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Do CEOs have confidence in Nigerian economy?

Nigerian economy
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Chief executives of multinationals, conglomerates, medium- and small-sized manufacturing companies are usually not the most vocal but their words carry weight whenever they speak.

More than 200 of them spoke recently in a most decisive way when they participated in the Manufacturers CEOs Confidence Index (MCCI) for the first quarter of 2019, which was conducted by the Manufacturers Association of Nigeria (MAN).

One major takeaway from the report is that issues that many think are over remain thorns in the flesh of CEOs managing critical firms.

Issues around foreign exchange, bank lending rate, government capital implementation, multiple taxes and sources of raw materials are some of the challenges dragging the growth of the sector, according to them.

This substantiates the need to pay attention to myriads of operating challenges hindering the sustenance of growth of the sector.

According to the MCCI, CEOs confidence stood at 51.3 points in the first quarter of the year, which is slightly above the 50 points benchmark of a good performance.

A composite manufacturing index above 50 points indicates that the manufacturing economy is generally expanding; 50 points indicates no change, and below 50 points indicates that it is generally contracting.

The data generated from the responses of over 200 CEOs of MAN member-companies across the country, as analysed by BusinessDay, revealed that the majority of the CEOs interviewed, about 92 percent of them, agreed that multiple taxes and levies depress production in the manufacturing sector. This represents the highest percentage when compared with other issues faced by the industry.

This is substantiated by the numerous taxes, levies, fees and other charges that manufacturers pay to agencies of the federal, state and local governments, MAN said.

The number of taxes paid by Nigerian companies has risen to 54 today, as against 37 in 2014, according to tax experts.

One CEO said that he received 16 different government agencies/ departments in one month, with each of them demanding compliance, which simply translates to parting with certain amount of money.

Also, 41 percent did not agree that the rate at which the sector sources foreign exchange has improved. However, 36 percent agreed while another 23 percent were not sure that foreign exchange access has improved. Today, many manufacturers, especially multinationals, say they cannot get as much foreign exchange as they need yet. Analysts think that Nigerian manufacturers must strengthen their backward integration plans to hedge against any dollar crisis that may result from oil price crash in the future. Nigeria relies on oil and minerals for over 90 percent of foreign exchange, and any hit on the market affects the amount of dollars available for use by manufacturers and other economic players.

MAN believes that the CEOs’ response suggests the need for continuous fine-tuning of foreign exchange policy in the country, particularly as it concerns the manufacturing sector.

Also, 63 percent of the respondents did not agree that the rate at which commercial banks lend to manufacturers encourages productivity in the sector.

About 28 percent of respondents agreed while the 18 percent were not sure if the size of bank loans to the sector encourages productivity.

Lending rate to the manufacturing sector averaged 22.21 percent in 2018 and 22.84 percent in 2017, according to MAN.

Many small and medium enterprises remain shut out from deposit money banks which lend at 20 to 35 percent rates. Tenor of funds is usually 12 months, which makes matters worse. Part of the challenge is that the monetary policy rate is 13.5 percent. This is the rate that determines the lending rate in the economy.

Nigeria may do well by looking at peers in Africa. The current repo rate (central bank lending rate to commercial banks) in South Africa is 6.5 percent while the prime lending rate (lending rate to customers) is 10 percent.

Kenya Central Bank’s monetary policy committee cut the determining bank rate in July 2017 to 9 percent from 9.5 percent.

Zambia’s central bank cut benchmark lending rate by 50 basis points to 9.75 percent in February 2018, citing lower consumer inflation and weaker economic growth.

In October 2017, the central of Ethiopia raised its benchmark interest rate to 7 percent, from 5 percent.

  This shows there is a need for measures that will lower cost of borrowing in a country that has one of the highest rates of accessing loans in the world, the report said.

However, development banks like the Bank of Industry are lending at single-digit rates (of about 9 percent) but need recapitalisation, according to industry experts.

MAN’s response from the industry players focused on their position on macroeconomic and business operating environments as well as perception on the diffusion factors which include: current business condition, business condition for the next three months, current employment condition, rate of employment, and employment condition.

The majority of respondents did not agree that government capital expenditure implementation encourages productivity in the sector.

“This claim can be justified with the available poor economic infrastructure such as inadequate power supply, bad road network, high cost of abstracting water, low patronage and many more,” MAN said.

The association suggested the need to pay urgent attention to initiatives that would improve economic infrastructure, especially those that supports productivity in the real sector.

Despite the real gross domestic product (GDP) growth recorded by the manufacturing sector for the fourth quarter of 2018, the sector’s contributions to the nation’s GDP during the period did not change from 2017 share (8.86 percent), as well as in the annual contribution, which rose only slightly from 9.18 percent in 2017 to 9.20 percent in 2018, National Bureau of Statistics (NBS) figures, analysed by BusinessDay, show.

This is the maiden edition of the report, which will now be a quarterly survey targeted at measuring the pulse of the manufacturing sector.

The responses show that while the economy sees gradual growth after exiting recession, investors want quick policy interventions that will improve the business environment. Similarly, they want to see a harmonisation of taxes and levies by federal and state governments. They want improvements at ports and sincere developments of ports outside Lagos to decongest Apapa and Tin Can ports.

 

Odinaka Anudu & Endurance Okafor

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