Government ‘wants’ to create jobs but industries struggle to operate
If an investor had taken the government up on its pledge to create millions of jobs within the last six years, data and experiences of manufacturing sector players show that over time, things have got worse with the continued existence of unaddressed challenges.
With stifled productivity and output, such investor(s) would likely be counting losses today, at best, struggling to break even and certainly less concerned about creating jobs.
To create jobs, particularly millions of jobs as repeatedly promised by the Buhari-led government, industries have to thrive and be successful. However, Nigeria’s manufacturing sector has struggled to stay afloat in the last six years.
No less than 50 manufacturing firms shut down operations between 2016 and 2018, despite the existence of a Presidential Enabling Business Environment Council (PEBEC) to make business operations easier. Following the COVID-19 outbreak, more firms collapsed while some suspended operations indefinitely.
Frank Onyebu, chairman, Manufacturers Association of Nigeria (MAN), Apapa branch, affirms that the sector is burdened by numerous challenges that have stifled its productivity and impact, however, the resilience of sector players is the adrenaline that keeps the sector running.
Data from the National Bureau of Statistics (NBS) show that the sector’s growth year-on-year contracted consecutively from 2015 to 2017 recording -1.5 percent, -4.3 percent and -0.2 percent, respectively. In 2018, growth picked up and achieved 2.1 percent; however, it dropped to 0.8 percent in 2019. After sliding into another recession in the third quarter of 2020, analysts have projected that the growth rate for full-year 2020 will still be a contraction despite the activities of the yuletide period, as the impact of the pandemic and the civil unrest will be felt.
Though, despite its weak growth performance, the sector’s contribution to GDP growth has increased annually, moving from 8.77 percent in 2016 to 8.83 percent in 2017. In 2018, it grew to 9.75 percent and in 2019 it achieved 11.64 percent, according to NBS data, depicting the resilience of the sector’s players.
While it is well known that countries that consume what they produce thrive economically, Nigeria has not been able to benefit from that ideology as the country’s production firms are not comfortably positioned to supply market demand. In addition to this, despite promises of economic diversification, the country’s resistance to fully explore its non-oil options as part of its economic diversification activities has stifled growth and productivity, especially in the manufacturing sectors.
Across the wide range of challenges facing the sector, these top the chart:
Naira-dollar tango and shortages
With manufacturers having to import many critical components of their production process, access to foreign exchange has been a major impediment to business operations.
Data from the Central Bank of Nigeria (CBN) show that in 2015 one dollar was N196 (officially) but by 2020 it increased to N379 (still, officially). Even at that, manufacturers find it hard to access dollar from the apex bank due to dollar shortages, forcing them to shift to the parallel market that sells at rates higher by almost 20 percent. This has significantly increased input cost of manufacturers, especially as they have to source for raw materials and equipment internationally using foreign exchange.
According to the MAN, the FX crisis led to the death of 54 manufacturing firms in 2016 alone and many more have followed since then with manufacturers saying they get 2 to 10 percent of their dollar needs from the market even after waiting for 30-90 days.
“Significant amount of FX is not available for use, and on the average over 40 percent of manufacturers cannot get the funds they require to give their operations a full capacity,” said Mansur Ahmed, MAN national president.
According to the MAN, in the first half of 2020, commercial banks’ lending rate to manufacturers declined by 13 percent to 19.5 percent from 22.5 percent recorded in H1 2019, it also declined by 3 percent when compared with 20 percent recorded in H2 2019.
MAN also revealed that the least interest rate being operated in the manufacturing sector was 14.8 percent given to the wood and wood products subsector, while the non-metallic mineral products subsector was given loans at 22 percent.
Constrained access to funds makes it difficult for manufacturers to expand and upscale. Despite arrangements made by the CBN to disburse loans, especially to manufacturers, many firms cannot access these loans due to reasons around high lending rates, difficult requirements and the lender’s reluctance to even give loans due to what they call ‘high-risk level’ of lending to businesses in Nigeria.
Availability of adequate infrastructure is a major determinant of the success of every country’s industrial sector; however, Nigeria lacks the necessary infrastructure needed to grow businesses. In particular, developed transport systems as roads are decrepit and although rails are coming up, they are not connected to the nation’s seaports.
Nigeria requires $15 billion (N5.8trn at N390 to a dollar) worth of investments annually for 15 years in order to adequately develop its infrastructure, according to reports from the Financial Derivatives Company, an economic and financial research firm.
However, the possibility of fulfilling that is quite slim considering the allocated budget for infrastructure in the country, coupled with the dwindling rate of foreign investment into the country.
Access roads to premier seaports in Apapa and Tin Can, Lagos, are plagued by gridlocks, hurting export and import, in addition to lack of functional scanners by the Nigeria Customs Service, which causes untold delays of raw materials to factories and exports to destination countries.
Also between 2019 and 2020, the cost of moving goods in a 40-foot container from Apapa to other areas within Lagos rose from N350,000 to N1.5 million-N2 million making manufacturers incur more cost.
Electricity supply to manufacturers
Epileptic power supply and high electricity tariff have plagued manufacturers, just like the average Nigerian, with data showing that the cost of energy used in manufacturing is about 40 percent of the total cost of production.
Electricity supply since the first half of 2018 stabilised at 10 hours per day while power outage per day was estimated at four times in the first half of 2020 as against five times in the corresponding half of 2019. In H1 2020, expenditure on alternative energy was N24.16 billion as manufacturers spent N9.45 billion on diesel; N8.64 billion on Gas; N3.04 billion on Generator; and N3.03 billion on other sources and accessories such as inverter, UPS according to survey done by MAN.
MAN recalls that some flourishing companies in Nigeria have relocated to neighbouring countries due to poor power supply in the country, noting that the consequences of such actions are under development, job losses, a bad international reputation, among others.
Regardless the seemingly endless challenges, local sourcing of raw materials in the sector has grown significantly since 2015, an improvement occasioned by government policies including the implementation of resource-based industrialisation and backward integration policy contained in Nigeria’s Industrial Revolution Plan (NIRP), FX restriction on some items by the CBN, the border closure exercise among others.
Data from MAN shows that local sourcing of raw materials moved from 48.8 percent in 2015 to 53.1 percent in 2016. Between 2017, 2018 and 2019, it was 63.2, 60.3 and 60.5 percent, respectively.
Although the manufacturers say this is expensive to operate, in the long run, it reduces production costs and exposure to unnecessary foreign exchange risks.
Some notable companies that actively engage in backward integration activities include Nestle, PZ Wilmar, a subsidiary of PZ Cussons, FrieslandCampina WAMCO, Dangote Sugar, Flour Mills of Nigeria (FMN), among others.