Nigeria’s manufacturing sector is on death row as bickering between the Presidency and the National Assembly over the 2016 budget continues to delay infrastructure needed to push the sector.
The sector has been in recession for three quarters and needs regular electricity, accessible roads, functional railways, new technology and incentives, all of which are factored into the budget to rejuvenate it.
Capacity utilisation in the manufacturing sector is currently 50.7 percent, as against 54.2 percent in 2014.
Business sources say the non passage of a budget four months into the fiscal year depressed economic activity in the first quarter of 2016 and could lead to a recession (two consecutive quarters of negative growth) when combined with the damage being done by ongoing energy and forex shortages.
Nigeria’s inflation rose by 12.8 percent in March and its unemployment rate pushed into double digits at 10.4 percent in the fourth quarter of 2015.
Economic growth dropped to 2.8 percent last year, the slowest since 1999 and will decelerate further to 2.3 percent in 2016, the International Monetary Fund (IMF) said on March 31.
Questions over Nigeria’s hard FX peg at N199/$ which has worsened inflation and led to slower growth is also weighing on investor sentiment, especially the potential for a misalignment between fiscal and monetary policy.
The policy which has worsened the foreign-exchange shortage and discouraged dollar inflows, has been widely criticised by investors and businesses.
“If you have an exchange rate policy, diaspora flows will come back, productivity will increase and output will rise to increase growth and reduce inflation,” Bismarck Rewane, CEO of economics consulting firm, Financial Derivatives Company, said in an interview monitored by BusinessDay.
The recent signing of a Yuan swap agreement between the Central Bank of Nigeria (CBN) and the Industrial and Commercial Bank of China (ICBC) may not ease the current backlog of unmet dollar demand and attendant pressure on the economy.
“The swap should in theory make it easier to settle transactions in yuan. So, for example, a Nigerian business importing goods from China may settle transactions directly in yuan…this is in theory, in practice it looks like banks haven’t offered such products for some time. Also, as long as confidence in the naira remains poor, it is likely that the flight to safety to the USD may continue,” an investment banking source, speaking on condition of anonymity, told BusinessDay.
Nigerian stocks are down 13.7 percent this year with over $5 billion of market capitalisation wiped off the local bourse since January.
Independent sources say local raw material sourcing has crashed to less than 50 percent, as against almost 60 percent in 2014.
Exporters such as RMM Global and Multi Trex Integrated Foods Limited, have shut down, as they could not withstand competition and high logistics cost in the international market, owing to lack of incentives.
Currently, power outages in industrial zones have worsened in the last four months, rising from five times per day in 2015 to between eight and ten in 2016, according to manufacturers.
Railways, which are supposed to ferry products at much cheaper rates, are still inoperable, as manufacturers continue to use the land and sea options, which are more expensive, open to security infractions and slow.
The controversy over the exclusion of the Lagos-Calabar rail does not help manufacturers’ case, as this would further intensify their woes.
“The state of infrastructure in Nigeria is poor. We are happy that the budget wants to address infrastructure issues in the country. But the budget is now taking a very long time to be passed or assented to,” said Frank Udemba Jacobs, president, Manufacturers Association of Nigeria (MAN) in an interview.
“The railways are still not there, and manufacturers are complaining of the poor power supply. We just hope they will begin to implement that budget to truly transform the manufacturing sector and economy in general,” Jacobs said.
Apart from railways, major roads in the country are still unpassable, giving room for security infractions during delivery.
The budget delay has crimped the profits of steel companies which supplied products to construction companies that are heavily owed by the Federal Government.
“These are not the best of times for the steel industry. The demand has been low for a year, but it is likely to change once the infrastructure spend comes through the budget. Most of the construction companies have not been paid for the jobs they have done,” said said Raj Gupta, chairman, African Industries Group, a consortium of 12 companies, including six steel plants.
Owing to the negative impact of budget delay on the real sector, the Lagos Chamber of Commerce and Industry (LCCI) says there should be statutory timelines to guide each stage of the budget process.
“This will make planning better for public and private sectors of the economy, and enhance faster delivery of infrastructure, critical for productivity in the economy,” said Nike Akande, president, LCCI, at the first quarter press briefing.
The Ministry of Finance, said last month that it had in anticipation of the budget’s approval , lined up about N350 billion, to pump into the Nigerian economy.
The N6.07 trillion budget proposes to spend N1.84 trillion on capital expenditure, which could have provided some stimulus to the economy.
PATRICK ATUANYA & ODINAKA ANUDU
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