The manufacturing sector has a role to play in the revitalisation of any economy in recession. But lack of infrastructure, challenging monetary policy and inclement business environment have weakened the sector’s capacity to pull Nigeria’s economy out of recession. Manufacturers are agonising over what they claim is the loss of N500 billion to Central Bank of Nigeria (CBN’s) implementation of the flexible foreign exchange policy. Assistant Editor CHIKODI OKEREOCHA reports that unless the drift is arrested, more factories may wind up operations.
They wore long faces, as they entered, one after another other, into the expansive hall of Golden Tulip Hotel in Lagos, venue of the 45th Annual General Meeting (AGM) of the Apapa branch of the Manufacturers Association of Nigeria (MAN).
Despite the razzmatazz and exchange of banters, it was obvious to discerning minds that the attendees at the AGM, mainly manufacturers, were barely struggling to conceal their worries and fears.
The bleak prospects staring at operators in the sector since the economy slipped into a recession were too serious to allow manufacturers savour the fun of the event. MAN’s local Chairman in Apapa Babatunde Odunayo articulated members’ collective fears over the crippling effects of some fiscal and monetary policies on their operations.
In his welcome address at the public session titled: “Economic recession and the future of manufacturing in Nigeria”, Odunayo lamented that manufacturers are in a fix over the loss of N500 billion to the implementation of the flexible Foreign Exchange (forex) policy introduced by the Central Bank of Nigeria (CBN).
According to him, the loss arose from the exchange rate differential between the approved Form ‘Ms’ and Letters of Credit (LCs) before the CBN introduced the new flexible exchange rate system on June 20.
A Letter of Credit is a bank document guaranteeing that a buyer’s payment to a seller would be received on time and for the correct without a glitch. In the event that the buyer is unable to pay for the products supplied, the bank has an obligation to settle the supplier.
On the other hand, Form ‘M’ is a mandatory statutory document to be completed by all importers for the importation of goods into the country. Its lifespan is 180 days (for general merchandise) and 365 days (for plant and machinery).
An extension of 180 days (for general merchandise) and 365 days (for plant and machinery) could be granted on the Form ‘M’ by an authorised dealer. Any further extension has to be approved by the CBN.
But Odunayo said that the LCs and approved Form Ms were documented at the CBN intervention rate at about N197/United States (U.S.) dollar, but affected manufacturers are expected to redeem them at the flexible exchange rate of N320/U.S. dollar
“Unfortunately, this unfolding situation poses a great burden on manufacturers since the pricing of the related manufactured goods was made at between N197 and N198 to a U.S. dollar at the time the Form Ms were approved and LCs established,” Odunayo complained.
Besides the sad reality that the final applicable exchange rates for these pre-June transactions at the flexible exchange market are presently undeterminable, the MAN chief said the naira continues to spiral downwards due to forex scarcity.
His words: “Manufacturers currently face up to N500 billion in exchange difference between the approved Form Ms and LCs established rates and the flexible market rate of N320 to a dollar.
“This is a huge loss that manufacturers are expected to bear, whereas the related goods had been mostly sold before the commencement of the new exchange rate system.”
He added that the huge exchange rate loss of N500 billion, which must be reflected in manufacturers’ profit and loss accounts, is already leading to factory closures, loss of unemployment and investments in the sector.
Odunayo identified the fact that the exchange rate loss will require additional working capital to make up the difference between N320 and N197 to buy the required forex volume at the flexible exchange rate market as another disturbing dimension to the crisis.
Factories’ closures, business
liquidation loom
A cloud of uncertainty has descended on the industrial sector. Manufacturers and other business operators are fretting over possible closure of more plants and businesses going into liquidation. The far-reaching socio-economic consequences of such development are job losses.
Such fears are justified. Even before the June 20 announcement of the flexible market-driven forex regime by the CBN, more than 200 out of the over 2, 000 manufacturing firms in the country were winding up operations due to the lack of raw materials to keep the plants running.
There were reports that about 100 operators in the general goods sector have indicated readiness to shut down after exhausting their raw materials. More than 120 others in the pharmaceutical sector have been down to several months’ supply of raw materials after which they may not restock.
In the food and beverage sector, only few of the 80 operators are still in business.
The apex bank’s monetary policy prohibiting importers of 41 items that can be sourced locally from having access to its official forex window, has thrown manufacturers into confusion.
Those requiring the raw materials and products restricted from the forex market as their primary products in the manufacturing process have been adversely affected.
Many real sector operators, especially manufacturers have described the bank’s new market-driven forex regime as a welcome development. They hope the policy will drive down the exchange rate, stimulate economic growth and encourage more Diaspora remittances, among others.
The intervention became necessary because of the import-dependent nature of the economy. The crash in oil prices at the global market, which started mid-2014, triggered an unprecedented slide in the value of the naira. The development informed the need for a policy intervention to defend the value of the naira and protect the nation’s foreign reserves.
According to experts, the CBN uses the foreign reserves to defend the naira, but the reserves have been depleted as a result of the sharp fall in oil revenue. Industry watchers said the CBN policy of defending the naira was failing, and there was need for the apex bank to leave the naira value to market forces.
The CBN tried to save the naira with the new forex policy. But the policy may have become a bitter pill for manufacturers to swallow.
The Nation learnt many manufacturers who are in the middle of factory projects have been gripped with the fear of the viability of their endeavours due to CBN’s forex developments.
Confirming the palpable fear, Odunayo said: “Many new manufacturing initiatives, which were conceived as commercially feasible projects, with reasonable returns on investment, had taken the first steps some 15 months ago towards their realisation with the commencement of factory construction and equipment ordering, at the then ruling exchange rates: N160, N170, N197 to the U.S. dollar.”
He expressed worries that the construction and projects’ installation are being undertaken with dollar borrowings, which now have to be redeemed at the flexible exchange rate market at the completion of such projects and at the end of the moratorium for such dollar loans.
“If these loans are not immediately approved for denomination at the pre-June 20, 2016 exchange rates at which the transactions were established, the losses to such of our members could be colossal, if not ruinous”, Odunayo warned.
According to him, it would be difficult for such projects to be viably brought under the flexible exchange rate regime without turning them into still-births.
He urged the government to remove pre-approved Form Ms from the flexible foreign exchange market and deal with it through a structured sovereign loan.
Push for borrowing, resource-based industrialisation
For manufacturers, borrowing to stimulate the economy has become imperative.
“This government must not shy away from borrowing. Otherwise, by the time our economic indicators return to satisfactory levels in two to three years, there would be no manufacturing sector in existence to benefit from the new prosperity”, Odunayo stated.
Pointing out that the private sector and manufacturers will benefit from the budget deficit financing through dollar borrowings, he said the step will improve dollars availability in the forex market.
He argued: “In any case, domestic borrowing does not have sufficient depth to take care of the financing deficit of federal and state budgets.”
Against this backdrop, the MAN chair threw his weight behind the President Buhari’s administration’s proposal to $30 billion from China for infrastructural development.
“The proposal is a welcome idea, just as the African Development Bank (AfDB) loan and the Eurobond will help address our infrastructural deficit,” Odunayo said, urging the government to negotiate the acquisition of robust and enduring technologies at economic prices.
“Project-tied borrowings favour the economy of the lender-countries but may add little to the relief of our forex market, nor of the current economic recession,” he explained.
MAN’s President Dr. Frank Udemba Jacobs agreed that the prevailing economic situation calls for greater synergy between the government and manufacturers to pull the economy out of recession.
He said the manufacturing sector, because of its capacity to create wealth, generate employment and engender skill acquisition, remained government’s most viable ally in rescue mission for the economy.
Jacobs said: “The fall in crude oil prices and its attendant constrictions of our national income as well as the recession which the country has unfortunately slipped into calls for greater attention to the manufacturing sector, which has been instrumental to the survival of many economies that slipped into recession in the past.”
Speaking through his vice Rev. Isaac Adeoye, the MAN president said it has become imperative for manufacturers to be creative to remain in business. He enjoined them to key into the government’s resource-based industrialisation policy, which he noted, has been MAN’s dream for some time.
The resource-based industrialisation policy, recently adopted by the Federal Government, involves the utilisation of the nation’s abundant resources in producing products needed domestically.
If well implemented, the policy will ensure sustainable industrialisation.
Jacobs expressed optimism that the policy would reduce the insatiable demand for forex to import essential raw materials for production, which has been the manufacturers’ headache.
He said that manufacturers only needed to retool their existing technologies and production processes to benefit from the policy.
“Government should create attractive incentives for investors who would engage in the processing of the abundant agricultural and mineral resources from primary produce to secondary or intermediate products”, Jacobs said.
According to him, such incentives would go a long way in attracting potential and existing manufacturers into the use of local raw material inputs. He added that in the meantime, government has to look for viable options of making forex available for manufacturers “as we must remain in production.”
The CBN recently directed commercial banks to sell 60 per cent of their forex allocations to manufacturers for importation of raw materials, plants and machinery.
But industry operators told The Nation learnt that the apex bank’s failure to monitor and supervise the retail banks to ensure compliance with its directive remains a challenge.
The recent release of $660 million by the CBN to manufacturers for the purchase of raw materials has been described as good news.
“It’s a welcome development. It will bring some relief to manufacturers, and it is hoped that such assistance can be sustained,” Odunayo said.
Govt reaffirms commitment
to manufacturing growth
The Federal Government is not unaware of the plethora of challenges facing manufacturers. At the AGM,
Industry, Trade & Investment Minister Okechukwu Enelamah, reiterated government’s commitment to the manufacturing sector’s wellbeing. He said the sector remains the most viable option towards economic renaissance.
Speaking through Dr. Francis Alaneme, an acting director in the ministry, Enelamah said the Buhari administration has not been oblivion of the role of manufacturing in the economic development of the country, hence, its focus on building an industrialised economy that is strongly based on locally available resources.
The minister also said that the government would continue with the pursuit and implementation of the Nigeria Industrial Revolution Plan (NIRP) and Small and Medium Enterprise (SME) development programmes, describing the NIRP as a holistic and integrated roadmap towards an industrialised economy.
Enelamah said: “It provides actionable plan across sectors as agro-allied, solid minerals, oil and gas-related industries, construction and light manufacturing activities.”
He added that the NIRP was anchored on the Backward Integration Policy (BIP), development of industrial clusters, parks and cities; development of specific sub-sectorial policies and programmes to stimulate industrial revolution in various sectors.
He identified infrastructural deficiencies such as power, transportation and lack of access to loans at single digit interest rates, dumping of substandard products, low patronage of locally produced products and insufficient industrial skills as some of he challenges facing operators.
Enelamah listed other challenges to include poor innovation, lack of adequate standard facilities, ease of doing business, finance and effects of forex policy, particularly on manufacturers who rely on imported products as raw materials.
The minister told his audience that the government has been working tirelessly to come up with appropriate policies, palliatives and programmes to address identified challenges to manufacturing.
Some of them include the implementation of NIRP, National Enterprise Development Programme (NEDEP), and harmonisation of quality infrastructure and certification.
Others are: power sector reforms, review of trade, industrial and investment policies and review of the Export Expansion Grant (EEG), among others.
These are no doubt, robust policies that could turn around the fortunes of the manufacturing sector. But the question remains: Will government be sincere with the implementation of the policies considering the fact that a robust manufacturing sector is fundamental to the push to diversify an economy hit by recession?
