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Manufacturing Sector: Marginal Growth amidst Daunting Challenges

01 Jan 2013

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Minister of Trade and Investment, Olusegun Aganga

Crusoe Osagie presents 2012 as a year of intense struggle in the real sector with minor growth attained against all odds

Growing with Obstacles

The socio-economic upheavals experienced in Nigeria in 2012 are capable of crippling any nation’s economy and keeping foreign investors at bay indefinitely. But in a way that defies logic, the nation’s manufacturing sector appeared to make modest advancements.

Analysts say the consummate attention, which the Minister of Trade and Investment, Olusegun Aganga, seemed to pay to the plight of manufacturers, might have played a key role.

Meeting manufacturers and industrialists at short notices; going through the pain every time to hear out even the smallest and seemingly insignificant operators and working with the National Bureau of Statistics (NBS) to generate data during the year, which revealed that over 90 per cent of real sector operators were in the category of Micro and Small enterprises were just a few of the direct efforts made by the minister to try to turn the tides for manufacturers and industrialists in 2012.

Although the minister still has some work to do with respect to getting the sector into a position commensurate with its potential, industry watchers confirmed that in 2012, Aganga spent a lot of time in Lagos, listening to industrialists and trying to resolve their challenges, unlike many of his predecessors who were mainly arm-chair industry ministers who simply stayed put in Abuja politicking.

Although the momentum for the growth of the sector did not kick off fully within the period, it seemed not to be entirely encumbered by the manifold challenges that have fraught the economic environment in the past 12 months.

According to the Manufacturers Association of Nigeria (MAN), most of the variables that measure the performance of the real sector have been on the upward swing, albeit marginally.

Capacity utilisation of the sector is now about 49 per cent, compared to around 47.5 per cent at the beginning of the year, indicating that more companies in the country are putting more resources to use in their factories than they did last year.

The value of industrial production has also increased, although marginally, from N130 billion to almost N350 billion at the end of 2012.
Also, new investment entering the sector moved upwards with the likes of Dangote, De United Foods and Procter and Gamble as well as Guinness adding more lines to existing factories, as well as, building new factories from scratch.

On the average, investment in the sector has risen well above $4 billion during the year and more than 100,000 additional industrial jobs have been created within the period.

However, the common culprits in the nation’s economic woes have remained adamant leaving many to wonder how the real sector managed to inch ahead despite the familiar setbacks.

A school of thought in the industrial sector believes that the potential for growth of the real sector is much higher than the growth now being seen in the economy. In fact, they say but for the numerous challenges the nation’s economy faces, most of them man-made, the present decade should have been the one in which Nigeria transforms into an industrialised nation.

“Director General of the Lagos Chamber of Commerce and Industry (LCCI) Mr. Muda Yusuf, said if the manufacturing sector still managed to achieve the modest growth recorded in the year so far, “one can only imagine the kind of improvement that could have come to the entire economy if the problems of insecurity, power, finance and other issues were milder.”

In the period under review, the average municipal power supplied by the Power Holding Company of Nigeria (PHCN) to industrial consumers was just around average not very good but not quite as bad as it was in 2011. Supply has been hovering around 5 to 6 hours out of 24 hours in a day on the average.

Apart from a few companies that have benefitted from cheaper, long term funding from the Bank of Industry (BoI) and the Ministry of Agriculture’s Commercial Agriculture Credit Scheme (CACS) fund, the cost of getting credit and servicing existing debt has hardly been lower than 20 per cent, putting manufacturers under intense pressure.

Exchange Rate
According to data provided by the President of LCCI, Mr. Goodie Ibru, the Nigerian economy is very sensitive to developments in the foreign exchange market because of the structure of the economy, which makes it heavily dependent on imports. This in itself is a major weakness of the economy.

Between January and now, the economy witnessed about 5 per cent depreciation in the exchange rate of the naira against the dollar. The rate was around N157 to the dollar in January and it rose to about N162/N165 to the dollar midyear. The naira gathered momentum again towards the end of the year changing at between N155 and N160 to a dollar in both the interbank and parallel markets.

The major factors responsible for the unfolding trend are the fluctuating oil prices, coupled with the attendant speculative activities. The trend is yet to abate and has the following implications for business performance: Higher production and operating cost as the cost of raw materials and other imported inputs increase; heightened exchange rate risk for investor, that borrowed offshore funds to finance projects in the country; and inflationary pressures induced by higher production cost.

Others are the policy response of monetary policy tightening may further increase interest rate and also there is the risk of exchange rate volatility, which will remain a major risk for investors for as long as the structure of the economy remains what it is – highly import dependent.

Operating Environment
The challenges of the operating environment for business intensified in the second quarter. Across all sectors, there were concerns over weak consumer demand reflecting the general downturn in the economy. Structural and institutional problems persisted as well.
Though the economy continued to post good growth figures (GDP growth of 6.17 per cent in the first quarter of this year) and offers a robust market for consumer goods, but leveraging on these opportunities is still a herculean task for investors, especially the indigenous entrepreneurs.

Power Situation
The power situation was and is still a major problem for business across all sectors. Expectedly, energy intensive sectors are worst hit. Energy cost remains a major threat to business sustainability. Although there is the power sector reform being currently implemented by government, one can only pray that the outcome begins to manifest sooner than later.

Security Challenges
The security situation has been a major challenge for investors. It’s already taking its toll on the economy in the following ways: the economies of many of the affected states are on the verge of collapse with implication for investment losses and job losses; hospitality industry in the affected states has been paralysed.

Many investors, especially SMEs, are relocating to other states with the attendant challenges of inventory and stocks of many companies being trapped in some locations in the affected states.

Many firms have lost up to 30 per cent of their sales as they can no longer access most parts of the Northern market. Manufacturing firms sourcing raw materials from the north are now facing serious challenges.

Projects funded by banks in the affected states are at risk; there serious perception problem has been created for the country; many bank branches have been closed, while the working hours for others have been drastically reduced; and sales representatives of many companies have fled the affected states.

Credit Situation
The credit situation in the economy has been a major challenge. As usual, there were two dimensions to the problem: access to credit and cost of fund. This was a lamentation across sectors, but more pronounced with investors in the real sector of the economy.

The key issues are were: banks’ tolerance of manufacturing sector continued to decline, perhaps because of the perception of the sector as very risky and many SMEs lacked the capacity to package bankable credit requests; some are too small to access credit individually. The summary is that the economy is in a quandary as far as credit conditions for investors are concerned. It will be difficult to stimulate job creating growth if this situation persists.

The situation has been further compounded by the fact that government treasury bills and bonds have returns of between 13-17 per cent and the consequence is that available funds have been mopped up by government. It is clearly more attractive now to invest in government securities than invest in ventures that would create jobs.

Even banks now would rather buy treasury bills and government bonds than give loans to investors. This credit and interest rate structure would continue to create distortions in the economy, which will only perpetuate the phenomenon of jobless growth and further depress the stock market.

Unfair Competition
The real sectors faced the serious problem of unfair competition as a result of the unbridled importation of consumer products into the country. Dangote Group and Lafarge are currently shutting down factories or running skeletal schedules because of a glut in the market which they say is caused by a displacement of their product in the market by subsidised imported cement. The situation has done considerable damage to the manufacturing sector especially. The areas of concern include: smuggling; faking and counterfeiting; influx of substandard products; evasion of import duty payment; under invoicing of imports; granting of waivers that are underserved and tax evasion.

All these contribute to the problem of uneven playing field for investors in the economy. The policy implication here is the need to strengthen regulatory effectiveness of relevant agencies.

Bad Roads
The state of the roads nationwide also created serious problems for real sector investors as it has increased logistics costs. A typical example is the Lagos Ibadan Expressway which is in total state of disrepair. It is difficult to move raw materials from various locations to the factories just as it challenging to distribute finished products across the states of the country.

Caution
So, although very modest growth was achieved in the last one year, the hemorrhage suffered by the economy and the attendant challenges posed to the real sector were unimaginable and must be fixed urgently, otherwise the marginal growth attained might be engulfed by the challenges that may result in the coming year.

Tags: Business, Nigeria, Featured, Manufacturing Sector, Marginal Growth, Challenges

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