Despite the potential to take millions of people out of poverty through job and wealth creation, Nigeria’s manufacturing sector is bedevilled by major problems that have continued to stall industrialisation in Africa’s biggest economy.
Problems such as foreign exchange scarcity, high borrowing costs, inadequate infrastructure, policy inconsistency, and insecurity have left the country’s manufacturing struggling for years and gasping for breath.
Studies of Asian economic success stories – from Singapore to Malaysia, Vietnam and Bangladesh – have shown that building competitive manufacturing is the quickest way a country can climb the productivity ladder and raise living standards.
Successive governments in Africa’s most populous nation have made several moves to boost local manufacturing without providing the enabling environment that drives industrailisation.
Asia’s development of its industries offer lessons to Nigeria on how to improve the economic lifestyle of its 200 million citizens, whose living standards have worsened in recent years.
Segun Ajayi-Kadir, director-general of the Manufacturers Association of Nigeria (MAN), said that growing the Nigerian manufacturing sector is a prerequisite for raising living standards and economic stability.
He said manufacturing goods for export makes local firms compete globally and gradually raise productivity through investments in capital and skills.
“Manufacturing remains the most reliable and sustainable path to steady industrialisation, inclusive growth, and development,” he said.
He, however, added that governments at all levels must contribute by providing the enabling environment, roads, power, and education for a literate workforce to encourage entrepreneurs to invest.
“Government needs to address issues hurting local manufacturing to reduce the cost of production, which remains significantly high,” he said.
Between 2018 and 2020, 1.9 million micro, small and medium enterprises shut down operations, according to the National Bureau of Statistics (NBS) and the Small and Medium Enterprises Development Agency of Nigeria.
Companies are still shutting down today owing to the harsh operating environment in the country. Recently, Unilever Nigeria repurposed its portfolio by exiting two categories of home care and skin cleansing products to produce efficiently, while several other businesses operating in the country have completely shut down.
Nigeria’s manufacturing growth rate in 2022 stood at 2.45 percent and contributed 8.40 percent in the fourth quarter, lower than the 8.46 percent recorded in the corresponding period of 2021.
Infrastructure
From agro-processors to brewers to banks and pharmaceuticals, operating costs have more than doubled owing to poor power supply.
Nigerian manufacturers rely heavily on diesel and gas to power their factories, and the prices of both commodities have surged over 50 percent in recent months.
The average retail price of diesel, paid by consumers, increased by 168 percent year -on-year to N837 per litre in February 2023 from N312 in corresponding period last year, data from the NBS show.
Energy cost accounts for 40 percent of factories’ operating costs, according to MAN.
“Power is a major challenge that has crippled a lot of businesses. The government must reform the power sector to improve supply for Nigerians,” said Femi Egbesola, president of the Association of Small Business Owners of Nigeria.
It is impossible to talk about infrastructure without discussing roads and port congestions.
From Agbara industrial cluster in Ogun to Apapa in Lagos, roads are bad or inaccessible.
The access road to Apapa and Tin Can ports has continued to be a nightmare for manufacturers and exporters.
The provision of critical infrastructure is a prerequisite for enabling Nigeria to stimulate economic growth and reach the targets for economic diversification and food security.
Obiora Madu, chairman of Multimix Group, said that Nigeria’s export drive can only be successful with adequate infrastructural facilities such as storage, and good road networks, stressing that the lack of these infrastructures has made the cost of production higher.
“The costs of logistics are also very high. It is cheaper to transport a commodity to Europe than to transport the same commodity within the country,” Madu said.
Policy inconsistency
Policy inconsistency is a major problem in Nigeria.
Tomatoes Growers Association has complained about the federal government’s recent sudden U-turn as it gave nine companies approval to import tomato concentrate despite pronouncing total foreign exchange restrictions several years ago.
The cassava inclusion policy is another example of policy inconsistency.
“The cassava inclusion policy failed because of policy inconsistency,” Segun Ladele, president of Industrial Cassava Stakeholders Association of Nigeria, said in a stakeholders meeting last year.
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FX scarcity
Dollar is scarce in Africa’s biggest economy, with the naira exchanging at 460.83 to a dollar in the Investors & Exporters window and 745/$ in the parallel market.
Nigeria’s multiple exchange rate regime, which has deterred foreign investment, has been a stumbling block to economic growth and the country’s industrialisation.
According to the World Bank, naira has depreciated by 10.2 percent in 2022 at the official exchange rate, prompted by rising food and fuel prices.
Manufacturers get only 5 percent of FX demand from the official market, while over 95 percent of their FX needs are sourced in the parallel market, according to Bismarck Rewane, managing director/ chief executive of Financial Derivatives Company.
This has made the cost of locally manufactured goods more expensive and unable to compete globally, experts say.
“The exchange rate volatility has taken its toll on investors. It has worsened uncertainty for investors, undermined their confidence, and heightened investment risks by making planning difficult,” Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise.
Funding
Another critical issues plaguing the industrial sector are funding and high borrowing costs. Nigeria is cash-strapped due to low oil prices. This is hurting the country’s capacity to fund projects and critical sectors.
However, the pool of funds from the Central Bank of Nigeria (CBN) and development finance institutions is stashed in banks, which are sometimes unwilling to lend to businesses.
Consequently, several manufacturers have complained that they are unable to access most funds advertised by the government. Manufacturing needs funding, especially long-term, single-digit funds, to compete.
The CBN recently raised the monetary policy rate (MPR), the benchmark for interest rates in the country, from 17.5 percent to 18 percent, the sixth consecutive increase since May 2022.
Usually, banks respond to MPR changes, according to experts. At the moment, commercial banks charge rates between 20 percent and 35 percent, according to BusinessDay findings.
“The increase in the MPR portends worrisome negative consequences for the manufacturing sector,” Ajayi-Kadir of MAN said in a note.
He said the rate hike would increase borrowing costs for businesses beyond the extant double-digit rate, which disincentivises new investments.
He added that it would lead to increased factor costs, which feed into high product prices, thus making the country’s manufacturing unproductive.
In the first half of 2021, the average interest rate charged Nigerian manufacturers stood at 24 percent, which increased from two percentage points in the same period in 2020, according to data from the MAN 2021 half-year review.
