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AfCFTA: How weak manufacturing sector reduces Nigeria’s strength

The African Continental Free Trade Area (AfCFTA) is creating one of the world’s biggest freetrade areas. It is opening up a market of more than 1.2 billion people, with a combined GDP of more than $3 trillion (£2 trillion). This would create business opportunities – and jobs – across Africa, while reducing the cost of some goods in the shops and markets. But Nigeria’s comatose Manufacturing sector (also known as Real sector) makes her a weak partner in the free trade area, reports PAUL OGBUOKIRI

 

…declining since 1980s

 

Manufacturing grows in Ghana, others, weakens in Nigeria

 

From available figures, Nigeria remains Africa’s largest economy by GDP but her manufacturing sector remains weak despite the six years of the economic diversification programme of the President Muhammadu Buhari’s administration.

 

With an estimated 200 million population, Africa’s largest economy is also the largest market within the Continental Free Trade Area, but is losing investments (foreign and local) in the manufacturing sector.

 

The opening of an Assembly Plant on Wednesday in Ghana by Toyota International, despite the fact that Nigeria remains the highest consumer of their products (fairlyused and brand new Toyota), underscores the loss of confidence in Nigeria as a destination for investments in the manufacturing sector.

 

Real sector declining since 1980s

 

The Nigerian manufacturing sector has been in steady decline since 1981 when the Late President Shehu Shagari’s administration introduced some stringent economic measures to cut cost because of the fall in oil prices in the international market at that time. This came on heels of the alleged extravagant spending of the Shagari government that did not prioritise investment in critical infrastructure like power.

 

According to a World Bank report, the Nigerian manufacturing sector has been on a steady decline since 1981. The sector was contributing 20.26 per cent to the nation’s GDP that year; the sector’s contribution to GDP rose slightly to 21.05 per cent in 1985, but fell to 17.78 per cent of GDP in 1990; it rose again to 19.99 per cent in 1995, but by 2000, declined to 13.93 per cent.

 

It continued the downward trend in 2005 to 10.05 per cent, falling lowest in 2010 to 6.55 per cent. It however rose slightly again in 2015 to 9.43 per cent because of the rise in cement manufacturing in the country.

 

Sector contracts by 2.75% in 2020

 

The Real sector contracted by -2.75 per cent in 2020, bringing two years of growth to an end. The 2020 Gross Domestic Product (GDP) report released by the Nigerian Bureau of Statistics (NBS) revealed that the real GDP of the manufacturing sector contracted by -2.75 per cent in 2020. This signals the end of a two-year run of real growth in the sector. The contraction in the real GDP of the Real sector leaves the sector in a vulnerable position, noting that the sector according to NBS computation grew by 0.77 per cent in 2019 and 2.09 per cent in 2018. It is essential to understand that in nominal terms, without factoring in the change in prices in 2020, the Nominal GDP of the sector recorded a growth rate of 16.44 per cent at the end of the year, compared to 34.73 per cent in 2019.

 

At the end of the fourth quarter of 2020, the Manufacturing sector’s Real GDP contracted by –1.51 per cent (year-on-year). This is lower than the corresponding quarter of 2019 and the preceding quarter by –2.75 per cent points and –0.01 per cent points respectively.

 

The growth rate of the sector, on a quarteron- quarter basis, stood at 5.60 per cent. However, in nominal terms, the sector’s GDP growth at the end of the fourth quarter of 2020 was recorded at 24.60 per cent (year-on-year), this is -1.69 per cent points lower than 26.29 per cent recorded in the corresponding period of 2019 but 11.06 per cent points higher than the preceding quarter (13.54 per cent). In nominal terms, quarter-on-quarter growth of the sector was recorded at 5.78 per cent.

 

The real contribution of the sector to the Nation’s GDP in the fourth quarter of 2020 was 8.60 per cent, which is lower than the 8.74 per cent recorded in the fourth quarter of 2019 and the 8.93 per cent recorded in the third quarter of 2020. At the end of 2020, the annual contribution of the Manufacturing sector to Nigeria’s GDP stood at 8.99 per cent.

 

The Manufacturing sector comprises 13 activities: Oil Refining; Cement; Food, Beverages and Tobacco; Textile, Apparel, and Footwear; Wood and Wood Products; Pulp Paper and Paper products; Chemical and Pharmaceutical products; Non-metallic Products, Plastic and Rubber products; Electrical and Electronic, Basic Metal and Iron and Steel; Motor Vehicles and Assembly; and other manufacturing.

 

The 2019 non-oil exports of $10.5bn not from local manufacturing

 

Nigeria recorded total export revenue of $10.4 billion in 2019, the highest since 2008 which is farthest we can trace the country’s export data. According to the data from the CBN, total exports (Free on Board “FOB”) in 2019 were $64.9 billion.

 

Thus, for the first time ever, oil revenue as a percentage of total exports fell to 83.9 per cent as against over 90 per cent in previous years. Non-oil exports jumped over 100 per cent from $4.6 billion to $10.4 billion. Non-oil exports typically averaged $4.7 billion in the last 11 years and hit its highest in 2013 when it stood at $7.2 billion.

 

But as they say, you need to dig deeper to see the facts behind the figures. A deep dive into the data revealed that a huge component of Nigeria’s non-oil export figures were “re-exports”. Note that re-exports is an economic term for items that were previously imported into a home country and then re-exported to other countries.

 

By definition, re-exports are all imported goods (other than goods declared in transit or transshipment) which are subsequently re-exported. A good illustration is when Company A imports some products into Nigeria and then carries out further processing on them before exporting them to Ghana and other African countries. This often occurs when countries try to avoid trade barriers or duties.

 

Nigeria’s Real sector not attracting desired investment

 

The Nigerian Economic Summit Group (NESG) in a recent report said that the gap between announced investment and actual investment in the manufacturing sector points to the low confidence level of investors in the real sector, saying despite the numerous opportunities in the sector, only N5.73 trillion has been invested in it so far.

 

Between 2019 and 2020, investment announced stood at US$46.4 billion with the manufacturing sector accounting for 25 per cent (US$11.56 billion) of these announced investments.

 

Actual Foreign Direct Investment (FDI) inflows into the economy in both years was US$1.96 billion (just 4 per cent of announced investment) with sectors such as Telecoms, Trade, Agriculture and Manufacturing, accounting for the larger inflows (NIPC, 2021). According to Pat Utomi, a Nigerian professor of political economy and management expert, one major reason the manufacturing sector has not attracted significant investments when compared with those of other countries is policy and regulatory inconsistency.

 

“Frequent reversals of government policies on importation, lack of implementation of the provisions in national policy documents and regulatory lapses are key factors that have affected the manufacturing sector in Nigeria,” he stated.

 

He said other challenges facing the sector include poor quality of infrastructure, which “is the longest standing problem of the manufacturing sector in Nigeria and it has contributed to the high cost of production. It is a disincentive for investment despite huge potentials and a large consumer market in Nigeria.”

 

Mr. Lucky Amiwero, a maritime expert and president of National Council of Managing Directors of Licensed Customs Agents (NCMDLCA) added that road networks, inadequate electricity supply and high cost of logistics caused by the gridlock along seaports’ access roads make it difficult for businesses to maximise returns and limit the cost of operations.

 

According to the World Bank (2021), businesses in Nigeria lose about $29 billion annually due to the country’s unreliable electricity. The Manufacturers Association of Nigeria (MAN) also confirmed that inadequate electricity supply and the high cost of alternative energy sources are the topmost challenges hampering the performance and growth of the sector.

 

Repositioning industrial sector

 

Meanwhile, at the 50th anniversary of the Manufacturing Association of Nigeria (MAN), Director General of MAN, Segun Ajayi-Kadir, stated that forex restriction policies by the Central Bank of Nigeria (CBN) as well as the impact of the Covid-19 pandemic forced 415 companies to stop manufacturing in 2020. Ajayi-Kadir listed several supply-side constraints limiting productivity within the sector, including traffic logjam at the ports slowing down access to imported raw materials, infrastructure (including power & transportation), land acquisition, multiplicity of taxes and levies from different tiers of government and inconsistent government policies.

 

Sunday Telegraph learnt that over the past five years (2015- 2020), the manufacturing sector has averaged real GDP growth of -0.9 per cent. Interestingly, the sector has contracted thrice. This is a stark contrast to prior five years where the sector averaged a growth of 13.3 per cent.

 

However, a former Director-General of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf, said that rethinking Nigeria’s industrialization strategy is one key step to repositioning the manufacturing sector. He made this point while assessing developments in the nation’s manufacturing sector. He said emphasis should be placed on resource-based industrialization in the country, which can make Nigeria a competitive economy.

 

He added that local value addition was key in driving industrialization, which can improve Nigeria’s global competitiveness. The former LCCI boss decried the fact that the sector in almost a decade contributed less than 10 per cent to the Gross Domestic Product (GDP) of the Nigerian economy.

 

“A shift from import substitution characterised by foreign exchange support for importing raw materials adversely affected the country’s manufacturing sector” he said. Yusuf noted that it was time to ease the FX environment, liberalize FX inflows, reduce illiquidity in the FX market and tackle economic rent-seekers’.

 

He reiterated the need for the government to address critical issues like energy (power), logistics/ transportation (roads, bridges, rail), and the ease of doing business. He also tasked the government with driving policies to support the activities of indigenous manufacturers in Nigeria, considering foreign dominance in the sector.

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