Manufacturing Sector: Expert urges government to remove policy obstructions to resource flows

The manufacturing sector is said to have suffered considerable setback with collapse of oil prices in the early eighties, as there was no sufficient foreign exchange to support the import dependence of the sector and the sector is still grappling with this obstructions till date.

Dr Muda Yusuf, the Chief Executive Officer, Centre for Promotion of Private Enterprises made this submission during the Commence and Industry Correspondent Association of Nigeria (CICAN) workshop and annual Award with the theme “Impact of Forex Crisis on the Real and SME Sectors” held in Lagos.

Yusuf disclosed that for the first decade after independence, the sector grew on the back of resource-based industrialization where industrialization was shaped by raw materials available in the country.

According to him, there was a transition to an import substitution strategy of industrialization following the oil boom as well as enormous foreign exchange to import raw materials in abundance.

He stated further that the performance of the various sub sectors was largely dependent on the extent to which they could source their raw materials locally, adding that this became a major factor in the competitiveness of industries.

He announced that the challenges of forex on the real sector, and indeed on practically all sectors, are three dimensional which includes: “The sharp depreciation of the currency over the last one year.

“The liquidity crisis in the foreign exchange market, which manifests in the acute shortage of foreign exchange in the official window.

“Volatility of the exchange rate which creates considerable uncertainty and unpredictability for investors.”

Speaking on the depreciation impact on the real Sector and the SMEs, the expert noted that there is high cost of production because of the high import dependence of our manufacturing sector for imported raw materials, adding that there is also low sales and turnover because of the increase in price and effect on demand; Erosion of profit margins because not all the additional cost can be passed on consumers; as well as increases business continuity risk for some segments of manufacturing.

On the impact of forex liquidity challenges, he explained that the liquidity challenges are about the availability of forex to investors in the economy, stressing that this has also been a major challenge to investors in the economy, including the real sector investors.

In his words: “It makes planning difficult because of the uncertainty. Profit or dividend repatriation becomes difficult, creating huge backlogs. It compels investors to patronise the parallel market at a more prohibitive exchange rate. Patronage of the parallel market creates compliance and regulatory issues for investors. Capacity utilisation is impacted when access to forex is constrained and poses a risk to business continuity.”

While dwelling on the exchange rate volatility impact, Yusuf bemoaned that it worsens uncertainty for investors including the SMEs; Undermines investors’ confidence; Makes planning difficult as well as heightens investment risk.

Yusuf recalled that in the bid to reduce the pressure on foreign reserves, the CBN had excluded over 40 items from access to foreign exchange in the official window, adding that some of the products on this list are intermediate products for some manufacturing firms.

He posited that this has had some degree of negative effects on some manufacturing firms and advised that the CBN should have a robust engagement with the stakeholders to review this list.

He pointed out that despite the numerous policies and measures that have been articulated by successive governments, manufacturing contribution to Gross Domestic Product remains less than 10 per cent on average over this period.

“The sector has remained largely import dependent which has made it very vulnerable to external shocks. This feature is also a factor in the weak competitiveness of the sector. Many manufacturing firms have low local value addition, weak backward integration, inadequate forward integration, and low job creation potentials. All of these weakened the impact of the sector on the economy and the development process,” he said.

The sharp depreciation of the naira exchange rate in the parallel market, he said, remains a cause for concern, adding that it is a trend that should not be allowed to continue and all necessary steps need to be taken [and urgently too] to stem the slide and volatility.

“These developments should not be ignored.  It is as much of an issue to consumers as it is to producers and other stakeholders that create value in the economy.  It calls for an urgent review of the current foreign exchange policy,” he emphasized.

Accordingly, he harped on the need to adopt a flexible exchange rate policy regime, adding that this is not a devaluation proposition, but rather a pricing mechanism that reflects the demand and supply fundamentals in the foreign exchange market.

He noted that “It is a model that is sustainable, predictable and transparent. It is a policy regime that would reduce uncertainty and inspire the confidence of investors. It is a policy framework that would minimize discretion and arbitrage in the foreign exchange allocation mechanism.”

He described devaluation as a policy choice often adopted to boost exports and discourage imports, adding that countries adopt this measure, not necessarily because they have a foreign exchange or balance of payment crisis; but as deliberate trade policy strategy to make their exports cheaper.

Flexible exchange rate regime on the other hand, he said is adopted to cope with changing demand and supply conditions in the forex market.

He mentioned the benefits of a flexible exchange rate model as follows: “It enhances liquidity in the foreign exchange market; It reduces uncertainty in the foreign exchange market and therefore enhances the confidence of investors; It is more transparent as mechanism for forex allocation;    It minimizes discretion in the allocation of forex and It reduces opportunities for round tripping and other sharp practices.”

Commenting on a fixed exchange rate regime on the other hand, he said will create the following outcomes: “Widening gap between the official and parallel market exchange rates; Collapse of liquidity in the foreign exchange market resulting in acute scarcity; Mounting trade debts; Increasing factory closure as many manufacturers are not able to access foreign exchange for raw materials and other inputs; Many investors are not able to meet offshore obligations;      Mounting inflationary pressures and Sharp drop in capital inflows.”

He therefore mulled that certain policy options could be explored to mitigate the current crisis, which includes: “Adoption of a flexible exchange rate regime as this would improve liquidity in the forex market, reduce uncertainty and enhance investors’ confidence. Deepen the autonomous foreign exchange market through the liberalization of inflows from Export Proceeds, Diaspora Remittances, Multinational Companies, Donor Agencies, Diplomatic missions etc. while Market rates should be allowed to prevail in the autonomous window.”

Yusuf declared that Nigerian economy has the capacity to weather the current turmoil if the policy contexts are right because we have the market, the people and natural resources, adding that the opportunities that the present situation offers would only be realized if policy obstructions to resource flows are removed.