Nigerian Manufacturing Dying by Installment

The mounting insecurity challenge in the country and the impact of the Russian/Ukraine war are further crippling Nigerian manufacturing firms, writes Dike Onwuamaeze

These are not the best of times for manufacturing firms in Nigeria.  The prevailing circumstances in the domestic operating environment, especially high cost of diesel, poor access to foreign exchange, insecurity, delay in importing raw materials and exporting finished products among others are taking a toll on their productivity.

Moreover, manufacturers in the country are also at the receiving end of the fiscal and monetary policies of the government and the central bank such as unfavourable trade policies, taxation, excise levies as well as scarce foreign exchange and high inflationary pressure.

On July 8, the Manufacturers Association of Nigeria (MAN), which represents the interests of over 3,000 manufacturers in the country issued a press statement in which it said that over the years, the manufacturing sector of the Nigerian economy has been battered by numerous familiar challenges that have plummeted the number of industries in Nigeria and converted industrial hubs in many parts of the country to warehouses of imported goods and event centres.

It went on to enumerate these familiar challenges that included high operating cost environment occasioned largely by inadequate electricity supply and the high cost of alternative sources. Others are excessive regulation and taxation, and inadequate supply of foreign exchange for the importation of raw materials, spare parts and machinery that are locally available. “All these,” according to the MAN, “have culminated into the lack lustre performance of the sector.”

On Friday, July 22, the Director General of MAN, Mr. Segun Ajayi-Kadir, explained to THISDAY how bad things have deteriorated for the manufacturing sector.

Ajayi-Kadir said that the leeways that manufacturers used to survive have come under threat presently. “For instance, we have always had inadequacy of power supply and have to resort to the use of diesel to power our machines. But now the price of diesel has been pushed above the reach of many, especially our small and medium scale industries and they are shutting down,” Ajayi-Kadir said, adding that it has “become uneconomical to produce. Our manufacturers cannot run the number of shifts that they ought to be running because they cannot buy enough diesels to produce and still be able to sell at a profit.”

Aside from the high cost of energy, the foreign exchange management of the Central Bank of Nigeria (CBN) also plagues manufacturers with poor access to foreign exchange to import raw materials and denial of full enjoyment of the foreign exchange they earned from exporting their products.   

Scarce FX

THISDAY’s investigation showed that most manufacturers hardly got more than five per cent of their foreign exchange requirement from the official foreign exchange market at N420 per dollar. This has constrained them to rely on the parallel market for almost 95 per cent of their foreign exchange needs at about N620 per dollar.

THISDAY was told by an authoritative source that “a manufacturer that applied for $500,000 from the commercial banks would be lucky to get $20,000. This is nonsensical to start with. The manufacturer has to go to the black market or the BDC to meet his need,” the source said.

Yet, the manufacturer’s problem is compounded when he exports his products and brought the proceeds via the CBN’s I&E Window where the central bank would ostensibly gave him an incentive of N65 to every one dollar he brought back. However, this incentive would drop to N35 if the manufacturer utilised the foreign exchange for his needs. 

The implication, according to Ajayi-Kadir, is that manufacturers are being constrained to exchange their export earnings at official rate of N420 even though they source 95 per cent of their foreign exchange needs at N620 from the parallel market. “With the entire rebate what you will be getting for your export is N480 per dollar against N620 per dollars that you used to import raw materials to produce.”

Moreover, manufacturers go through a herculean experience at the port to export their products because the facilities at the Nigerian ports are not export oriented. “So you have your products staying in port for three months even for products that have a shelf life of six months. That is also an issue that is confronting the manufacturers.”

In addition, a new fiscal regime that commenced in January imposed excise levies on carbonated soft-drinks. This came soon after the VAT was increased from 5.0 to 7.5 per cent. All of these results into poor sales as the purchasing power of Nigerian consumers are being crushed daily by low income, inflation and depreciation of the Naira. The corollary is that “a manufacturer will have higher inventory of unsold goods. This also means that the manufacturer will hire warehouses to keep those products that he was not able to sell at additional cost,” said Ajayi-Kadir.

Heightening insecurity

The heightening insecurity situation in the country is not helping matters for manufacturers. It has led to the shutdown of several industries, especially in the North-east region where almost 45 per cent of industries in the country are located.  

 Currently, the tyre and textile manufacturing sub-sectors have gone into extinction. There is hardly any fabric maker in Nigeria. Moreover, the steel companies in the country are shutting down one after the other and might be wiped out if urgent measures are not taken by the government to reverse the trend.

As recently as 2001, the city of Kaduna used to host seven textile firms. Today, all of them have stopped production. Ajayi told THISDAY that, “the subsidiaries of the United Nigeria Textile Limited (UNTL) alone were employing 10,000 workers. Now the UNTL has 40 workers. It has shut down operations. So many textile industries have shut down due to massive influx of textile materials that are mostly smuggled. There is also the incidence of dumping. There is even the problem of insecurity that is affecting local production of cotton. Under these challenges the textile industry, which is capital and labour intensive, could not survive.  We are looking on how best to rescue this sector that used to be the highest employer of labour after the government. That is the national emergency that we have.

“Look at the steel industry. It is almost going extinct. It has three firms now against 10 that existed a decade ago. We have very few of them that are able to function because it is an industry that 40 per cent of its cost is power. So you do not need a soothsayer to tell you where the bandits are recruiting their foot soldiers.”

It is indeed a vicious circle as industrial closures feed the country’s unemployment rate which swells the number of people living in abject poverty that wouldn’t mind joining the insurgents, the bandits and the terrorists whose activities are crippling economic activities and multiplying unemployment. 

Ajayi-Kadri said: “The industrial sector is not being disaggregated for the special attention it required. In other climes when you have this situation that is occasioned by Russian/Ukraine war there should be a national strategic plan to sustain the economy. That is why we are saying that there must be stakeholders engagement between the government and key bodies of the organised private sector to analyse all these issues and ameliorate them so that at least the pressure will go down and we can then see how can talk of sustaining the economy. Our economy does not have to collapse because a war between Russia and Ukraine is disrupting international supply and logistics chains.”

Failure to Tackle Issues

In addition, the issues that were raised in the “Factsheet on AfCFTA,” and presented to the federal government by MAN have not been adequately addressed. “They are familiar issues and that have not been addressed not because government is not aware; not because those issues have not been well articulated; and not because government has told us that it will not do it. It is just because they are not being done adequately while the processes of accessing whether governments have addressed them or not is not clear. Because if you say infrastructure: government is addressing infrastructure; if you say power, government is addressing power; if you say insecurity government is addressing insecurity. If you say it is the port the government is addressing it. But we are still suffering from these things. This is the situation and the frustration actually.”

The Chairman, Lagos State Chapter of the Nigerian Association of Small and Medium Enterprises (NASME), Dr. Adams Adebayo, told THISDAY that manufacturing is a big challenge today in Nigeria. “Buying diesel at the rate of N850 per litre already guaranteed high cost of production. The rate of inflation is so annoying because it is pushing up the price of our raw materials. To worsen the situation the individual consumer’s purchasing power has reduced. So the manufacturers are saying that it is a difficult thing for us to produce.

“Secondly we cannot maintain the level of workers working with us due to increasing production cost. Three, is no market as people are not buying our products. We are no longer competitive in the market as imported products from Asia are damn too cheap. We are not selling and our production has dropped.  

“At least 30 per cent of our members, especially those into waste recycling, have all shut down. It is not drop in production but that they have shut down. If you want to know what we are saying go to the Industrial Development Centre at Ikorodu, Lagos State, and you will see most of the workers sleeping.

“And apart from that you look at the general situation of things in terms of security where people are being kidnapped for ransom. A member that is using cassava as major raw material has two members of his staff harvesting cassava kidnapped last year in Ogun State and the company paid about N10 million for their release else they would have killed them.

“He said the they went with security people that collected N500,000 from for two days to harvest about 20 hectres of cassava. This is a very big challenge. He said that there is no point for him to go and invest in the farm. My fear is that local production will be killed because of our high cost of production.”

Sadly, the Chief Executive of CPPE, Dr. Muda Yusuf, said that Nigerian firms are now importing raw materials that could be grown in the country from neighbouring ECOWAS countries. That is.