Manufacturers to cut jobs, raise prices on back of austerity measures

Manufacturers may respond to austerity measures and devaluation that have hit the Nigerian economy by cutting jobs and raising prices in order to remain afloat.

Continuous decline in oil prices has forced Nigeria’s Federal Government to introduce austerity measures to cushion possible impact on citizens.

Similarly, the Central Bank of Nigeria (CBN) has announced devaluation to save naira, dwindling foreign reserves and the economy in general.

But analysts say the current economic vagaries will have multiplier effects on Nigerian manufacturers who now have to battle high cost of raw materials, funds and other inputs, and will likely respond by seeking ways of cutting costs, which could result in cut jobs, placement of ceiling on employment and higher cost of products.

“It is not too clear how the Federal Government wants to control inflation now. There is likelihood that oil prices will decline further. Owing to the fact that the exchange rate has moved downwards, the manufacturer has to pay higher in naira terms for raw materials imports,” said Ede Dafinone, chief executive officer, Sapele Integrated Industries Limited, in a chat with BusinessDay.

“In order for him to replace the stock, he must charge a higher price in order to have enough naira to buy raw materials,” he said.

“By charging higher prices, resulting from higher production costs, the manufacturer’s demand could fall. Once demand falls in the face of a huge cost burden, the manufacturer seeks ways of cutting costs. And one way of doing this is to reduce the number of workers,” Dafinone, who is a key member of the Manufacturers Association of Nigeria (MAN), stressed.

He  added that labour unions will likely seek higher pay to compensate for inflation, which could further raise costs and place a ceiling on employment.

Remi Bello, president, Lagos Chamber of Commerce and Industry (LCCI), said the current situation has shown that an economy that is diversified has a better capacity to withstand shocks.

According to Bello, creating an enabling environment to enhance the productivity of enterprises and ensure economic diversification has been the focal point of discussion by the organised private sector before now.

“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,” said Bello.

“Many firms are already feeling the heat across all sectors. In the few weeks, naira exchange rate has depreciated by about 11 percent in the interbank market and over 12 percent in the parallel market. The impact of the depreciation on operating costs is very profound,” he added.

One key solution to the present quagmire is the review of the taax structure, according to Bello.

“Tax revenue [Non-oil] to GDP ratio is about 4 percent. In many other climes, the percentage is well over 25 percent.  There should also be more emphasis on indirect tax, than direct tax.

This model is better suited for an economy that is largely informal,” he said, stressing that the tax drive should also reflect the pattern of income distribution.

The National Bureau of Statistics (NBS) says a total of 349,343 new jobs were created in the third quarter of 2014. Out this figure, the manufacturing sector led the chart with a total of 54,446 jobs created in the formal sector within the period. In recent reviews by the NBS, the manufacturing sector has been tipped as the key economic driver.

The situation coincides with rise of capacity to 53 percent and local input content to 59 percent. But analysts fear that the current situation could reverse the trend. They say now is the time to support all the 77 sub-sectors, rather than dwell eternally on three.

“This government must support manufacturing. We bear huge energy costs and we have importers who are suggesting lower products,” Robin Neville, managing director, First Aluminium plc, leading maker of roofing sheets, in an exclusive interview with BusinessDay.

“We lost 200 employees not too long ago. We had a situation before we closed down our rolling mill operations. Gas was cut off for six weeks. That was the case in 2011. By stopping the rolling side of business, cost has been reduced by 75 percent, but  22.7 percent of our cost still goes to energy costs,” Neville said.

ODINAKA ANUDU