The Manufacturers opined that the 2019 Budget has important provisions aimed at reinforcing and building on the recent accomplishment of the economy.
With the performance of the manufacturing sector and economy in general in 2018 hampered by delays in passage of the budget, the Organised Private Sector (OPS) is again entering the 2019 fiscal year with great trepidation.
Its members from across several sectors are expressing fears that this year’s budget of N8.83 trillion presented by President Muhammadu Buhari to a joint session of the National Assembly which is lower than the N9.1 billion figures of 2018, will put the economy at a great disadvantage. This is even as the foggy political climate ahead of next month’s general election has further heightened anxiety over fresh investments in the sector.
Members of the OPS, including the Manufacturers Association of Nigeria (MAN), Nigeria Employers Consultative Association (NECA) and the Lagos Chamber of Commerce and Industry (LCCI) have all critically projected that several indices would be working against the performance of the sector amidst current political uncertainty.
They have argued that the budget holds little hope for the economy in the light of the prevailing infrastructure deficit, especially in the 2018 fiscal year.
For instance, while national output growth slowed from 1.95 percent recorded in the first quarter of 2018 to 1.81 percent in the third quarter of the year, the OPS is concerned that national debt profile and servicing expenses soared, capacity utilisation in the manufacturing sector slowed to 54.6 percent in 2018 from 57.14 percent recorded in 2017, while the aggregate local sourcing of raw materials by the sector also dropped to about 57.87 percent in 2018 from 63.21 percent recorded in 2017 remain major challenges for it in 2019.
According to MAN, this may be blamed on the general sluggishness of the economy and a renewed ability for importation of raw-materials considering the tranquility in the foreign exchange market.
Capacity utilisation in Food, Beverage and Tobacco Group at 58.88 percent representing 5.1 and 3.62 percentage points decline from 63.98 percent recorded in the same half of 2017 and 62.5 percent recorded in the preceding half.
On the other hand, Textile Apparel & Footwear group also declined to 50.17 percent in the first half of 2018 by 2.81 percentage point from 52.98 percent recorded in the corresponding half of 2017. Capacity utilisation in the group fell by 7.03 percentage point from 57.2 percent recording in the preceding half.
The manufacturers association said that the decline in manufacturing capacity utilisation in the period under review can be ascribed to the general low macroeconomic ambience in the country.
On the production value, MAN said the cross sector analysis indicates a general slowdown within the sectors. Production in Food, Beverage & Tobacco sector which always accounts for largest production in the sector slowed to N1.55 trillion in the first half of 2018, representing N0.13 trillion (7.7 percent) from N1.68 trillion of the corresponding half of 2017. It also declined by N0.09 trillion (5.5 percent) from N1.64 trillion recorded in the preceding half.
It further explained that the production performance of the sector in the half was largely due to the general sluggishness of the Nigerian macroeconomy in the period.
Also of great concern is the inventory of unsold manufactured goods which stood at N149.23 billion, down by N10.36 billion (6.5 percent) and N12.3 billion (7.6 percent) from N159.59 billion and N161.53 billion of the corresponding period of 2017 and the preceding half respectively.
Director General of the Manufacturers Association, Mr. Segun Kadiri, explained that the inventory of unsold finished goods in the sector within the period, was induced by low real consumption due to inflationary pressure; smuggling, counterfeiting and cloning of Nigerian manufactured products as well as high cost operating environment.
Sectoral analysis indicates that greater part of inventory of unsold manufactured goods was observed in the Basic Metal, Iron & Steel Fabricated Metal group (N28.41 billion or 19.03 percent); Chemical and Pharmaceutical sector (N24.36 billion or 16.2 percent): Food, Beverage and Tobacco (N19.5 billion or 13.1 percent); and Domestic/Industrial Plastic, Rubber & Foam (N18.96 billion or 13.4 percent).
But Ogun zone recorded the highest inventory of unsold manufactured goods with the value of N57.30 billion (38.4 percent); Ikeja zone recorded N36.76 billion (or 24.6 percent): while Apapa zone recorded N35.76 billion, representing 24.0 percent of the total inventory during the period.
The association said the inventory of unsold goods in Ogun zone which stood at N57.30 billion in the first half of 2018 down by N9.06 billion (13.7 percent) and N3.28 billion (5.4 percent) from N66.36 billion recorded in the corresponding half of 2017 and N60.58 billion of the corresponding half respectively.
“Although inventory in the zone is gradually slowing, it was as a result of poor road network as heavy industries in Nigeria such as iron and steel, cement as well as plastics are located in the zone. Likewise, these industries exhibit high inventory of unsold manufactured goods,” Kadiri said.
MAN noted that the oscillatory nature of the economic growth, remained a source of concern for the association and other stakeholders.
It stated, “For instance, in the first quarter of 2018, growth rate stood at 3.39 per cent; fell to 0.68 per cent in the second quarter and later increased to 1.92 per cent in the third quarter of the year. MAN attributes the poor performance of the sector to high cost of doing business, sluggishness in manufacturing activities due to the heaps of unsold inventory majorly resulting from the delay in implementation of the budget during the year and dwindling purchasing power of the average consumer.”
For the Lagos Chamber of Commerce and Industry (LCCI), Nigeria’s business environment issues are critical to the progress of the economy ranging from infrastructure, policy issues, tax issues, regulatory environment, institutional issues, security situation, policy consistency and many more impacted on businesses in 2018.
The Director General of LCCI, Muda Yusuf, said the power situation continues to pose severe challenges to private sector operators, and impacting adversely on productivity.
“Throughout the year, we received complaints across sectors about high energy costs especially high expenditure on diesel, higher cost of and scarcity of gas, and payment demand by Discos for power that were not supplied. These continue to take its toll on the bottom line of investors. SMEs and some real sector companies reported that they spend as much as 20-25 percent of their total operating cost on provision of alternative power supply and payment to Discos”, he said.
The Nigeria Employers Consultative Association (NECA), shared same view with LCCI on the nation relapsing a step backward on the Ease of Doing Business from 145th to 146th in the concluding year.
The ranking takes account, trading regulations, property rights, contract enforcement, into investment laws and availability of credit.
The two bodies however lamented on the unending traffic gridlock in Apapa, home to two major international seaports in Nigeria.
NECA President, Mohammed Yinusa, said Tin Can Island and Apapa ports is today a nightmare to both the business community and road users. The situation is compounded by the concentration of tank farms in the Apapa axis, thereby attracting large numbers of petrol tankers that jostle with container-bearing trucks on the road.
“The adverse economic implications on businesses cannot be over emphasised. For instance, the maritime operators quantified just two weeks traffic gridlock’s cost on the industry to be over N1.3 billion, which is an enormous loss”, he said.
In the same vein, recent maritime port feedback research finds that approximately 40 percent of businesses located around the Lagos ports’ have either relocated to other areas, scaled down operations or completely shut down due to vehicle traffic congestion crises. The development which OPS said has very huge adverse implication for non-oil export, job creation, tax revenue and real economic activities.
The Manufacturers Association, analysing the future of the sector based on the 2018 experience said in broad terms, that the manufacturing sector could be in for a tough operating environment in 2019, considering that the needed supporting policies and infrastructure have not been given sufficient priority in the 2019 budget.
The proposed capital expenditure budget for Power, works and housing infrastructure was N408.03 billion representing 26.5 percent reduction from N555.88 proposed in 2018.
It noted that, “Although the budget touched on key project (construction of new power plants and maintenance of existing ones; rehabilitation of rail tracts; and construction/rehabilitation of roads infrastructure across the country) that will support economic activities if completed, the allocation appears insufficient, in the light of the prevailing infrastructure deficit.
“Inadequate electricity supply from the national grid and the bad condition of roads across the country remain core challenges of the manufacturing sector.”
Equally, MAN said the Budgeted capital allocation to the development of Transportation infrastructure is N194.24 billion, indicating 26.2 percent reduction from N263.10 billion allocation in 2018.
According to MAN, the proposed 2019 budget appears to be an extension of 2018 as no new grounds were explored. The association has said, “There is the need to properly align the assumptions of the budget with economic realities. No doubt, some of the provisions of the budget would be very important in supporting economic activities in the coming year.”
Technically, from the observed trends in the Nigerian budget cycle, MAN said the 2019 budget proposal might undergo late passage and the resultant negative effect on the overall economic ambience of the country might be colossal for an economy whose current growth rate is still fragile.
In specifics, the association warned that issues like development in the global scene such as increasing interest rates across large developed markets and tightening commodity markets would likely contract investment inflow to the country evidenced by the capital reversals from emerging & frontier markets observed in the current year.
Also being an election year, MAN stated that performance of the economy in 2019 would to a large extent depend on the transparency and credibility of the election, while distractions from political activities may slow down infrastructure spending and the performance of the manufacturing sector being a sector whose operations relies heavily on these infrastructures.
Inflation rate might also slightly increase due to electioneering spending resulting from heightened political activities and lack of proper policy coordination.
It added, “Even though the Central Bank of Nigeria is in a stronger reserve position than in recent years, there may be a slight depreciation of the value of Naira due to the recent pressure on the country’s external reserve, naira amidst the continuous dip in oil prices and the usual withdrawal of foreign capital as a result of anticipated political uncertainty; More pressure may be mounted on registered companies by Government Agencies in a bid to vigorously drive for revenue to salvage the precarious status of the country’s debt service to revenue ratio.”
Among others, MAN equally said funds allocated to the Industry, Trade and Investment Development (ITID) which include the N42 billion allocation for the development of the Special Economic Zone Projects across the geopolitical zones to drive manufacturing/exports; Export-Expansion Grant (EEG); N5.12 billion (though grossly insufficient to drive the needed impetus) allocation in the form of tax credit to support export through the Export Expansion Grant; the N15 million allocation for the recapitalization of Bank of Industry (BOI) and Bank of Agriculture (BoA); and the N10 billion provided as a grant to BOI to subsidize interest rate charged on loans to SMEs all fall short of the expectation of stakeholders and may limit the achievable success level in 2019.
The Manufacturers however opined that the 2019 Budget tagged “Budget of Continuity” has important provisions aimed at reinforcing and building on the recent accomplishment of the economy.
“Consequently, for the budget to be effective, there is need to sustain expansionary policy stance while ensuring a sufficient synthesis of monetary and fiscal policies.
“By implication, lending rate should moderate through development windows while taxes and levies should either drop or remain unchanged and backed by incentives”, it stated.
Director General of LCCI, Muda Yusufvsaid OPS are concerned about the fast-growing public debt profile and the country’s fiscal sustainability in the medium term.
“Debt service to revenue ratio of 31%; and debt service to capital expenditure ratio of 75% in the 2019 budget proposal are on the high side with implication on the country’s ability to deliver infrastructure investments,” he said.
Yusuf said the Nigerian economy remained fragile with the high dependence on oil sector for revenue and foreign exchange earnings. He said, “Although oil revenues increased with recovering oil prices in 2018, the impact on the economy was subdued by the huge foreign exchange commitments to petroleum product importations and the inherent subsidy.
“With the limited progress in the ongoing effort to diversify government revenue sources, the performance of the oil and gas sector would remain a critical factor that would shape the outlook for the economy in 2019. According to estimates by Capital Economics analysts, every $10-per-barrel fall in oil prices will cause a 3-5% decline of GDP in most of the Gulf economies, and a slowdown of 1.5-2% of GDP in Russia and Nigeria on an annualized basis. The outlook will therefore depend to a large extent on developments in the oil and gas sector and the political will to undertake far reaching reforms, beginning with the oil and gas sector.
“Given the challenging economic conditions, key policy reforms would be imperative to support and sustain macroeconomic stability. These include, among others, a foreign exchange management framework that reflects the market fundamentals, the acceleration of the economic diversification agenda, normalization of Lagos ports environment, the oil and gas sector reform, especially the petroleum industry bill; reduction in the cost of governance at all levels; improvements in the domestic revenue (particularly independent revenue) to reduce volatilities of government revenues, among others.”
Based on the global bodies projections, the International Monetary Fund (IMF) which cut the growth projections made for Nigeria to 1.9 percent from 2.1 percent, the World Economic Outlook report that Nigeria’s economy would grow by 2.1 percent in 2018 and 2.3 percent in 2019, the World Bank recent cut in Nigeria’s growth projections by 0.2%, from 2.1% to 1.9%, citing reduction in crude oil production levels, and contraction in the agricultural sector, following the herdsmen-farmers crisis which have greatly affected economic recovery, NECA warned that any further slide in crude oil price could worsen the economy.
“Nigeria could face challenges in the areas of deficit financing, cash call payment, microeconomics performance, project financing and political uncertainties. “We, as the voice of business, are also worried about the consequent looming foreign exchange shortfall to support economic activities, especially as it affects importation of required raw materials for the sustenance of production in the real sector of the economy”, NECA president has said.
Yinusa however stressed that what would save the economy is the diversification from crude oil, especially as other emerging countries are becoming a better destination for foreign direct investment. He also advised government not to focus solely on politics at the expense of the economy and good governance, but continue to work assiduously to sustain the steady stabilisation of the economy through informed policies to position it for continued growth.