Macro-economic and business environment factors together stunted manufacturing in the first quarter of this year, according to the Director General of the Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf.
Muda Yusuf
He also cited the negative impact of smuggling and unstable power supply and concluded that the outlook is gloomy.
Monetary policy tightening, high interest and exchange rates, delay in releasing Pre-Arrival Assessment Report (PAAR) which add to the cost of clearing goods at the ports, all heighten the woes of the real sector, Yusuf said in an interview with Assistant Business Editor, Kelechi Mgboji, in Lagos.
Those worst hit are small and micro enterprises, Yusuf added.
He upheld the $510 billion value tag on the economy after rebasing the gross domestic product (GDP) but sought interventions to make the economy trickle down to the masses to impact on living standards.
He said foreigners with cheap funds are taking over the juicy chunk of the economy while the government is raising interest rates that shoot up the cost of credit.
Below are additional excerpts:
Review of productive sector Q1, 2014: Monetary policy factors
Macro-economic and business environment factors impacted the manufacturing sector in the first quarter. In the official market, the CBN (Central Bank of Nigeria) managed to moderate the exchange rate, but, as you know in this economy, the parallel market rate has a signaling effect.
Again, because we have a large informal sector, many informal sector players who have to go to Asia to buy products also source their foreign exchange (forex) from the parallel market. This has some inflationary implication. The cost of production also went up. This is reflected in the component of inflation referred to as core inflation.
During the period, even now, we had issues with interest rate. Because of tightening monetary policy, interest remained high during the quarter, hovering between 20 and 25 per cent. In some extreme cases it went as high as 25 to 30 per cent, depending on the profile of the business. But generally, interest rate was still an issue during the quarter.
The tenor of funds was also an issue although that has been resolved for quite a while. The tenor of funds remained very short term, which posed a challenge to the real sector, particularly when investors want to invest in capital equipment and machinery and things that require long term gestation.
Business environment factors
On the business environment side, we had challenges in power supply. In spite of the privatisation of the power sector, it witnessed one of the worst power supply problems in the period.
The deterioration was very profound. Many businesses had to spend a lot on diesel and petrol. This had implications on the cost of production during the period. It had implication for productivity and profitability.
We had challenges with logistics, too. Although the government is doing some work on rules and regulations, all this effort has not gone far enough to really bring down the cost of logistics.
There were issues with the real sector at the ports occasioned by the delay of the Pre-Arrival Assessment Report (PAAR) by the Nigeria Customs Service. It is about the business of risk assessment. Since the Customs took over the predestination assessment report, what they issue is PAAR.
Perhaps, because of some transitional issues, there are very serious delays in the clearance of cargo. That led to an increase in demurrage paid by importers.
It also affected in some ways even the production schedules of companies. To the extent that they were not able to clear their cargo in good time, particularly those relating to raw materials, it affected production schedule.
Of course, the problem of smuggling was also very profound. The government, wanting to boost domestic rice production, imposed a duty of 110 per cent on rice import. Quite a number of investors invested in rice plantation hoping that because of the new fiscal policy regime, there would be a bigger market for their product.
But it didn’t quite work out because we witnessed an upsurge in the smuggling of rice. That made nonsense of the entire fiscal policy of protecting local rice producers.
Gloomy Q1 for SMEs, not so rosy for big business
The challenges were quite enormous, especially for small businesses. Big businesses have a way of coping with these situations because of their size. They enjoy the economies of scale, for capital and all of that. They enjoy better access to credit, because they can bargain better with banks. Their risk profile is low, so their cost of fund is also minimal.
For such businesses I won’t say they are doing too badly. But for the micro, small and medium enterprises (MSMEs), which are very critical to the economy in terms of job creation, the story is gloomy.
Implication of high cost of credit to the real sector
Foreigners are taking over the juicy chunk of the economy. We don’t have an economy that is inclusive because the bulk of the juicy areas are not being accessed by domestic investors.
In terms of access to funds, and cost of funds, it is very difficult to compete with investors coming from outside the country.
If you are sourcing funds at 25 per cent interest, and somebody is coming with funds sourced at 5 per cent, and you are facing the same variables in terms of infrastructure and other external factors, there is no way you can compete with such an investor. Even if it is in the distributive sector.
I mean somebody is importing goods straight from Asia, and he has borrowed money at 25 or 30 per cent interest, and you have a Chinese or Indian who is bringing a similar product from his country and over there he is paying about 5 or 10 per cent, there is no way you can compete with such an importer.
Increasingly, domestic investors, whether in the real sector or distributive trade, are being increasingly marginalised. They do not have equal opportunity with foreign investors because of the advantage of funding foreigners have.
So, there is an issue in promoting inclusiveness in the economy. If domestic investors are not very active in the economy, if they are not in the mainstream, there is no way they can get the benefits of the growth of GDP they are talking about. This is the situation.
How to promote inclusiveness and have domestic investors in the mainstream
The only thing to do is improve the enabling environment. That is the only way out; make it easy for them to produce so that they will not rely on diesel. Make it easy for them to produce with cheaper funds which will make them more competitive.
Also make sure that our borders are not too porous such that every Dick, Tom and Harry will not have access to bring in all sorts of goods that are far cheaper than those produced in the country. These are some of the things that need to be done.
But beyond these, the government and the citizens should create the market for our own domestic products. We should patronise what is produced locally, particularly the government. It is easier for the government to come up with a policy that will encourage consumption of locally made products.
For instance, the government can say, if we are giving you an LPO for any supply, what we want from you are made in Nigeria products. That will go a long way.
If our hospitals insist that if you are giving an LPO to supply drugs you must go to a local manufacturer of that drug and buy it, that will also go a long way, rather than giving somebody a contractual LPO and the next moment he flies out of the country to import the product.
We consume quite a lot in this country but we produce 15 to 20 per cent of what we consume. If we can alter the ratio a little, the impact on the economy will be very tremendous.
Stakeholders, Customs dialogue on PAAR predicament
We have engaged the Nigeria Customs Service; we had some interaction with them. I was a member of the team that went to Zone A, the zonal command of the Customs on Harvey Road, Ikoyi Lagos, to meet the zonal comptroller. We told her the challenges businesses are facing concerning PAAR.
Shortly after that, the comptroller general of customs came to Lagos to discuss with stakeholders. All these issues were put on the table, and he gave an assurance that there would be an improvement. We are waiting to see the improvement.
But there is a high degree of engagement of stakeholders in business in the matter, especially importers at the receiving end of it, manufacturers, freight forwarders, and so on.
Banks were not parties to the engagement because they were not directly involved.
If you borrow money from a bank to import goods and your container is stuck at the ports, the banks have nothing to lose so they are not under pressure to run after the Customs to say this or that.
It is the man that has borrowed money, on which interest is running, who will pay the demurrage at the ports. These are the people bearing the burden. So, it is the importers and their agents, and in most cases it is the clearing agent that represents the importer.
Between the importer and the agent, those are the ones represented in our negotiations who are aware of these challenges. And we engaged the authorities.
No waiver of demurrage cost, only promises of improvement
Well, there are promises of improvement. But nothing concrete yet on the ground.
There is no waiver of demurrage because demurrage is at three levels. It could be at the level of the shipping company. If they are not able to discharge in good time or if your cargo is within the premises of the shipping company, or if you have a vessel and the vessel could not easily anchor because there is a backlog of cargoes to be cleared. So, the person who hired the vessel has to pay more charges.
Then if the cargo is discharged at the terminal and you don’t have your PAAR to clear it, the terminal operators will charge you. The Customs has control over terminal operators, and terminal operators said they are not responsible for the delay.
So, it is an issue that is beyond the Customs in terms of intervention to make sure there is a waiver. In any case, the banks are still there waiting for you because you borrowed money to import the items. The longer it takes to sort out yourself and clear the cargo, the more interest you pay.
Rebased $510b economy one thing, development another
The GDP rebasing is to provide economic information; information on the size and structure of the economy. It provides a basis for further analysis of economic conditions and further analysis of our fiscal and monetary policies. That is the value of the rebasing.
You cannot compare an economy of 1990, the base year that was used, to an economy of 2014. A lot of things have changed, a lot of sectors have emerged which need to be taken into account and reflect in the configuration of the economy.
What we have seen is a clearer picture of the structure and the size of the economy. Growth is one thing, which is what GDP is all about, development is another thing. Now that we have a robust GDP, it creates the challenge of making sure that the benefits of the robust GDP translate into improved welfare for the people.
That is where the challenge of governance comes in, the quality of governance to make sure that the benefits of the wealth of the nation is felt by a large majority of citizens.
It is for the government to put fiscal and monetary policies in place to ensure the channeling of the benefits of the growth to those at the bottom of the pyramid.
The government can do that by investing a lot more in the social sector; in education, which is one of the easiest ways of reducing inequality; in health, which is also the easy way of building your human capital; in infrastructure, which is one way to ensure that SMEs are more productive.
If they are more profitable, they can employ more people and generate more income.
The government can also reduce corruption, which is one of the major problems we have in this economy. Too much leakages through oil subsidy, ghost workers, and all sorts of things.
These are some of the ways the benefits of this growth can trickle down to the larger economy and to the citizenry. That is what we mean by having an inclusive economy, bringing more people to the mainstream of the economy.
Questioning NBS data and conclusions on rebased GDP
Nobody is disputing the fact that Nigeria has the highest population on the African continent. Nobody is disputing the fact that Nigeria has the largest market on the continent. So, it is not unlikely that our GDP is as high, given all these parameters.
In the chamber, we have members who have investments in different locations on the continent and they know that when it comes to the size of market, size of business, size of economy, they cannot compare the kind of business they are doing in Nigeria with what they do in any other part of Africa.
Even South Africans, when they come to invest here and compare the two economies, they can tell the difference between the business they are doing here and what they are doing in South Africa. So, there is no disputing the fact that this is the largest economy.
I don’t doubt the fact that this economy is the largest because there is a correlation between market size and the size of the economy. There is also a correlation between population and the size of the economy, and between resources like oil and the size of the economy.
So, I don’t have any doubt about it. My only worry is how to make the benefits of the economic growth trickle down. And that is governance issue: distributing income, take care of the poor and the vulnerable. That is where we have to engage the authorities.
What President Goodluck Jonathan needs to do to turn around the economy
He needs to fix the challenges that entrepreneurs are facing. The power sector reform is neither here nor there because the energy situation has deteriorated badly since privatisation.
To move this economy forward, to create jobs and reduce unemployment, the government needs to fix the challenge of infrastructure to reduce the cost of doing business. It should also look at the challenge of finance for small businesses, so that we can have many more small businesses.
The government must address insecurity, which is also affecting investor confidence, particularly foreign investors, as well as domestic ones. No investor can take his investment to the North East, a lot of manufacturers in Lagos cannot take their products to the region for sale.
Many investors have also relocated from there, so it is loss of business. The security issue is serious and we hope investors will not finally abandon the economy as politics is now on the front burner.
Even in the composition of the cabinet, there should be more of technocrats than politicians. But, as you can see, there are more politicians in the cabinet than technocrats, which reduces the quality of governance.
