Vanguard News Nigeria

2016 in review: Manufacturing sector groans under recession weight

Manufacturing

*MAN proposes way out in 2017

By Franklin Alli

DESPITE expectations of better business environment in 2016, the reverse was the case for operators in the manufacturing sector of the economy.

Minister of Industry, Trade and Investment, Okechukwu Enelamah

A review of happenings in the sector from the second quarter of 2016 aptly summarised what the Minister of Finance, Mrs. Kemi Adeosun, said, “The manufacturing sector was one of those badly hit by the economic recession in the country.”

Trouble started for the manufacturers when Central Bank of Nigeria (CBN) removed 41 items from the lists of utilizers of foreign exchange. Added to this is the continued drop in the naira to dollar exchange rate. The high cost of sourcing dollar made it difficult for the firms to bring in their raw materials and those that were able to pay don’t even get the dollars supplied to them until after three to four months.

Profit margins

Consequently, players in the sector recorded huge drop in patronage, turnover and profit margins as well as decline in production, layoffs and factory closure.

According to CBN, manufacturing PMI dropped to 41.9 per cent index points in June 2016, compared to 45.8 per cent in the preceding month.

This implies that the manufacturing sector declined at a faster rate during the review period. Of the sixteen manufacturing sub sectors, fourteen recorded decline in the review month in the following order: electrical equipment, non metallic products; furniture and fabricated metal products; chemical and pharmaceutical products; printing and related support activities; paper products, food; beverage and tobacco; cement; plastics and rubber products, etc.”

Within the period under review many companies scaled down their production and reduced staff strength, while those who didn’t sack their workers reviewed downward their staff salaries.

Examples of such companies were local tomato manufacturer, Erisco Foods Limited which shut down its N4 billion tomato paste processing plant in Oregun, Lagos State. The company’s President, Mr. Eric Umeofia, said it closed down its 450,000 tonnes tomato plant and sacked 1,500 workers out of its 2,520 entire workforce and moved its operations to China. According to Umeofia, this is due to the refusal of CBN to allocate forex to the company for importation of raw materials.

Another company, Dag Motorcycles Industries Nigeria Limited, the assemblers of Bajaj tricycles and motorcycles, was forced to cut down its 1,000 per day production capacity by 40 percent and terminated some of its staff.

Ademuyiwa Abe, the Company Secretary said, “In the last few months, there was restriction on foreign exchange by CBN. So, most of the time, there was no forex to bring in the Completely Knocked Down, CKD, not just the CKD, but other items required for assembling. The situation became so bad that we had no choice but to scale down production and terminate the services of our contractor who supply the workers.”

Managing Director/Chief Executive, May and Baker Nigeria Plc, Mr. Nnamdi Okafor, who shared his company’s experience, stated that the forex situation got worst in the last six months of the year.

He said, “Over 98 percent of raw materials used for pharmaceutical manufacturing are imported. What is happening to finished products is also happening to us, you may have read pronouncements from government that manufacturers are getting some special allocation, which is not happening. I can assure you. We are not able to bring in our packaging materials; in fact, that we have survived this year is a miracle to most of us.

“We are not surviving any more with the present situation, it has gone beyond what we can live with and from first quarter in 2017, most factories that are still standing will begin to shut down, because the situation with forex has gotten worse in the last six months. It was better in the first half because we could get allocations, maybe 20 per cent or 30 per cent of our requirements, but in the past six months we have not gotten anything.

“Profit wise, we are actually not growing we are just flat. But top line, we are growing and I will tell you that growth is given by price increases not by volume growth. We have managed to keep our market share and reduce the drop in volumes, that is why we still have some slight revenue growth,” he said.

2017 outlook

The Manufacturers Association of Nigeria (MAN) in its assessment of the impacts of recession on the sector, said, “It is unfortunate that the Nigerian economy has gone into recession despite attempts made to prevent it.”

Frank Udemba Jacobs, President of MAN said, “I do not, however, intend to go into the analysis of what led to this as I believe that we are all aware of it and the government is doing quite a lot to improve the situation. However, I would like to recommend what the Association thinks should be done, from the angle of the manufacturing sector, to pull the country out of the recession.

“The industrial sector, especially the manufacturing sub-sector, should be strengthened by removing all obstacles restraining the growth and competitiveness of the sector such as the indiscriminate changes in the Monetary Policy Rate (MPR) which changed as many as four times between 2014 and July 2016, with its distorting effects on the economy; the exclusion of 41 items, some of which are essential raw materials, from the official forex market as well as failure to synchronize monetary and fiscal policy actions.

Employment generation

This will enable the sector to be optimally productive and play its expected role of employment generation, capital mobilisation, wealth creation and technology acquisition. Reduction of the MPR and by implication, other rates especially refinancing and bank lending rates, as the inflationary situation in the economy may not be purely a monetary phenomenon, but could also be a result of output gap created in the real sector.

“We also expect government to reduce company income tax (CIT) to 15 percent for manufacturers as a way of attracting further investments aimed at pulling the economy out of recession as has been done in other countries with success. Government should also adjust Value Added Tax, and Personal Income Tax downward as the country has gone into recession with growth of the productive sector being significantly negative and consumption has whittled down as a result of inflation.

“Any further tax increase will crowd out more investments in the sector. Instead, I would suggest that the current Tax-GDP Ratio of 12 percent which is below the World Bank Benchmark of 18 percent may be raised by widening the tax net and ensuring that all taxable individuals and entities are covered.” he said.

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