Creating Improved Manufacturing Environment with Subsidy Removal

Creating Improved Manufacturing Environment with Subsidy Removal

Manufacturers and members of the organised private sector has argued that monies spent to subsidise consumption should be used to drive production, writes Dike Onwuamaeze

Operators of the Nigerian manufacturing sector are demanding for fiscal and monetary reforms that would improve the country’s business environment and make their products competitive in domestic and international markets. These reforms, according to their expectations, would take away expenditures like fuel subsidy and channel them to productive ends to finance infrastructure development. They believed that adequate funding of infrastructures like rails, roads, port’s facilities and electricity would lower their cost of production and enable them to produce at competitive prices.

They also believed that monetary policy reforms, especially in the management of the country’s foreign exchange market, in a manner that could bridge the gap between the official and parallel market could block financial leakages that would bring N4 trillion into the government’s coffers in 2023 alone to finance critical infrastructures.

The reforms should also go as far as breaking the monopoly of the NNPC as the sole importer of refined petroleum products and accommodate the recent request by the Manufacturers Association of Nigeria (MAN) that its members should be given licences to import same products, curiously from the Republic of Niger.

The Director of the Centre for the Promotion of Private Enterprises (CPPE), Dr. Muda Yusuf, stated this clearly in a paper he titled “Unlocking Revenues From Subsidy Regimes.”  

Yusuf argued that the Nigerian economy is heavily burdened and encumbered by two major subsidy regimes: the fuel subsidy regime and the foreign exchange subsidy regime, adding that huge sums of revenue could be unlocked from these subsidy regimes, if appropriate reforms are implemented.

Need to Remove Subsidy

Already, there is a plan to discontinue petroleum subsidy, which is a positive development. This action would unlock a minimum of N6 trillion revenues into the federation account annually.   

The second major subsidy regime from which huge revenues could be unlocked in the short term is the foreign exchange policy regime. Over the years the exchange rate assumptions in the appropriation acts were grossly and deliberately understated, leading to loss of trillions of Naira to the federation account.

In 2021, for instance, the Central Bank of Nigeria (CBN) sold an estimated $18 billion US dollars as interventions in the foreign exchange market at a hugely subsidised average rate of N400 per dollar. Effective exchange rate in the economy at the time was N560/$.  This meant an estimated subsidy of N160/$, which translated to conservatively estimated revenue loss of N2.9 trillion.

Similarly in 2022, an estimated $18 billion was sold as intervention in the FOREX market at an average rate of N447/$.  The average effective exchange rate for the period was conservatively about N650. Again, this meant a subsidy of N203/$.  This translated to an estimated revenue loss of about N3.64 trillion.

He said: “These are huge loses of revenue to foreign exchange subsidy, which is as damaging to the economy as the fuel subsidy. But curiously, the National Assembly and the CBN had serially, grossly and inexplicably underestimated the exchange rate benchmark in the appropriation bills of the past few years.

“For an economy that is burdened by huge fiscal deficit and unsustainable debt obligations, this should not be allowed to continue in 2023.  The reality is that FOREX end users are paying well over N700/$ for their business transactions. Selling government forex at less than N500/$ is inexcusable.

“The exchange rate assumption in the budget should be immediately reviewed to reflect exchange rate realities and boost revenue to the federation account.  This could be done within the framework of the Finance Act which is fortunately being reviewed. A realistic exchange rate benchmark would boost the federation account revenues by about N4 trillion in 2023.”   

NECAs View

The Director General of Nigeria Employers’ Consultative Association (NECA), Mr. Adewale-Smatt Oyerinde, told THISDAY that in other climes, these funds being thrown at subsidies “would have been judiciously used for more productive activities that will directly impact the lives of citizens, most especially provision of infrastructural facilities.”

Oyerinde noted that over a decade, the country has spent well over N20 trillion on fuel subsidies while about N15.5 trillion was spent on capital expenditure, N2.5 trillion on health and about N3.9 trillion on education.  

In 2022 alone, over N5 trillion was expended and over N3trillion budgeted for same in the 2023 budget.

This, according to him, is a misplacement of priority and showed that critical developmental items such as education, health and infrastructure have suffered due to crass misplacement of the country’s economic priorities. The corollary is that Nigeria seemed to be behind in all economic growth fundamentals, except a large market, which if not harnessed might become a curse as the implementation of the AfCFTA gains more steam.

The fuel subsidy mechanism was introduced in Nigeria in 1973 as a tool to cushion the landing cost of the petroleum products as a result of the Turn Around Maintenance (TAM) of the refineries. Since then subsidy has taken a frightening turn, becoming a major drain in the purse of the nation.

“It is no gainsaying, that the subsidy regime as currently operated is shrouded in secrecy and fraught with corruption. The humongous amount spent in the guise of subsidy regime is literally being used to subsidise inefficiency, corruption and consumption.  

“Few years ago, the report of a Presidential Committee on Verification and Reconciliation of Fuel Subsidy Payments between 2009 and 2011, showed that about ₦667 billon (about $4.3b) was being mismanaged annually subsidising millions of litres of petrol that Nigerians never used, or even needed.

“Recent comments by high-ranking Government officials including the Comptroller-General of Customs also alluded to the fact that the subsidy scheme is a brazen rape of our scarce resources,” Oyerinde said.

The NECA believed that the application of the subsidy regime has remained unsustainable, and has been characterised by fiscal loss and the recklessness associated with the subsidy regime. Worse still, Nigerians are currently not buying petrol at the subsidised rate of N165. The product sells as high as N650 in some part of the country.  

The employers’ association strongly recommended that the fuel subsidy regime should be removed latest by June 2023, as contained in the Appropriation Act, 2023. It also argued strongly that government should not spare any effort to complete the Turn Around Maintenance of the four refineries before the June, 2023 date; institute a judicial enquiry involving employers and workers representatives to ascertain those that are culpable in the fuel subsidy scam and make necessary adjustment to the Finance Bill 2022, by removing sections that contradicts the Petroleum Industry Act, for the rapid development of the oil and gas industry.   

Ensuring sustainable development

The Director General of  MAN, Mr. Segun Ajayi-Kadir, said recently that Nigeria’s path to economic growth, industrialisation and sustainable development has been compromised by inadequate attention to the numerous pressing challenges of the manufacturers who are meant to be the propellers of its long-term economic agenda.

Ajayi-Kadir argued that achieving a stable rapidly-growing Nigerian economy would require taking head-on the daily bottlenecks confronted by business owners within the manufacturing sector because of its active inter-linkages with other key sectorial drivers of the economy.    

He observed that the Nigerian economy is completely dependent on importation of refined petroleum products including diesel and other vital manufacturing raw materials and there are currently no sufficient alternatives.

The MAN expressed concern about the implications of the sharp increase in the price of diesel on the manufacturing sector, which include the exertion of untold hardship on the manufacturing sector leading to the closure of many industries, leading to reduction in capacity utilisation, further decline in GDP, large scale unemployment across 76 sub-sectors and increase in crime rate; further decrease in foreign exchange earnings from the manufacturing sector as high cost of production feeds into export commodity prices; reverse-multiplier effect, as cost of production escalates and the headways already made in the sector are grossly eroded; negative spiral effects on every sector of the economy, resulting in hyperinflation, lower productivity and turnover amongst others.

“In light of the gravity of the precarious situation that we have found ourselves as a nation and the looming dangers ahead, the expectations of manufacturers in Nigeria are as follows: that government should continue to support manufacturing to accelerate the process of recovery from the aftermath of COVID-19 and previous bouts of recession to avert the complete shutdown of factories nationwide with multiplier effect on the employment.

They also demanded the issuing of licenses to manufacturing concerns and operators in the aviation industry to import diesel and aviation fuel directly to avert the avoidable monumental paralysis of manufacturing activities arising from total shut down of production operations and movement of persons for business activities.

“As a matter of urgency, address the challenge of repeated collapse of the national grid (twice within a week), which is causing acute electricity shortage in the country, especially for manufacturers and to urgently allow manufacturers and independent petroleum products marketing companies to also import AGO from the Republic of Niger and Chad by immediately opening up border posts in that axis in order to cushion the effect of the supply gap driven high cost of AGO,” MAN said.

It also demanded “concessional FOREX allocation at the official rate to manufacturers for importation of productive inputs that are not locally available.”n

The President of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Michael Olawale-Cole, stated that particular attention must be put on investing more in transport infrastructure to resolve the many logistical challenges that have impacted the movement of goods across the nation.

“Looking beyond oil revenues, we can enhance our FOREX  earnings through the increased inflow of foreign direct investments. We need to invest more in infrastructure and critical port reforms to reduce the bottlenecks in our export logistics and processes that will boost non-oil production and exports.

“The cost of logistics has gone up due to the poor state of our roads and the lack of connection among farms, factories, and markets.”

Improve infrastructure

The LCCI, however, commended the federal government for the recent effort to improve infrastructure, such as the completion of the second Niger Bridge, which is a key national infrastructure, with immense socio-economic benefits for the contiguous states and indeed the entire nation.

The project was funded through the Presidential Infrastructure Development Fund (PIDF) that was created by President Muhammadu Buhari and managed by the Nigeria Sovereign Investment Authority (NSIA).

The LCCI said that it would want to see more of such developments for the benefit of the organised private sector, adding that to “reduce the shocks from disruptions to supply chains for raw materials, manufacturers should be assisted with subsidised input and more allocation of FOREX for importing critical inputs.”

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