocacy among small and medium manufacturers that spend huge sums on power.

What the Federal Government finally does with Export Expansion Grant (EEG) review will likely dominate discussions. Though the Federal Government admitted that the previous scheme was not sustainable, but industry watchers are waiting anxiously to see what the scheme will look like after review. This will likely determine whether the Federal Government is matching words with action regarding driving the real sector.

Sectoral waivers as well as indiscriminate issuance of import waivers are likely issues that will also dominate real sector discussions this year.