The manufacturing sector is struggling to survive amidst fresh operational challenges. The shortage of foreign exchange and the hike in electricity tariff may lead to the collapse of about 40 per cent of manufacturing plants across the country. The Manufacturers Association of Nigeria (MAN) recently stated that 776 local industries have shut down operations due to exorbitant costs of essential raw materials. The development has hampered backward integration, research development and innovation.
Between 2018 and 2022, no fewer than 322 manufacturing plants shutdown operations and some relocated to other West African countries. Many multinational companies have left due to unfriendly business climate. The situation has been worsened by the recent hike in electricity tariff and unending scarcity of forex. The surging inflation now at 33.2 per cent and food inflation at 40 percent for the month of March have not helped matters.
The effect of the clearing of the backlog of forex by the Central Bank of Nigeria (CBN) and other interventions is yet to be felt in the real sector of the economy as high cost of essential raw materials may lead to the collapse of the manufacturing sector. About 16 local and multinational companies had recorded forex-related losses amounting to trillions of dollars in the 2023 financial year. This is not good for the economy.
The high energy cost will adversely affect the manufacturing sector. That is why the government should reverse the recent hike in electricity tariff. The government will also address the scarcity of forex. The policy uncertainty of the administration is not good for businesses because they need long-term planning strategies to thrive.
Moreover, businesses thrive in a stable and secure environment. Unfortunately, our business environment cannot be said to be very stable in the face of mounting insecurity, galloping inflation and high cost of lending. However, CBN should sustain its current efforts to inject forex in the economy. But it should also go beyond attracting Foreign Direct Investments (FDI), to improving the performance of local manufacturers.
Sadly, the foreign direct investments have been limited to short-term portfolio investment like the stock market, while long-term foreign investments have remained at near-zero level in recent months. It is disturbing that some of the manufacturing plants being classified in the Band ‘A’ category are not enjoying the 20-hour power supply. The tariff hike will lead to increase in prices of goods.
Already, prices of essential commodities and medicines have gone beyond the reach of ordinary citizens whose disposable incomes witnessed sharp decline since the removal of fuel subsidy. Government should drastically reduce the 240 per cent tariff hike and ensure steady supply of electricity by the Distribution Companies (Discos). Let the frequent collapse of the national grid be quickly addressed. In addition, the CBN should slow down its tightening of the monetary policy as it had done in two recent Monetary Policy Committee meetings.
In the last 284th MPC meeting last month, the apex bank raised the Monetary Policy Rate to 24.73 per cent. This rate is too high for businesses. It will make borrowing hard for businesses as lending rate will equally go up. Further tightening of the MPR will strangulate the real sector. The economy requires a holistic policy framework that will ensure that the little gains from the appreciation of the naira are sustained.
The government must ensure that manufacturers have access to credits with single-digit interest rate. Currently, interest rate has soared above 30 per cent. High lending rate is a disincentive to business growth and profitability. Cutting down on the nation’s import bill is also essential to addressing the stability of the naira. We urge the CBN to exercise caution in formulating policy measures that appeal to portfolio investors at the detriment of local manufacturers. Focus should be on improving the quality of Nigeria’s exports in the global markets.
A recent data from the World Trade Organisation (WTO) for the year 2022 showed that South Africa’s manufacturing export value was $46billion, compared to Nigeria’s $3billion within the same period under review. This represents 15 times bigger than Nigeria’s export value. Let the government address the major constraints hampering economic development and create a favourable operating environment for businesses to thrive.