ECONOMIC recession and the unfavourable business climate are taking their toll on the manufacturing sector, with 196 manufacturing companies reportedly shutting down operations in the last two years. This is in spite of government’s efforts to mitigate the effects of the economic crisis. The latest figure from the Manufacturers Association of Nigeria (MAN) is, however, an improvement on its previous statistics which put the number of firms that closed shop as a result of the recession at 272.
In 2016, MAN had lamented that as a result of foreign exchange restrictions and the ban on some imported raw materials, over 45 firms shut down operations, while more than 220 Small and Medium Enterprises (SMEs) closed shop completely, erasing over two million jobs and inducing huge financial losses estimated at N62.184 billion.
The association, in the figures released last week by its Economic and Statistics Department, attributed the closures and job losses to a combination of factors, among them, the unfavourable operating environment in which forex scarcity and high cost of power generation played key roles.
MAN said that the share of energy cost to total cost of production in the sector was estimated at 36 percent, one of the highest in the world. A survey by the association also claimed that member-companies put their annual expenditure on alternative energy source at N129.95bn last year, up from N58.82bn in 2015.
In addition, MAN noted that despite the emergence of electricity Distribution Companies (Discos), power supply to the manufacturing sector remains abysmally poor. However, the association acknowledged efforts made by government in recent times, in particular, the CBN intervention in the forex market that has brought a measure of stability in sourcing materials for production.
The apex bank has also affirmed the general decline in the industrial sector last year, as indicated by the Purchasing Managers Index (PMI), which reduced to 53.6 percent last year, although it improved to 54.4 percent in the first Quarter of 2017. This is an indication that the manufacturing sector may still bounce back. But, the expected recovery depends on government squarely addressing the challenges that MAN has persistently complained about.
Addressing the problems identified by MAN will help the recovery of the economy. There is no way Nigeria can fully exit economic recession without resolving the challenges in the manufacturing sector. Capacity utilisation in this sector currently hovers around 20 percent. This is not enough to expedite growth. Most of the surviving firms are ailing and just managing to stay above water.
For instance, last year, blue chip companies like Nestlé Plc, Dangote Group, Nigerian Breweries Plc, Lafarge, Cadbury PLC and Guinness (Nig) PLC, among other organisations driving the industrial sector of the economy, all posted huge losses amounting to N51.86bn last year.
Undoubtedly, many manufacturing firms are reeling under the burden of rising costs of production while some are almost in economic stagnation. As we have noted in previous editorials, the business environment remains plagued by epileptic power supply, bad road network, high interest rate and high cost of production, resulting from high cost of energy. These factors hamper competitiveness of the sector.
The problems highlighted by MAN have also affected the fortunes of SMEs, which account for about 50 percent of Nigeria’s Gross Domestic Product (GDP). However, less than seven percent of all registered SMEs has access to credit facilities, according to statistics from the Bank of Industry (BoI). Even those that have access to bank facilities cannot break even due to high interest rates.
Therefore, government should treat the call by MAN as an emergency. While the ongoing intervention in forex supply is a step in the right direction, its availability to genuine end-users must be sustained. Government should also work harder to improve the businesses environment.
There is no way government can achieve the goals of the Economic Recovery and Growth Plan (ERGP) without the manufacturing sector in good operating condition. The firms that have shut down need to come back on stream. Nigeria’s loss has become the gain of neighboring countries because they have comparatively more business-friendly environments. Government should not allow the modest achievements recorded in the manufacturing sector to be eroded. They should be improved upon.