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Why manufacturing needs policy changes in Buhari’s second term

Manufacturing sector
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President Muhammadu Buhari has won a second tenure. But as victory memes gradually die down, key issues stare him in the face as he sets the stage for his second term.

Notable among these are die-hard manufacturing sector issues that seem to have defied solutions.

Manufacturers say though a few positives were felt in Buhari’s first tenure, a lot more ground needs to be covered, especially as regards policy-making and implementation.

A lot of manufacturers are asking whether Buhari’s second tenure will leverage funds for the sector. Nigerian commercial banks are improving in lending to manufacturers, but they are still not doing enough as their rates seem very high. Of course, they only bear a partial blame since Nigeria’s monetary policy rate (MPR), which is a benchmark interest rate in the country, has remained 14 percent for almost two years. Cost of borrowing is a function of MPR, overhead cost, personnel cost and other costs borne by banks, experts say.

In the first half of 2018, average interest rate charged to Nigerian manufacturers stood at 22.9 percent, representing 0.25 percentage point higher than 22.65 percent recorded in the same half of 2017, according to the Manufacturers Association of Nigeria (MAN).

“Access to and cost of funds remain a big issue for many domestic investors,” Muda Yusuf, director-general, Lagos Chamber of Commerce and Industry (LCCI), said in the 2019 Economic Outlook.

“There are still pockets of issues with access to funds,” he said.

Yusuf said with commercial bank lending rate at between 20 to 35 percent, the private sector, especially the SMEs, cannot access funds capital for their businesses.

In the last quarter of 2018, credit to the manufacturing sector was N2.3 trillion. This looks big and encouraging, but it may not be even enough for 40 large enterprises such as Dangote Group, Flour Mills of Nigeria and Chagoury, among others.

“Again, this money may likely have been accessed by the big firms, leaving out the medium and small-scale manufacturers,” one senior manager in a manufacturing company in Ikeja said.

Manufacturers say they want the Bank of Industry and Bank of Agriculture recapitalised to enable them lend more single-digit loans to manufacturers.

Secondly, Buhari needs to enunciate a policy that encourages local sourcing of raw materials. The backward integration programmes done by manufacturers are mostly self-supported. Some raw materials needed by factories need beneficiation while others are still on the ground. Because of high amount of money needed for exploration of such inputs, manufacturers prefer to look outwardly. Moreover, issues like non-availability and low quality are already not helping matters.

According to data from MAN, utilisation of local raw materials by manufacturers in Nigeria stood at 56.6 percent in the first half of 2018.

MAN says this may be attributed to general sluggishness of the economy and a renewed ability for importation of raw-materials considering the tranquillity in the foreign exchange market.

Hence manufacturers are gradually returning to importation of inputs, which squeezes the foreign exchange and reduces jobs.

More so, the issue of taxes remains a major challenge which manufacturers expect Buhari to solve with pronouncements.

Tax experts told BusinessDay that the number of taxes payable by businesses across the country is now 54 as against 37 in 2014.

To solve this challenge, Vivian Chigozie-Nmonwu, tax expert and lead partner at Vi-M Professional Solution, said these taxes need to be amalgamated into one or a few, since the whole tax cycle is a multiple chain of taxes on the same income stream.

Again, the Apapa debacle remains a clog in the wheel of progress for manufacturers.

Firms bringing in raw materials from Apapa ports and those exporting commodities abroad have seen their costs swell on rising dwell time, which results in high demurrage charges.

Only 10 percent of cargoes are cleared within the set timeline of 48 hours now while the majority of cargoes take between five and 14 days to clear, according to a maritime report conducted by the Lagos Chamber of Commerce and Industry (LCCI).The report notes that some cargoes take as many as 20 days to be cleared at the ports.

Manufacturers say there is a need to develop other ports across the country to decongest Apapa and Tin Can ports.

Furthermore, smuggling is still aggressively on and government needs to stand up against it. Smugglers are largely responsible for the death of over 500 textile mills of the 1980s in the country. Today, there is no longer any full-fledged textile firm. Textile manufacturers are now rug manufacturers and cotton farmers, including fashion designers, which is abnormal.

India’s textile industry is estimated at $108 billion, contributing five per cent to Gross Domestic Product (GDP) and 14 per cent to overall Index of Industrial Production (IIP), according to India Brand Equity Foundation.

The industry attracted Foreign Direct Investment (FDI) valued at $2.41 billion between April 2000 and December 2016, creating 100 million direct and indirect jobs with over 350 textile mills working.

According to Nigeria’s Textile Manufacturers Association, about 85 percent of the $1.4 billion worth of textiles that flood the country’s market is smuggled, mainly from neighbouring countries.

“We cannot compete with the level of smuggling and counterfeiting going on now,” said Grace Adereti, president of the Nigerian Textile Manufacturers Association (NTMA) in Lagos at a Made-in-Nigeria stakeholders’ meeting in Lagos in 2017.

“We used to have about 127 textile firms in Nigeria, but that has come down to two or three now,” she added.

Nothing can be discussed without reference to high energy cost borne by manufacturers. Forty percent of manufacturing expenditure goes to alternative energy. Manufacturers have spent N212.85 billion on alternative energy sources between the second half of 2016 and the first half of 2018. This is over 100 percent higher than what was incurred in the previous four halves. Manufacturers told BusinessDay that logistics costs have risen by 50 to 100 percent in the last two years, owing to poor state of roads and lack of a good transport system.

“Manufacturers in Nigeria currently self-generate as much as 13,000MW through alternative sources of energy in order to stay afloat,” Frank Jacobs, immediate past president of MAN, said at a special interactive forum on Eligible Customer Regulation of the Nigeria Electricity Regulatory Commission (NERC) in June 2018.

“In fact, cost of alternative electricity generation alone constitutes about 40 percent of our production cost. With such high costs, made-in-Nigeria products will hardly be competitive,” he said.

Manufacturers want Buhari to support MAN Development Company, which is a private initiative aimed at providing cheap power to industrial clusters.

There is also the issue of implementation of executive orders pronounced by Buhari himself.

For instance, ministries, departments and agencies of government are not in tune with Executive Order 004, which mandates them to give preference to locally produced goods in award of contracts.

Pharmaceuticals told Real Sector Watch in 2018 that there was no big contract that year.

Due to poor patronage and other related isssues, the pharmaceutical sector is struggling with major players unable to sustain production pre-2015 years. Already Swiss Pharma has been bought by an investor after experiencing early struggles, while Evans Medicals has gone under. Incidentally, these two drug makers got the WHO prequalification, which ordinarily should raise the level of their competitiveness.

 

ODINAKA ANUDU

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