Rising production costs exacerbate manufacturers’ problems

EDIDIONG IKPOTO writes on the challenges facing the real sector of the economy a year after President Tinubu took office, promising an agenda of renewed hope

When President Bola Tinubu assumed the reins of power on May 29, 2023, the former national leader of the ruling All Progressives Congress promised Nigerians that his administration’s agenda would usher in a new era of “renewed hope.”

This mantra echoed in the ears of over 200 million Nigerians who witnessed the economy bottom out under former President Muhammadu Buhari.

But a year later, ricochets from across the board would suggest that, so far, an administration that promised renewed hope has yet to deliver on that promise. As a result of the bold economic reforms launched by Tinubu after taking office, players in virtually every sector of the Nigerian economy had to either adapt or perish.

One of the sectors that suffered the most in the new reality was the manufacturing sector. Long before the President took the oath a year ago, the real sector of the economy was already struggling with a hydra-headed monster, which included severe challenges such as high inflation, currency shortages, numerous taxes, high energy costs and low access to credit, among others. .

For the sector, the new Presidency provided a unique opportunity to assess, reset and explore fresh and potentially effective ideas.

Tinubu Industrial Plan

Like many of his predecessors, President Tinubu pledged during his election campaign to revitalize Nigeria’s manufacturing sector. Tinubu admitted that the manufacturing belt of the Nigerian economy had been underperforming for a long time and would be revived under his leadership.

In his renewed manifesto of hope, the President said he plans to produce, create and invent the goods and services consumed in Nigeria. “Nigeria will be known as a nation of creators, not just consumers,” he said.

He further stated that his administration would focus on import substitution, national industrial plan, pharmaceutical production and technology production, among others.

He said: “The import of non-essential products will be discouraged through policy measures, including luxury taxes, higher customs duties and processing fees.

“At the same time, international brands will be encouraged by tax breaks, rebates and other fiscal incentives to set up manufacturing facilities in Nigeria, both for exports and to meet the needs of the large consumer population in Nigeria and the broader ECOWAS region.”

A few weeks after the President’s inauguration, the Political Advisory Council Report on the Economy prepared by the PACR Subcommittee on the National Economy was released.

The report, which was prepared on May 17, 2023, included an outline of, among others: fiscal, monetary, industrial and trade policies of President Tinubu’s administration.

The report indicated that the objective is to increase the share of non-oil exports in GDP, renew concessions for the Kano and Calabar Free Trade Zones, and establish new export processing zones that would create the capacity to generate exports of at least 20 percent of Nigeria’s total export earnings.

She also stressed the need to review and restructure existing incentives, exemptions and tariffs to plug leakages and boost key economic sectors. It also envisaged the development and implementation of a comprehensive transformation program to support export quality assurance and “the establishment of dedicated export terminals at seaports and airports, with sufficient capacity to process/handle the target export volume and modernize access roads to export terminals.” .

Others were the design and implementation of backward integration programs for strategic sectors to enable import substitution and reduce exchange rate-induced inflation affecting the economy; accelerate the revitalization of the National Commodity Exchange with regional shopping centers and facilitate investment in the entertainment industry in cooperation with the private sector, using a $600 million credit line managed by the Bank of Industry.

Manifesto versus reality

Considering the enormity of the challenges facing the manufacturing industry before President Tinubu’s administration came in, it would only be wishful thinking to expect immediate change. However, it is important to note that the sector was already stretched to the breaking point and was typically unprepared to cope with the exacerbation of the acute challenges it was then facing.

The Manufacturers Association of Nigeria during the presidential election campaign presented a strong stance on key issues that need to be addressed by the incoming administration. The position paper covered some of the long-standing challenges that have plagued the sector over an extended period.

However, in the case of the real sector of the economy, the scenario has diverged from that immediately after President Tinubu assumed office. The removal of petrol subsidies and the introduction of the naira exchange rate worsened the economy. The manufacturing sector is facing rising costs that are worsening an already difficult situation.

As an immediate temporary solution, the federal government announced it would ease the pain of producers with a $75 billion palliative loan to be provided through the Bank of Industry. The move failed to inspire confidence among manufacturers who felt that a N75 billion loan to an industry employing over 3,000 manufacturers was a drop in the ocean.

Forex shortage

The challenge of scarcity in the country’s foreign exchange market predated President Tinubu’s administration. Forex shortage has become a permanent feature of the challenges faced by producers during Buhari’s tenure.

When the former president left office, the naira exchange rate in the official market was $461. However, due to the prolonged currency shortage that the economy constantly faced, producers had to turn to the parallel market to meet their needs, where they sometimes had to buy foreign currency for as much as $900.

With the launch of the local currency on June 14, 2023, the forex illiquidity challenge faced by producers deepened, especially in February 2024 when the naira price was as high as 1,900/$.

Recently, during a presentation on the manufacturer’s CEO Confidence Index, MAN’s Director of Research and Advocacy, Oluwasegun Osidipe, said manufacturing operations continue to suffer from persistent foreign exchange scarcity and currency instability.

According to the report, only 16.8% of surveyed producers confirmed that access to the Forex market had improved in the first quarter of 2024; 62 percent disagreed and 21.2 percent were unsure whether Forex supply had improved.

Despite the Central Bank clearing the foreign exchange market backlog and reintroducing dollar sales to Bureau de Change operators, MAN found that the cancellation of approximately $2.4 billion worth of Forex forward contracts and the revocation of over 4,000 BDC licenses rather exacerbated Forex market shortages during the period quarter of an hour.

This occurred in conjunction with the continued impact of currency restrictions imposed by the launch of the Price Verification Portal in Q3 2023.

Energy costs

For several years now, rapidly rising energy costs have been one of the biggest challenges for local manufacturers, who need huge amounts of energy to power their factories. The energy crisis has been exacerbated by shrinking electricity supplies coupled with significant increases in the costs of alternative energy.

Last July, shortly after the President took office, MAN sent a “Save Our Soul” message to the government, maintaining that energy accounts for 40 percent of manufacturers’ operating costs.

While talking to Hit in response to the government’s planned increase in electricity rates last year, MAN president Francis Meshioye warned that any increase in energy costs such as electricity tariffs would further increase manufacturers’ operating costs.

Meshioye said: “We rejected the electricity tariff increase because, firstly, energy costs are very high for producers, especially those who consume energy like steel producers.

“On average, this takes up 35-40 percent of the total cost. Each increase in electricity tariffs makes this task more difficult. The harder it is, the harder it will be for consumers. When this happens, it means that the demand for the products will decrease. As I said in a previous interview, the profit margin will be low.”

On April 3, the Nigerian Electricity Regulatory Commission at a press conference in Abuja announced an increase in the electricity tariff for A-band customers. The increase represented a 240% increase.

This development meant the removal of subsidies from the tariff of customers in the Band A category, who constituted approximately 15 percent. out of a total of 12.82 million energy consumers across the country.

However, the increase was met with sharp criticism from private sector entities who wondered why the government had decided to make such a move at a time when companies were struggling to breathe.

For its part, MAN said it has received numerous complaints from its members regarding the impact of the recent astronomical electricity tariff increase implemented by the Nigerian Electricity Regulatory Commission for Group A customers without proper consultation with the private sector.

It said the sudden exponential growth in the face of inadequate electricity supply is detrimental to the competitiveness of Nigerian products and businesses and will further increase production costs.

According to the association, over 65 percent private businesses, especially manufacturing companies and SMEs, will be forced to close due to high electricity tariffs.

Other production challenges

While foreign exchange shortages and the energy crisis have traditionally been the main challenges faced by producers under President Tinubu, other known enemies have also exerted influence, exacerbating the problems facing the real sector of the economy.

Recently, MAN’s Director of Research and Advocacy, Oluwasegun Osidipe, noted that high inflation, lack of access to credit, scarcity of raw materials, over-regulation and inconsistency, high and multiple taxes, insecurity and high interest rates have played various roles in weakening the performance of the manufacturing sector .

Other challenges identified included poor infrastructure and distribution channels, high logistics costs, unfavorable trade policies, high inventories of unsold industrial goods, high and volatile port customs rates, and the influx of substandard goods.

To put into perspective the challenges facing manufacturers over the past few months, MAN in its report earlier this year said that in 2023, 767 manufacturers had ceased operations and 335 were in difficulty.

The association said this in a statement condemning the federal government’s recent repeal of the foreign employment tax.

The association noted: “The imposition of the EEL has potential impacts on the manufacturing sector and the economy as a whole.

“This in turn will mean an unjustified and unprecedented increase in the cost of doing business in Nigeria, especially for manufacturers. The manufacturing sector is already struggling with multidimensional challenges. In 2023, 335 manufacturing companies found themselves in difficulty and 767 closed down.

“Inventories of unsold finished goods rose to $350 billion, and real growth fell to 2.4 percent.”