Inflation, forex scarcity worsens woes in manufacturing sector
Growth rate in the manufacturing sector is projected to suffer further decline in September and third quarter of 2020 as operators come under a renewed wave of inflation and foreign exchange scarcity.
Last week the National Bureau of Statistics, NBS, announced that Nigeria’s inflation soared to a 29-month high of 13.2 per cent. This is the 12th month consecutive rise and the highest level since March 2018.
The sharp increase in headline inflation was driven by a faster month-on-month inflation, which was up 10 basis points to 1.3 per cent, the highest since June 2017.
This development, according to the sector leaders, was already taking heavy toll on the manufacturing companies and it has now been complicated by an increasing difficulty in getting foreign exchange to import foreign components for their production.
Consequently, the Manufacturers Association of Nigeria has noted further deterioration in the sector’s key performance indicators such as capacity utilization, unsold goods inventory as well as sector contribution to Gross Domestic Product, GDP, in the current month to year end 2020.
A survey by Chief Executive Officers’ (CEO) Confidence Index Report of MAN also listed the major factors that would lead to the poor performance of the manufacturing sector to include:
Increasing difficulty to source foreign exchange (forex); dearth of trade facilitation infrastructure, poor access to the ports and prolonged turnaround time for clearance of cargoes; inadequate and epileptic electricity supply (with manufacturers spending N67.38 billion or 38 percent of production cost on self-generated electricity in 2019 alone); dearth of loanable funds and high cost of borrowing (with interest rates as high as 22.5 percent); and multiple regulations from various regulatory agencies, amongst others.”
MAN also says that unfriendly operating environment and inconsistent government policies were responsible for the weak results recorded in the sector so far this year, which was further worsened by the COVID-19 pandemic.
Unsold goods inventory value is projected to reach an all timehigh of N500 billion by end of the year, almost 25 per cent up from N402.4 billion recorded by the sector in 2019.
NBS statistics had indicated that the contribution of the sector to GDP has been unstable since last year, while recording a sharp decline of -8.78 per cent in the Q2-2020 as against the positive position of 0.43 per cent in Q1 2020. The best performance of the sector was a 1.24 per cent GDP in the fourth quarter of 2019.
Also the Central Bank of Nigeria’s (CBN) Purchasing Managers’ Index (PMI) Survey Report noted that the Manufacturing PMI in the month of August 2020 stood at 48.5 index points, indicating a fourth month consecutive decline in the sector.
Manufacturing PMI was at 44.9 index points in July, 41.1 in June and 42.4 in May, after previously expanding for 36 consecutive months.
The Production Level followed the same pattern, contracting for four consecutive months at 49.2 points in August; 44.7 points in July 2020; 36.6 points in June; and 44.5 points in May, following 37 consecutive months of growth previously.
Sector pain points
Reviewing the activities of the sector, President, MAN, Engr. Mansur Ahmed, said that the manufacturing sector performance that was expected to be strong having recorded an impressive performance in the Q4’19, has now suffered a huge setback.
He noted that inflationary pressure remains a source of concern as COVID-19 disrupted the demand and supply side of the global economy.
He added that genuine exporters are still being owed huge sums of money as a backlog of unpaid outstanding from the Export Expansion Grant (EEG) scheme.
Ahmed also said that manufacturers have not been able to access the required foreign exchange (forex) from CBN for their operations, adding that about 40 per cent of their forex needs are not met by the apex bank.
Speaking to Vanguard on the issues, he stated: “I can confirm to you that there is significant demand for forex by our member companies but it’s not being met; and the percentage that is not being met is over 40 percent.
“This means that manufacturers can’t get the required amount of forex that they need to bring in raw materials that are not locally available, or equipment they need to keep their operations running.”
MAN points way forward
Speaking on the way out of the crises Ahmed said the sector is in need of a comprehensive and concerted support system from the government.
He called on the federal government to: “Reduce the financial pressure on companies occasioned by COVID-19 by compensating manufacturing concerns that are forced to shut down with 60 percent of employees’ salaries for at least three months to prevent laying offs of employees and massive unemployment.
“Support manufacturing concerns with existing loan facilities by reviewing the terms, especially reducing interest rates to 5 percent with 2 years moratorium. Manufacturers that are investing in order to scale up production should be granted loans at 5 percent interest rate for a period of 5 to 7 years.”
Ahmed further said the MAN was reversing its earlier stance on border closure, urging that the federal government should re-open the nation’s closed land borders to ease the plight of manufacturers that have lost export opportunities due to the closure.
He stated: “Actually, border closure was part of some recommendations that we made to the government, that one thing we must do to checkmate the influx of foreign goods and the dumping of substandard goods into our markets, is to close the border.
“However, we have recognized that the border closure will not be a sustainable solution, rather we should take the opportunity to improve our trade facilitation infrastructure for import and export. This would enable us to key into the African Continental Free Trade Area (AfCFTA) agreement.
“So we have made a presentation to the government to reopen borders, not only because it is not good for sustainable trade within the region, if it remains closed we will not be able to participate in the Africa One Single Market in 2021”.
Also speaking on the way out, Director-General, MAN, Mr. Segun Ajayi-Kadir, recommended that government should: “Encourage CBN to work out the modalities for a specialized single digits interest loans for businesses involved in production activities; Simplify the terms and conditions for accessing funds from development banks and; Facilitate the implementation of the approved gas price for manufacturing sector.”
He further urged the government to: “Rehabilitate and improve railway line from Apapa/Tin Can Island ports; Speed up rehabilitation of roads leading to the ports and generally improve on other trade facilitation infrastructure at the ports; Adopt and implement the 30 percent Margin of Preference threshold for Made-in-Nigeria products ahead of imported items and; Reverse the current slow implementation of the Revised Export Expansion Grant and settle unpaid backlog of Export Expansion Grants (EEG).”
Written by Kartia Velino