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Fixing manufacturing value chain through fiscal, monetary policies

Nigeria’s manufacturing sector recorded a modest growth in the third quarter of 2019, thanks to the Central Bank of Nigeria’s policy aimed boosting credit to the sector.

The sector grew 1.10 percent on an annual basis, its fastest expansion since the start of the year, against a negative growth of 0.13 per cent in the previous quarter, as the sector was a major beneficiary from the CBN’s policy, forcing commercial banks to lend as much as 65 percent of their loans mainly to the real sector.

While the news of an expansion of 1.10 percent is something to cheer, seeing that the sector has been a free fall since it recorded a 2.35 percent growth in the fourth quarter of 2018, it is still meagre going by the 7 percent growth global consulting firm, Pricewaterhousecoopers, says the sector could grow if structural issues across its value chains are resolved.

But boosting lending to the sector alone is a necessary but not sufficient condition for solving the numerous challenges in the sector as there needs to be a push from the fiscal side aimed at stimulating growth in the sector.

Such fiscal reforms needed to complement the increasing credit include: fixing the dilapidated road network, providing power, scrapping the multiple exchange rates, and supply variability of rain-dependent agricultural inputs.

The challenges faced by manufacturers are probably best put by Frank Jacobs, a one-time president of the Manufacturers’ Association of Nigeria, in remarks to the media in April 2018: “A situation where you generate your own power for production does not make you competitive, because whatever is produced in this country is produced at a higher cost when compared to other parts of the world. The same goes for the transportation system as we still move our goods via roads, even the heavy duty goods. Such goods which should go by rail, lack enough rail lines to carry them. There is a need to develop the transportation sector to the point where it can support the manufacturing sector and also support the economy.”

The Nigerian manufacturing sector is made up of 77 industries and is dominated by food, beverages and tobacco, with sugar and bread products generating the greatest value of output, based on data from the National Bureau of statistics.

As a critical sector, it has a lot of opportunities that, if harnessed effectively, could attract the needed investments that would create jobs for the country’s teeming youths, as well as boost economic development.

However, due to the economic maladies from the fiscal side, growth in the sector has been tepid.

According to MAN, over N20 billion is lost annually by manufacturers operating within the Amuwo Odofin and Kirikiri Industrial Zones as a result of dilapidated infrastructure.

In Agbara, Ogun State, one of the biggest industrial clusters, roads were bad for many years despite taxes paid by large enterprises in the cluster such as Flour Mills, Unilever, Pharma-Deko and others.

“I will like to put on record that the only motorable road within the OPIC Estate was constructed by members of MAN within the estate,” Paul Gbededo, group managing director of Flour Mills of Nigeria Gbededo, told  Dapo Abiodun, governor-elect of Ogun State, on April 11 this year, while describing the dismal state of roads at Agbara.

The roads in the industrial city are being constructed at the moment, but it is long in coming.

In 2017 alone, manufacturing companies in Nigeria spent as much as N117.38 billion on fuelling their plants to run their daily operations,  MAN said. This affected their ability to expand operations, acquire new machinery to produce more in order to give juicy returns to shareholders.

“The biggest challenge facing manufacturing companies as well as small and medium scale enterprises is power and this has led the death of many business in the country,”  Muda Yusuf, director general, Lagos Chamber of Commerce and Industry, said recently.

This is so not good for a nation that wants to open up its economy to trade with others in the continent as this might put it on the losing end

Nigeria had in July this year joined 53 other African countries in signing into a trade agreement that will see it open its economy to free trade on virtually 90 percent of its imports.

With the trade pact, the country alongside other parties to the agreement would be open to an estimated $3 trillion market with trades among 1.2 billion people. While the African Continental Free Trade Area agreement is expected to come with several benefits, stakeholders have raised concern on the possibility of Nigeria losing big to other smaller African nations in the deal given its huge infrastructural deficit.

In order for Nigeria to benefit from the African trade agreement, MAN highlighted several recommendations that must be looked into by the government

At a recently held stakeholders’ forum in Lagos, Frank Onyebu, chairman, MAN, Apapa branch, said beyond the challenges of dilapidated roads, poor power supply, multiple taxation, and security challenges, manufacturers, especially those within the Amuwo Odofin and Kirikiri industrial areas, are faced with additional challenges of access to their factories owing to the invasion of trailers and other articulated vehicles into the industrial areas.

Onyebu said the precarious situation has brought about most factories accumulating large stocks of unsold inventories since customers no longer have access to the affected factories.

 In 2015, when the Muhammadu Buhari-led administration came into power, it said its focus would be largely on small and medium scale enterprises as well as the manufacturing sector as its key execution priorities of its four-year Economic Recovery and Growth Plan (ERGP).

Other stated priorities included the stabilisation of the macroeconomic environment, energy sufficiency, improvement of transportation infrastructure, and the achievement of food security.

To ensure optimal execution of the ERGP, the Nigerian government resolved in August 2017 to conduct sector or focus labs “designed to tackle complex challenges by bringing together all stakeholders to identify the root causes of the challenges within a sector and generate ideas and resources to solve them”.

For manufacturing and processing, phase one of the ERGP focus labs sought to unlock investment commitments in the food manufacturing, textile, garments and leather industry, mining and downstream activities, petrochemical industry, general manufacturing, and industrial parks.

In phase one, for instance, the focus labs expedited the access of a mining company to the Solid Minerals Development Fund (SMDF), and brought to the attention of the mining minister the troubles of a bitumen mining company seeking to renew its exploration licences. Additionally, the focus lab aided a metal manufacturing and aluminium company, which “required additional funding” and had held several funding syndications with multilaterals and commercial banks, in getting an agency of the World Bank to conduct a review of their projects within the lab.

However, most of the recommendations are yet to be implemented.

A major key area challenge that must be addressed is multiple taxation. Experts say manufacturers and MSMEs in the country pay over 50 taxes across the country.

In the second quarter of 2019 survey conducted by MAN, 95 percent of CEOs said multiple taxation was their biggest impediment. The number was previously 92 percent in the first quarter.

Analysts believe that addressing this drag will improve manufacturers’ margins, with positive multiplier effect on job creation, factory expansion and improvement in non-oil export to earn foreign exchange for the economy.

 

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