• Thursday, March 28, 2024
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Nigerian manufacturing sector in era of AFCFTA

The African SMEs story: Building Nigeria’s manufacturing industry

The Nigerian manufacturing sector is among the largest in Africa. With a contribution of eight to nine percent, the sector contributes over $30 billion to the the Gross Domestic Product (GDP).

In 2019, the biggest discourse in the sector was the African Continental Free Trade Area (AfCFTA), which was expected to bring the continent under one trading umbrella.

The AfCFTA implementation will begin in July 2020 and all manufacturers are keen on what the trade treaty holds out for them. While it provides opportunity for Nigerian firms to leverage broader continental market, it also promises to pressure firms to either innovate or die. Bismark Rewane, CEO of Financial Derivatives, said in July 2019 that the AfCFTA would favour Nigeria, Kenya, Egypt and Ghana and other big countries, but warned that any government that was not effective would fail within the AfCFTA environment.

The United Nations Economic Commission for Africa (UNECA) projects that the trade agreement will boost intra-African trade by between $50bn and $70bn in monetary terms, with a 40 percent to 50 percent increase over the first 20 years of its implementation. In addition, the trade agreement is hoped to expand a market of 1.2 billion people and a gross domestic product (GDP) of $2.5 trillion across all 55 member states of the African Union.

These and much more benefits await participants of the trade agreement.

However, the big question is, how prepared are manufacturers for the trade agreement?

Osaro Omogiade, managing director of Nosak Distilleries, which manufacturers food-grade ethanol, told BusinessDay that his team was ready.

“Our group presence in the export trade zone, especially in the oil and vegetable oil, is an indication that we are ready,” he said.

“We have commenced export of food-grade ethanol to the neighbouring West African countries, particularly Ghana. It is an expression of our readiness. We believe in living global because of the associated advantages. If you do export, you will hedge against the foreign exchange problems,” he further said.

Segun Ajayi-Kadir, director-general of the Manufacturers Association of Nigeria (MAN), told BusinessDay recently that  manufacturers were ready for the trade agreement.  But he warned that unless issues around ports, taxes and other regulatory pressures were addressed, the country might lose out.

“There is a moratorium for us to get our acts right, and it could be anything between five and 10 years,” he said.

“I believe strongly that if government is willing, and this president has told us that he is willing, we can mitigate those risks and manage the process robustly and become net gainers of the free trade. The only thing is that if we carry on as business as usual, Nigerian economy will suffer badly,” he further said.

Read also: Manufacturing faces big test in 2020 on oil price, border closure, AfCFTA

BusinessDay understands that many multinationals are already in many parts of Africa and the trade treaty seems well-suited for them.

Moreover, many export companies such as De-United Foods, British American Tobacco, Indorama Eleme Fertilizer & Chemicals and Dangote Group, among many others, have the opportunity to grow their margins, expand operations and earn bigger foreign exchange as the African Continental Free Trade Area (AfCFTA) offers them an opportunity to consolidate foothold on the continent.

Vice-President Yemi Osinbajo said at a breakfast meeting in 2019 that the implementation of the African Continental Free Trade Agreement would transform the Nigerian economy and create jobs for millions of people.

 “AfCFTA will also promote a vibrant and competitive industrial sector that is central to job creation and income growth,” he said.

However, some Nigerian manufacturers say they are at a disadvantage as the business environment makes them uncompetitive. Their reasons are not farfetched.

Recent reports from MAN showed that major problems of these manufacturers included the congested Apapa and Tin Can ports in Lagos, poor power supply, issues around multiple and excessive taxation, infrastructure deficit, difficulty in sourcing Forex, among others.

The poor state of infrastructure in the country causes manufacturers to lose millions of naira yearly.

“Manufacturing companies situated on the Amuwo-Odofin and Kirikiri axes lose over N20 billion annually, and most of the factories are on the brink of shutting down because we produce but do not sell as customers avoid coming to this area,” said Frank Onyebu, chairman Manufacturers Association of Nigeria (MAN) Apapa branch in Lagos recently.

Oluwafunmilayo Bakare Okeowo, chief executive officer of FAE Limited, said in a phone interview that manufacturers needed better infrastructure to reduce cost of production.

“The issue of tariffs should be properly addressed. We also need protective policies to create an enabling and competitive environment,” she further said.

For some manufacturers, border closure remains one big hit that hurts their capacity to import inputs through the border.

In August 2019, the federal government gave a directive to shut the land borders in a bid to reduce the dominance of foreign goods and smuggling while improving the patronage of locally produced goods. This has automatically constrained trade relationship between Nigeria and its neighbouring countries and surprisingly came after the signing of the free trade agreement.

“It is quite evident that the border closure stands in stark contrast to the principal objectives of the AFCTA. Consequently, regional trade and cross- border investments are in dire straits, limiting the overall competitiveness of the continental market.” said Vincent Nwani, CEO RTC Advisory Services said in a telephone conversation with BusinessDay.

Read also: Buhari summoned Minister, NNPC boss  over global oil crisis- Presidency Sources

Some manufacturers say they now incur more costs while importing inputs and machineries.

During the presentation of the 2020 budget, President Muhammadu Buhari said N2.46 trillion, including N318.06 billion in statutory transfers, was proposed for capital projects out of the N8.155 trillion estimated as the total federal government revenue for the year.

Nigeria requires $15 billion (N4. 59tn at N306 to a dollar) worth of investments annually for 15 years in order to adequately develop its infrastructure, according to a report from the Financial Derivatives Company, an economic and financial research firm.

However, the possibility of raising the funds that is quite slim considering fiscal crisis facing the government and the dwindling foreign investments into the country.

Manufacturers need investments in infrastructure such as road and rail to move their goods to the market at cheaper rates. But this is not happening. Logistics ranks after power to manufacturers and it is gulping huge expenditures of many firms.

The capital importation report released by the National Bureau of Statistics (NBS) showed a persistent decline of foreign investments in value in most sectors of the economy, especially in protected sectors with the exception of the banking, finance and telecoms sectors.

The foreign direct investments (FDI) into Nigeria in 2014 stood at $2.28 billion but five years later, inflows slowed to $1.19 billion growing at a negative rate of 15 percent, as firms moved out of the economy in droves, taking with them long-term capital. FDI in half-year 2019 fell by eight percent and in the third quarter of the year stood at $200.08, according to data from the National Bureau of Statistics (NBS).

Unfortunately, Nigeria’s manufacturing sector, which should be one of the active drivers of FDI and economic growth, was only able to contribute a marginal three percent, which shows how low investments are in the sector.

In a 2019 third quarter report prepared by MAN, chief executives of manufacturing companies in Nigeria identified multiple taxes and levies as a major challenge for businesses.

Eighty-nine percent of the CEO-participants in the survey agreed that multiple taxes and levies dampened productivity in the manufacturing sector with records showing that manufacturers pay over 30 different taxes, levies and fees to agencies of the federal, state and local governments on account of increased revenue target.

 The Global Competitiveness Report for 2019 ranks Nigeria 116th position out of 141 economies, with a 39.7 rating in infrastructure and 37 in government orientation as well as public sector performance in business regulation, despite squaring 58.5 in business dynamism.

The 2020 World Bank’s ease of doing business index ranks Nigeria 131st in position, which is an improvement from its previous ranking of 146. However, according to the president, the goal is to be a part of the top 70 by 2023.

The question is, are there policies and instruments in place to achieve this? What is the government’s plan to expand the horizons of Nigeria’s trade portfolio considering its recent actions? How will Nigerian manufacturers, especially the medium and small segments, survive competition in the face of low power supply/ high energy cost, multiple taxation, poor infrastructure, high funding cost and insecurity? The answer is best left for the government.