With Nigeria’s exit from recession, all eyes are on the real sector to pick up to aid economic growth. For the manufacturing sector, surviving the recession involved a lot of digging-in. Manufacturers Association of Nigeria (MAN) president, Frank Jacob, in this interview with Bukola Aroloye, said some policies must now be put in place to help the real sector impact on the economy. Excerpts:
Nigeria has been praised for exiting recession in record time. Looking at how operators weathered the storm, what did they put in place to survive?
You may agree with the year 2016 was indeed a very difficult year for all economic agents – government, firms and consumers alike. Unfortunately, the main reason has been the acute shortage of FX following the persistent low crude oil prices in the international market. As a result, government fell short of its fiscal obligations, firms/manufacturers cut down production due to inability to import raw-materials used in the sector that are not locally available and household aggregate consumption plummeted due to erosion in real value of income resulting from high inflation as depreciating naira fed into prices. The end result was therefore economic recession.
However, the most important measure taken by MAN in addressing the situation was to step up her advocacy through frequent engagements with the government for better understanding of the veracity of the problems and evolving credible ways of mitigating them. Consequently, by May 2016, the CBN gave a directive for 60% allocation of all available forex to sector for importation of raw-materials. This helped ease the stagnation in the production in the sector. MAN advocacy was also responsible for the recent forex policy of 21st of February 2017 that efficaciously narrowed the premium between the parallel and official rates and made forex more available.
In addition, we encouraged our members to key-in to the economic diversification and backward integration initiatives which have been successful as the sector was able to upscale its local raw-materials utilisation from first half of 2016 (46.3%) and the second half (58.98%). Consequently, capacity utilisation increased from 44.3% in first half of 2016 to 59.18% in the second half. Members were encouraged to continue to adopt best practices, engage in backward integration programmes, engage the principles of lean manufacturing, curb wastages and deploy potent survival strategies to stay afloat till the recession storm recedes.
Apart from MAN advocacy in that period, the doggedness and resilience of our members also ensured that production in the sector was sustained, notwithstanding the severity of the operating challenges in the period.
What is the difference in the production cost of manufacturing sector that suggests that recession is over?
It may be difficult to quantitatively determine for purpose of comparing the period when the economy was in recession and now that it is out. This is because costs in the sector are determined by individual companies. However, it is plausible to assess this cost differential by comparing the exchange rate situation in 2016 when manufacturers principally sourced forex from the parallel market at the rate well over N400/$ as against their ability to source officially at N305/$ which has been consistent. No doubt, this forex differential would reduce the cost of product in the sector in the post-recession period. Moreover, the fact that inflation rate is declining also shows that production cost may be declining. For instance, inflation rate in December 2016 was 18.55% and that of June 2017 was 16.25%, according to the CBN.
NBS GDP report also shows that the manufacturing sector real output growth was -4.38% in Q3 and -2.54% in Q4 2016. In Q1 2017 the growth rate of output of sector was 1.36 % and 0.64% in Q2 2017. You may agree that it is plausible that low production cost would encourage increased output. By implication, the positive growth recorded in the sector in Q1 and Q2 of 2017 may support that cost is declining in the post-recession period.
How did the CBN monetary policy influence Nigeria’s exit from recession?
No doubt, monetary policy is a very important tool for the management of an economy especially in the period of recession. It can be said that CBN policy measures during the recession and in the post-recession periods vi-a-viz the monetary policy transmission mechanisms of interest rate, exchange rate and aggregate credit has had a mixed-bag. The CBN’s exchange rate policy in the period, especially recently, has been efficacious as it stabilised forex market by narrowing the premium between the parallel and official markets rates and making forex more available in the economy. The same view held for loan to manufacturers, especially those emanating from the development funding windows, particularly the Bank of Industry (BOI). The bank has within its limited capacity been granting credit for acquisition of machinery to manufacturers and other industrialists. Nonetheless, the CBN interest stance remains a challenge as it retains Monetary Policy Rate (MPR) at 14% which MAN considers high and is responsible for the increase in the other rates such as the lending rate which stands at about 30%. The high lending rate from the commercial bank has been a huge disincentive for investment in the manufacturing sector.
What do you think should be done to prevent the economy from slipping into recession in future?
The sustainable way to mitigate the recurrence of recession is to adequately tackle its root cause which in this case has been shortage of forex. I believe that the solution to economic recession in Nigeria lies on the development of non-oil sector so to diversify export earnings in the country. Therefore, I recommend the following strategies: The industrial sector, especially the manufacturing sub-sector, should be strengthened by removing all obstacles restraining its growth and competitiveness. Forex allocation to the sector should be sustained and the remaining (32 has been reinstated) items of raw-materials in the list of 41 items (in essence 95 items) excluded from the official forex market should be reinstated;
Stronger synthesis between monetary and fiscal policy policies; the Federal Ministry of Finance, the CBN and the Federal Ministry of Budget and National Planning should work together in developing policies that will move the non-oil sector forward;
Strong support to the intensification of the resource-based industrialisation programme adopted by the federal government and which MAN has also been championing as it involves the utilisation of the country’s abundant natural resources in producing the goods that the country needs. This is a more sustainable and enduring form of industrialisation, compared with the import-dependent industrialisation which has been practiced in Nigeria for long. This would also save the country a lot of foreign exchange currently used in importing raw materials and free funds for government development projects.
Strongly support the intensification and aggressive undertaking of the development of key selected mineral resources through backward integration especially those with high inter-industry linkages such as iron ore, zinc-led, bitumen, lime stone and coal; Government should intensify backward integration in the agricultural sector to catalyse more industrial input supply from the sector. These would also free more forex as importation of primary raw-materials will be reduced;
Fast track the recapitalisation of the Bank of Industry (BOI) and the operational phase of the Development Bank of Nigeria (DBN) so as to meet up with the huge credit demand of the industrial sector; Upscale access to the various funding windows created to assist the development of the sector such as the N220billion Micro, Small and Medium Enterprises Development Fund (MSMED) and the N300 billion Real Sector Support Facility (RSSF) through relaxing stringent conditions that deny manufacturers access to these funding windows; also fast-track the implementation of the Moveable Assets Collateral Registry system;
Improve and maintain proper implementation of the newly resuscitated Export Expansion Grant (EEG) by observing and improving on all the provisions in the new guideline so as to encourage more production and export of manufactured goods to boost foreign exchange earnings to the economy;
Development of support infrastructure so as to facilitate the country’s industrialisation efforts. There is the need to resuscitate the Public Private Partnership (PPP) programme through the establishment of Concession Agreements under Built-Operate-Transfer (BOT) in road construction and maintenance, rail construction and maintenance, etc;
Proper deregulation of the downstream petroleum sector to encourage private investment in domestic refining. Government should consider privatising the four national refineries to make them fully functional and save money for other purposes.
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