Following the latest report of under-performance by the nation’s manufacturing sector, Olaseni Durojaiye writes on possible lasting solutions to the perennial crisis
The lacklustre performance of the nation’s manufacturing sector has again attracted headline news, necessitating a review of activities in the sector with a view to finding a lasting solution to the problems that has caused the sector to underperform, even as some analysts argued that the time to revisit the nation’s National Industrial Regulation Plan (NIRP) may just be now.
Besides the perennial challenge of high cost of capital, Manufacturers Association of Nigeria (MAN) had listed other factors hobbling the sector to include, weak infrastructure and harsh socio-economic and political environment. The report appeared at variance with the claims by the federal government that the on-going economic diversification efforts were bearing positive fruits.
Though MAN had highlighted a huge leap in its inventory of unsold goods produced by its member, a THISDAY source insisted the actual figure would be higher. The analysts argued that the MAN figure covered data from its members adding that there are other businesses, particularly in the small and medium enterprise (SME) segment, that their data could not be captured because they are not MAN members.
The manufacturing sector is seen as very critical sector of the economy largely due to its capacity to generate employment, economic empowerment and wealth creation. However, the implication of its continued underperformance was that rather than contribute meaningfully to the nation’s economic growth and development, it is on the verge of recession, and a scenario that many insisted could further worsen the unemployment rate in the country.
MAN had raised the alarm a fortnight ago that the nation’s manufacturing was on the verge of recession, and expressed the dismay that despite the government’s position that the country’s economy had exited recession, the manufacturing sector has been recording zero growth.
MAN report
In the MAN report, which was released at the just-concluded 46th Annual General Meeting (AGM) of the association in Lagos recently, the sector did not record any growth in the 2017 business year, despite the current efforts to position the sector for Africa and global competitiveness.
According to the report, “high lending rate remained a major challenge to the manufacturing sector in the period under review.” A survey by the association showed that the cost of lending to the manufacturing sector stood at 23.05 per cent in the second half of 2017, which was almost the same figure with 23.3 per cent recorded in 2016. This showed about 0.4 per cent improvement when compared with 22.65 per cent in the
preceding half of the year. Overall, the report showed that the cost of fund to the manufacturing sector, averaged 24.1 per cent in 2017, showing 1.4 per cent point increase over 22.7 per cent recorded in 2016.
MAN also noted that unsold inventory of finished goods produced by its members rose to N161.53 billion in the second half of 2017 from N35.42 billion recorded in the corresponding period of 2017, indicating N126.11 billion increases over the period. It also showed an increase of N1.94 billion or 1.2 per cent when compared with N159.59 billion recorded in the preceding half.
According to the report, over all, unsold inventory of manufactured goods in Nigeria totalled N321.12 billion in 2017 when compared with N90.43 billion in 2016, representing an increase of N230.77 billion or 255.19 percentage point. The report also recorded a decline in manufacturing investment at the end of 2017 with estimated cumulative manufacturing investments from 2013-2017 at N4.63 trillion based on
data generated from a survey conducted by the association.
In the second half of the year, investment declined to N176.69 billion from N448 billion recorded in the corresponding period in 2016, showing a decline of N272.25 billion or 60.6 per cent over the period.
According to MAN, it also declined further by N152.59 billion or 46.3 per cent when compared to N329.28 billion achieved in the preceding half of the year.
Overall, manufacturing investment recorded during the year under review totalled N508.98 billion compared with N614.55 billion achieved in 2016; an indication of N105.57 billion or 17.2 per cent decrease over the period. MAN also decried the continued existence of multiple taxation, saying that it is one of the factors against the industrialisation of the country and called for the commencement of the implementation of the
harmonised taxes and levies even as it called for a strict monitoring by the Joint Tax Board (JTB). This is with a view to enforcing compliance by states and local governments.
On power, MAN said electricity supply to the manufacturing sector averaged nine hours per day in the second half of 2017 against eight hours and five averages of the corresponding half of 2016 and the preceding half respectively. It, however, noted that power outage in the sector had remained consistently at four times since the second half of 2016, adding that the manufacturing sector alternative energy utilisation in the second half of 2017 declined to N51.35 billion from N66.96 billion expended in the corresponding period in 2016, representing N15 61 billion decline over the period.
MAN added that there was also decline of N14.17 billion, when compared with the N66.03 billion recorded in the preceding half. Also, expenditure on alternative energy utilisation in the sector totalled N117.38 billion in 2017 as against N129.95 billion recorded in the previous year-2016, indicating a decline over the period. According to MAN, the decline in the expenditure of alternative was a result of the slight improvement
Analysts
Some of the analysts who spoke to THISDAY on the challenges facing the sub sector insisted that the time was right to revisit the National Industrial Revolution Plan (NIRP) even as they argued that there may be need to review some aspect of the plan which was initiated in 2014, given the dynamic nature of the economy. According to them, the plan was robust as it is to run with, while the needed adjustment can be worked out along the way.
According to the Director General of the Lagos State Chamber of Commerce and Industry (LCCI), Muda Lawal, the solution to the issue of high cost of funding is long term, even as he added that the sector could do with more access to developmental finance. He also noted that the efforts of developmental banks, particularly the Bank of Industry and the CBN deserved commendation.
“The solution is long-term, even though the sector needs to have more access to developmental finance and that is not to say the developmental finance institution like the Bank of Industry is not trying. The CBN is also trying especially with the differential funding facilities, commercial papers and the likes. “The solution is to look at all the variables, take them one by one and begin to address them,” he stated.
Continuing on the high-volume inventory of unsold products, Yusuf explained that there are two sides to the cost, “demand and supply,” he stated.
According to him, “The high inventory of unsold products is a function of the price environment. The cost of everything is high, from getting foreign exchange to importation of raw materials, cost of clearing goods at the ports, distribution logistic and cost of alternative source of power; all of it are factored into price of the price of the finished product to be high.
On the demand side, there is weak purchasing power. The minimum wage is just about $50, yet there is issue of staff being owed salaries added to that is the huge unemployment in the country; weak purchasing power leads to low consumption rate.”
In his own analysis, a research and economic policy
analyst with the Nigeria Economic Summit Group (NESG), Rotimi Oyelere, argued that the manufacturers would continue to face funding challenges unless a preferential lending rate of not more than nine per cent is worked out for operators in the sector. He added that, “Even though they produce locally, they compete globally given that other competing products from economies, where funding is far cheaper, find their way into the Nigerian market to compete with locally produced goods.
“The performance of the sector as reeled out by the MAN report is a reflection of the economy. As a matter of fact, the inventory of unsold goods may be higher; MAN can only compute data from its members whereas it cannot gather data of unsold products, especially among SMEs that are not members of the association,” he stated.
Explaining the cause of the high volume of unsold products, Oyelere stressed that, “This is caused by the slow growth in the economy, which in turns translates to slow down in consumption, of course this is bound to lead to unsold good pilling up.” He added that one of the possible causes of this scenario was government indebtedness to contractors particularly in the construction sector. For example, if government owes contractors in construction industry, this will pile up unsold products by manufacturers of products required for construction,” he pointed out.
Addressing the perennial complaints bordering on high cost of fund plaguing the sector, a senior banker with one of the top banks in Nigeria, who craved anonymity, posited that the solutions to the problem are short-term to long-term. According to him the short-term measure would be preferential lending rate for the sector, while medium term and long-term solutions are MAN having to work out “factor intensity” approach and “macroeconomic issue” respectively.
Expatiating, he said, “In the short term, government through the Central Bank of Nigeria needs to come up with a preferential lending rate of not more than nine per cent for the manufacturers. This will help them on the short term because while they produce locally, they compete globally. Many products from markets where cost of funding is far lower, make their ways into the Nigeria market and this places the local manufacturers at a disadvantage competition-wise.
“In the medium term, manufacturers need to evolve a factor intensity approach. They need to work out a balance between labour and efficiency using technology. This could be through investments in more efficient factors of production and distribution to cut operation cost and boost margins approach and distribution in efficient distribution,” the banker posited.
