MAN urges Govt to harmonize fiscal, monetary policies to promote productivity in manufacturing sector, improve ease of doing business

 Manufacturers Association of Nigeria (MAN) has released the Manufacturers Confidence Index (MCCI) for the first quarter of 2023 with a charge to the Government to harmonize fiscal, monetary policies, among others to promote productivity in the manufacturing sector, as well as improve the ease of doing business in the country, writes Editor Gentechnews, Tony Nwakaegho .

 

Manufacturers Confidence Index (MCCI) measures changes in key macroeconomic indicators including sector specific factors that represent Government activities and policy measures in the economy. Consequently, the effects of movements in Foreign Exchange, Lending Rate, Credit to the manufacturing sector and Capital Expenditure of the Government were also measured. In addition, it gauges the outcome of changes in business operating environment factors which include Over-regulation, Multiple taxes/levies, Access to seaports, Local raw-material sourcing, Government’s patronage of Nigerian manufactured goods and Inventory of unsold manufactured products.

According to MAN, the survey instrument used in the fieldwork of for MCCI is a structured questionnaire administered on the 400 Chief Executive Officers (CEOs) of MAN member-companies across the six geo-political zones and Sectoral Groups of the Association through MAN’s branch networks.

The result of the MCCI first quarter 2023 survey shows the perceptions of manufacturers on movements in the macroeconomic environment, compared with the operating environment in the fourth quarter of 2022.

The Aggregate Index Score (AIS) of MCCI is the weighted mean of the observed and expected changes in business conditions, employment and production level in the economy based on the perceptions of manufacturers in the quarter under review.

The AIS of MCCI, therefore showed that employment decision by manufacturers has been so difficult due to the unpredictability and difficulty in macroeconomic environment. Accordingly the issues of acute shortage of forex and depreciation in Naira value, cost of energy and limited supply of electricity, speculation about the effect of redesigning of Naira, the National elections and the lingering adverse effect of Russian-Ukrainian war were major concerns of manufacturers in the quarter.

The Aggregate Index Score (AIS) of MCCI declined to 54.1 points in the first quarter of 2023 from 55.0 points obtained in fourth quarter of 2022. The index score of the current quarter though below that of the previous quarter, indicates that manufacturers generally show resilience and have confidence in the economy.

A close observation across sectoral groups reveal that Electrical & Electronics (49.7) and Motor Vehicle & Miscellaneous Assembly (48.6 points) plummeted below the 50-point benchmark. This suggests a gross loss of confidence in the economy among manufacturing operators in the two sectoral groups. Other sectoral groups including Food, Beverage & Tobacco (60.3); Textile Apparel & Footwear (51.9); Wood & Wood Products (51.0); Pulp, Paper, printing & Publishing (53.6); Chemical & Pharmaceutical (58.8); Non-Metallic Products (51.4); Domestic/Industrial Plastic & Rubber (58.3) and Basic Metal, Iron & Steel (57.1) all scored above the 50-point standard. The scores suggest that manufacturers operating in the groups have confidence in the macro economy condition of the country in the period under review. However, these sectoral groups were adversely affected by erratic electricity supply and instability of macroeconomic indicators have significantly worsened sales performance in these sectoral groups.

 

Going by the zonal breakdown of the MCCI, an observation of analysis of the 14 industrial zones shows that the Index scores of Kaduna (49.5), Abuja (48.6), Rivers/Bayelsa (46.2 points) and Cross-Rivers/Akwa-Ibom (43.9 points) fell below the 50-point standard. The scores indicate that manufacturing operating in the zones have lost confidence in the economy due to persisting harsh operating environment in the zone. Ogun (60.1), Edo (57.6), Oyo/Ondo/Ekiti/Osun (53.6), Anambra/Enugu (50.5) and Bauchi/Benue/Plateau (50.2) though have index scores above the 50-point benchmark in the first quarter of 2023, their performances dipped below the record in the last quarter of 2022.

Imo/Abia (54), Kano (56.6), Apapa (62), Ikeja (66.7), and Kwara/Kogi (58.3) recorded index scores above the 50-point standard in the quarter under review with incremental changes from the figures recorded in the previous quarter. The scores indicate continuous improvement of the confidence of manufacturers operating in the zones on the economy.

 

The Macroeconomic Performance of the period under review showed that the lingering forex scarcity and continuous depreciation of the Naira have left manufacturers bleeding and limited their capacity utilization since the importation of non-locally produced critical input has become a nightmare.

It also shows that interest rate charged to manufacturers by the commercial banks appears to have deteriorated the productivity of the manufacturing sector in the quarter under review. Highly exorbitant double-digit lending rate of about 30 percent has rendered a number of manufacturers uncompetitive and contributed to declining investment in the sector. It indicates that the size of loans given to the manufacturing sector by commercial banks is grossly inadequate and as such does not encourage productivity in the sector.

Unfortunately, while credit to public sector has soared over the years, credit support for the private sector in general and manufacturers in particular has been abysmally low. Incidentally, when credit is available, it is usually on short-term tenure which does not adequately support the medium to long-term gestation required in the manufacturing sector. The implication is low investment; limited capacity utilization and low production level in the sector.

It noted that the Government capital expenditure should address the issues of economic infrastructure such as road, electricity, water, etc. that supports industrial sector businesses, adding that the absence of economic infrastructure contributes significant to the high-cost of operating environment which obstructs the development of manufacturing in Nigeria.

On the operating environment performance, the perspectives of manufacturers on the implication of the operating environment on manufacturing activities in the first quarter of 2023 was also measured focusing on multiple regulation, multiple taxes, access to the national ports, local sourcing of raw materials, inventory of unsold manufactured, and patronage of Nigerian manufactured goods by Government MDAs. This is taking into consideration the Production and distribution costs; Capacity utilization; Volume of production; Investment; Employment; Sales volume; and Cost of shipment.

Table XXI: Effect of Macroeconomic Environment on the Manufacturing Sector

The figure reveals that:

• Production and Distribution costs escalated by 24% in the quarter under review much higher than the 19% increase witnessed in the preceding quarter;
• Capacity utilization nosedived further by 5% in the quarter under review similar to the contraction witnessed in the preceding quarter;
• Volume of production contracted by 13% in the quarter under review against the 1% growth recorded in the previous quarter;
• Manufacturing investment dropped by 3% in the first quarter of 2023 from 2% increase recorded in preceding quarter;
• Manufacturing employment reduced further by 3% in the first quarter of 2023 from 2% contraction recorded in preceding quarter;
• Sales volume plummeted by 13% in the first quarter of 2023 against the stable record witnessed in the preceding quarter;
• Cost of shipment rose by 20% in the first quarter of 2023 though witnessed a slowdown from the 22% increase recorded in the fourth quarter of 2022.

A critical evaluation of the analysis above provides an inference that the performance in the first quarter of 2023 was much lower than what was obtained in the last quarter of 2022. Major performance indicators of the manufacturing sector all recorded unfavorable changes. Amidst the harsh business-operating environment evidenced by poor macroeconomic indices, the underperformance was largely driven by the nationwide cash crunch in the first quarter of the year.  The economic turmoil significantly crushed consumer patronage and costly disrupted the manufacturing value chain in most periods of the quarter.

Challenges of Manufacturers

In the course of the survey, manufacturers had the opportunity to identify and rank the current challenges of the manufacturing sector in order of severity of impact. Based on the ranking as presented in Table 2, multiple taxes/charges/levies was top on the list of major manufacturing challenges. This was accordingly followed by inadequate power supply, low patronage/poor sales/low purchasing power, unavailability of raw materials/delay in receiving imported raw materials/high cost of raw materials and scarcity of forex/high exchange rate/poor allocation of forex.

Table 2: Ranking of Manufacturing Sector Challenges

Manufacturers’ Recommendations

The Index Score (IS) of first quarter of 2023 nosedived to 54.1 points which is 0.9 points less than 55.0 points recorded in the last quarter of 2022. Although the quarter recorded marginal contraction in IS, the performance indicates that manufacturers maintained their confidence in the economy since the index remains above the 50-point benchmark. They remain resilient despite the far-reaching implications of high inflation, multiplicity of taxes, erratic power supply, high cost of energy, as well as worsened credit and forex shortages which continue to deter the sector’s prospect of catalyzing the country to its desired stage of industrial development.

Nonetheless, marginal contraction in IS portends that the untoward hardship meted on the manufacturers is growing overwhelming and diminishing the resilience of the sector. Therefore, tackling the challenges of the manufacturing sector must be at the front burner of the new administration. The President-elect must exhibit his articulate reasoning and compassion to act differently by hitting the ground running with a value system that can rescue manufacturers from these inflictions. To allay the manufacturing sector of the aforementioned hiccups, the following recommendations are imperative:

(1) Improving Forex availability

➢ Prioritize forex intervention through the official market, particularly to support the raw materials and machine needs of the industries;

➢ Improve forex allocation to industrial sector and enhance the capacity of designated banks to efficiently process application of forex by manufacturers;

➢ Grant concessional forex allocation at the official forex market to industries for importation of productive inputs that are not locally available;

➢ Unify the various forex windows in the country;

(2) Improving electricity supply to the industry

➢ Commit to upscaling electricity generation by at least 10,000MW; Egypt built 10000MW in 2 years.

➢ Encourage further investment in electricity value chain, Generation, Transmission and Distribution

➢ Sustain the Eligible Customer initiative to improve electricity supplied to the manufacturing sector;

➢ Embrace and support significant development of energy mix and renewables: the country has huge potentials for Solar and Wind energy sources;

➢ Resuscitate the existing national refineries to produce fuels locally;

➢ Allow gas to be supplied to domestic users including manufacturers at international export price plus $1; that $3.2+$1 rather than the current $8.76 per cubic metre.

➢ On the medium to long run, urgently commission the Chiyoda Groups Japan that built the national refineries originally to carry out a Turnaround Maintenance of the four refineries

(3) Improving electricity supply to the industries

➢ Increase the quantum of energy generation in the economy and encourage energy mix and energy efficiency within the private sector;

➢ Rehabilitate the four national refineries to resume domestic refining of crude oil into various fuels: PMS, DPK, AGO, and so on;

➢ Sell gas to the local industries at the export price of $3.25 per cubic metre;

(4) Reducing the number of taxes payable by industries

➢ Publish the list of approved harmonized taxes and levies for the manufacturing sector by the Joint Tax Board (JTB)

➢ Commence implementation of the harmonized taxes and levies project which should be monitored and enforced strictly by the Joint Tax Board (JTB);

➢ Jettison the proposed increase in Excise Duties.

➢ Develop a comprehensive and integrated framework that will facilitate the intentional movement of operators in the informal sector to the formal sector.

➢ Widen the tax net rather than increasing the tax base or the tax burden of existing tax payers.

(5) Improving the availability of local raw materials

➢ Re-invigorate the backward integration policy through the use of local resources to provide raw materials to the industries;

➢ Provide a structure inventive for potential investment in local development of raw materials;

(6) Improving access to credit by industries

➢ Set up a monitoring and evaluation platform with private sector representatives to oversee the disbursement of the various development funds meant for the industries;

➢ Provide a Credit guarantee for industrial loans from commercial banks;

➢ Create development funding windows for SMEs with liberal conditionality.

(7) Stabilizing the macroeconomy

➢ Through fiscal and monetary policy authorities’ joint effort, formulate and implement a national policy that would address the current high inflation in the country;    

Conclusion

In all the manufacturing activities in the first quarter of 2023 was adversely affected by escalation in the Consumer Price Index (CPI), continuous erosion in Naira value and difficulty in accessing forex, high cost of energy, naira crunch, exorbitant taxes, high lending rates, persisting insecurity and the consequences of lingering Russian-Ukrainian war. Manufacturers are extremely groaning in pains due to these issues that are frustrating their contribution to the economy.

The Aggregate Index Score (AIS) of MCCI declined to 54.1 points in the first quarter of 2023 from 55.0 points obtained in fourth quarter of 2022. The index score of the current quarter though below that of the previous quarter, indicates that manufacturers generally show resilience and have confidence in the economy.

However, across sectoral groups however, operators in Electrical & Electronics and Motor Vehicle & Miscellaneous Assembly with respective index scores of 49.7 and 48.6 exhibited gross loss of confidence as they fell below the 50-point benchmark. These sectoral groups were adversely affected by erratic electricity supply and instability of macroeconomic indicators have significantly worsened sales performance in these sectoral groups.

Similarly, among industrial zones, activities in Kaduna (49.5 points), Abuja (48.6 points), Rivers/Bayelsa (46.2 points) and Cross-Rivers/Akwa-Ibom (43.9 points) were depressed by the high-cost of operating environment in the first quarter of 2023 as underlined by their index scores which fell below the benchmark points.

Consequence to above trends, it is highly expedient that the Government strive to ensure the harmonization of fiscal and monetary policies that will pave way for a stable macroeconomic environment needed to promote productivity in the manufacturing sector and improve the ease of doing business especially at a time when the Dangote Refinery stands to benefit the economy via improved forex management and availability of energy.