THE Manufacturers Association of Nigeria (MAN) and other stakeholders in the real sector have cried out for the umpteenth time, that Nigeria’s path to sustained economic growth is being stifled by high costs of borrowing and electricity tariffs, among others.
Their concerns stem from the resumed contraction of the Manufacturing CEOs’ Confidence Index (MCCI) from 53.5 points garnered in the first quarter of 2024 (Q1 2024) to 51.9 points, in Q2 2024, as disclosed in the recent MCCI Q2 2024 report, a pointer to the nation’s path to sustained economic growth being threatened.
The Organised Private Sector (OPS) expressed worries about the aggressive hike in the monetary policy rate (MPR) by the Central Bank of Nigeria (CBN), which they observed took a toll on output in Q2 2024, probably, contributing to the decline recorded in major contributors to the Q2 2024 Gross Domestic Product (GDP), such as manufacturing, trade, ICT and real estate.
The association listed some of the challenges as prohibitive increase in electricity tariff, aggressive hike of the interest rates, high exchange rate, persistent inflationary pressure, re-occurrence of fuel scarcity, as well as the disruptive effect of the industrial action taken by the Nigerian Labour Congress (NLC).
It, therefore, called on the Federal Government to prioritise forex sales to productive sectors of the economy, particularly manufacturing and stabilise the naira value by managing the floating exchange rate within a business-friendly threshold, as a way of taming inflation, stabilising exchange rate and improving access to forex.
Also, the association is seeking a review of the foreign exchange rate for import duty assessment to production inputs, including raw materials, machines and spare parts that are not locally available by pegging the rate at N800, pending the stabilisation of the exchange rate.
MAN called on the government to focus less on interest rate hikes and more on exchange rate management which is highly linked to rising food prices and energy costs.
On the energy crisis facing the sector, the association urged the government to direct the Nigerian Electricity Regulatory Commission (NERC) to review the high electricity tariff for Band ‘A’ customers, as no manufacturer has access to the stated 20 hours minimum electricity supply per day, yet they are paying the exorbitant bill.
“Government should also prioritise the domestic supply of gas to make it more accessible for local manufacturers and enforce the pricing of domestic gas supply in naira as it is only a fraction of gas export,” MAN added.
MAN also believed for the manufacturing sector to experience a new lease of life, the government should refocus the Gas Master Plan to ensure a sufficient supply of gas for power generation.
“Government should also commence the effective implementation of the Electricity Act 2023, by judiciously utilising the N115 billion FG-USAID deals to support the private sector and address some of the longstanding challenges,” it stated.
Besides, the Lagos Chamber of Commerce and Industry (LCCI) called on the CBN to consider easing disposition to interest rate hikes in the face of multiple burdens this has continued to have on businesses.
The president of the Chamber, Gabriel Idahosa, said the recent hikes in the MPR have directly translated into higher interest rates making it more expensive for businesses to access credit for working capital, expansion and sustainability.
He stated that the real sector, which can create more jobs, manufacture products for consumption and export and act as the economy’s industrial base, has continued to struggle, due to weak consumer demand, weakened purchasing power and high cost of production due to forex illiquidity and high interest rate.
To manage the persistently high inflation, the chamber recommended that monetary and fiscal authorities should focus on the factors driving the inflation rates by tackling supply-side deficiencies instead of focusing too much on demand-side management.
It also urged the CBN to be consistent with the forex market reforms until the desired impact on the rising inflation rate and burdening high interest rates are achieved.
On power supply, the chamber would want the government to create the needed environment where local meter manufacturing can thrive to bridge the current gap in meter deployment. This, it stated, will reduce the pressure on the foreign exchange market, create jobs, generate revenue for the government and develop local expertise in metre manufacturing.
“The Federal Government needs to invest more in building the required infrastructure to drive the deployment of Compressed Natural Gas (CNG)-powered transportation. Since this is perceived to be cheaper than petrol, we see it as having the capacity of driving down transport costs. We need the basic infrastructure, which is charging facilities,” the chamber added.
On the free fall of the naira, the chamber stated that while there is the possibility of the naira gaining some value before year-end due to the billions of dollars expected from the sales of marginal oil fields, it, however, urged the CBN to reconsider a review of the free-floating exchange rate
“The CBN needs to sustain its interventions and improve supply in the FX market, adopt policies that would attract more FX inflow into the economy and build market confidence in the performance of the Naira even in the long run,” the chamber stated.
Speaking with the Nigerian Tribune, the Director/CEO, the Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, stated: “High interest rate is one of the major challenges being faced by investors in the real economy. Currently, the lending rate ranges between 28 to 39 percent. Given the state of the economy, there is hardly any investment that can yield a return that can match this interest rate.
“So, in practical terms, the situation is as good as saying that the real sector investors should just avoid going for bank loans. It will be suicidal for any investor, particularly the real sector, to go and take a facility of 30 or 35 percent.
“It is a bigger issue for the real sector operators because, firstly, their margins are not that large. They have very thin margins.
“Secondly, they have a longer gestation period; in other words, it takes a longer time for them to complete a business transaction cycle. That means they are likely to hold the funds for much longer. This is one of the major challenges for the real sector.
“For the small businesses in the real sector, it could even be much worse because some of them take facilities from microfinance banks. Some of them take facilities from finance companies and in most cases, these facilities are charged on monthly basis. It could be four percent or five percent or even six percent per month. When you annualised that, you will know what that amounts to. So, it is a major issue that needs to be addressed.
“While we understand that the CBN is trying to manage or tackle inflation, it believes that it has to continue to tighten monetary policy. That is understandable because you can only use the instrument at your disposal to solve the problem that you want to solve.
“But our argument is that there is need to define the limit of monetary policy tightening. What we are dealing with now in terms of the monetary policy tightening stance is such that the current parameters are almost unprecedented. Also, comparatively with other climes, our monetary policy tightening is one of the highest in the world.
“At this point, if the CBN cannot lower the interest rate, that is the MPR and the CRR, then the CBN should at least ensure there is a pause in tightening. We must realise that CBN alone or the monetary policy alone cannot solve inflation problems.
“This is why the coordination or handshake between the monetary policy and fiscal policy is extremely very important.
“The monetary policy has reached its limit as far as tacking inflation is concerned. We think that the rest of the job should be left with the fiscal authorities because a big part of the problem is supply side related. They are cost related issues which we think the fiscal authorities are in a better position to tackle.
“And we are beginning to see so much of that in some of the policies of the accelerated economic stabilisation planning of government, which is focusing on reducing import duties, levies for some essential services, especially food processing.
“We are hoping that by the time this keys in, we will begin to see some moderation in prices of goods and inflation. I think it is time to give fiscal policies a chance to play its role in moderating inflation.
“We also need to have a concessionary financing window for the real sector. This is what development banks are meant to do. I am talking of the Bank of Industry and Bank of Agriculture. Government should improve on the capitalisation of these banks.
“Government needs to ensure these banks are given capacity to do a lot more. I don’t believe that the Ministries of Trade and all of that should get involved in managing intervention funds. These should be left to the development banks to do. We need to see a lot more of the role of development finance institutions in the fight against inflation.”
A financial expert and Chief Executive Officer, Wealthgate Advisors, Mr Adebiyi Adesuyi, said the constant hikes in MPR have left the cost of fund available to the manufacturing sector too high.
He said: “As the CBN raises the MPR, the lending banks will also be forced to raise the interest rate charged on loans. In addition to the high interest rates that are being charged, the borrowing manufacturers will also pay management fees and other charges to the bank. All put together, the cost of fund made available to manufacturing companies is too high.
“In an ideal situation, only single digit interest rate can help manufacturing companies to run successful operations. Unfortunately, it is only the Bank of Industry that charges a single-digit interest rate on credit facilities extended to Nigerian manufacturers.
“The non-availability of cheap power from the grid and high cost of diesel have raised the cost of production in the sector beyond reasonable limits. Naturally, all the costs will be passed to the consumers in the form of high prices.
“However, the real income of average Nigerian family has reduced significantly because of inflation and devaluation so they cannot purchase the same volume and value of manufactured goods as they did about a year ago.”
Adesuyi noted that since these challenges have forced many manufacturers to operate below their installed capacity, the government must adopt fiscal and monetary policies that are business-friendly to rescue the sector.
The manufacturing sector appeared hugely impacted by economic headwinds during the Q2 2024 as growth rate was a mere 1.28 percent against 1.49 percent recorded in Q1 2024.
Recent data released by the National Bureau of Statistics (NBS) showed that the manufacturing sector in Q2 2024 contributed a meagre 8.46 percent to the 3.19 percent Real Gross Domestic Product (GDP) growth recoded in Q2 2024, while top contributors were agriculture (22.62 percent), ICT (19.78 percent) and trade (16.39 percent).
The adverse impact of high cost of petroleum products on the economy manifested in the huge decline in transport sector’s GDP from 3.33 percent recorded in Q1 2024 to -13.53 percent in Q2 2024.
Headline inflation rate for July 2024 eased 33.40 percent from 34.19 percent in the preceding month, while food inflation, which accounts for the bulk of Nigeria’s inflation basket, also slowed down to 39.5 percent compared to June’s reading of 40.8 percent.
The Monetary Policy Rate (MPR), which moderates lending rate, is 26.75 percent as of July 2024.
Like in Q1 2024, when growth was driven by the oil sector, growth in Q2 2024 was also driven by the oil sector at 10.15 percent.
The non-oil sector performance was powered by the services sector chiefly, financial services and ICT. This sector’s contribution to GDP in Q2 was 2.80 percent, exactly same as in Q1 2024
Adesuyi said: “This identified growth pattern, weighted in favour of the services sector, is not healthy for a developing economy such as ours. Little wonder, economic growth does not appear inclusive reflecting in rising unemployment and poverty levels.”
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