New Telegraph

COVID-19: Curtailing manufacturing, other costs

Recent Manufacturers Association of Nigeria (MAN) CEOs Confidence Index (MCCI) showed that COVID-19 has spiked production and distribution costs to 31 per cent in 4Q’20 from 27 per cent recorded in the third quarter. TAIWO HASSAN reports

Indeed, statistics indicate that manufacturers across the country under the umbrella of Manufacturers Association of Nigeria (MAN) are yet to be out of the country’s economic doldrums with the second wave of COVID-19 still baring its fangs. Sadly, the situation has been a tale of woes for local manufacturers, who are still struggling and complaining bitterly over the rising cost of production and difficult access to raw materials in the country. Precisely, this and other challenges confronting them have made them spend more on manufacturing, thus passing the cost onto the final consumer.

MCCI reports

According to MAN CEOs Confidence Index (MCCI) reports for last quarter (4Q) of 2020, the coronavirus outbreak, coupled with its second wave, increased both the production and distribution costs of their products to 31 per cent from 27 per cent recorded in the third quarter.

FX sourcing

In the current survey, most manufacturers also reported not being able to adequately source foreign exchange for importation of productive raw materials and machinery that are not available locally. The report stated that the Nigerian private sector reported significant FX shortages during discussions with staff, which are being met by a combination of delayed payments, use of own FX funds and purchases in the parallel market, where premiums relative to the official exchange rate have ranged between 13-31 per cent since April. The MCCI report pointed out that Nigerian economy was at a critical juncture; that is, a weak pre-crisis economy characterised by falling per capita income, double-digit inflation, significant governance vulnerabilities and limited buffers, is grappling with multiple shocks from the COVID-19 outbreak.

FX crisis

On the effects of foreign exchange on their businesses, the manufacturers and CEOs explained: “Traditionally, foreign exchange rate plays important role in investment determination via its relationship with inflation and interest rates. Exchange rate feeds into aggregate prices resulting to high inflation. “And to maintain a certain level of investment, interest rate is raised. In addition, constant and large depreciation in FX (as with the naira) makes imports expensive, again leading to high inflation.

“Therefore, variability and large depreciation in exchange rate obstruct economic activities and manufacturing production is not in any way insulated. “These assertions are supported by the fact Nigerian manufacturing across sub-sectors is heavily raw-materials import dependent. “A favourable exchange, a case of appreciation of the Naira, no doubt, would present good omen and improves manufacturing production.” As MAN has consistently observed, FX crisis, in which naira value depreciates among convertible currencies such as the US$, strangulates and reduces the size of manufacturing in the country. This is because depreciation in naira value causes manufacturing raw-materials and machinery imports to be more expensive.

COVID-19’s effects

On the effects of the pandemic on the macroeconomic, as far as production and distribution of goods are concerned, the survey indicated that 96 per cent of the manufacturing CEOs that responded reported an increase in production and distribution costs in the sector due to the prevailing macroeconomic environment and on account of the pandemic. The report added: “This is supported by the rising aggregate prices, the continuous erosion of the value of Naira, increase in electricity tariff, increase in price of PMS, high cost of gas and the distortion caused by the End-SARS demonstration in the period.” The survey further showed that only three per cent of respondents reported no effect, while the remaining one per cent claimed that the macroeconomic environment had decreasing effect on manufacturing production and distribution costs in the period under review. “There is no doubt that the macroeconomic ambience that prevailed in the last quarter was still influenced by the onslaught of COVID-19 as business activities sluggishly resumed in the period,” it stated.

Post-lockdown

The manufacturers, however, noted that in this post-lockdown easing and emergence of secondwave of COVID-19 periods, “it is important that government begins to critically consider ensuring that forex is allocated to manufacturers at the official rate, particularly for importation of machines and raw-materials that are not at the moment produced in the country.” The manufacturers said: “It is important that government ensures modalities and that access to COVID-19 stimulus are friendly to manufacturing companies.”

Lending rate

The manufacturers revealed that they had issues with the lending rate, which they complained had remained at two digits and 71 per cent of the CEOs agreed that this did not encourage productivity in the manufacturing sector in the period under review. “The cost of borrowing in the country remains at double digits even amidst the reforms that are meant to culminate in lower rates to engender the country’s economic recovery process. “Special single digit loans of-fered by development banks are still hard to leverage on as conditionalities to access the loans through commercial Banks are often overwhelming and laden with additional charges that will eventually make the interest rate double digit,” the report noted.

Deterioration

They submitted that the general deterioration in the manufacturing indicators in the quarter under review was occasioned by the abrasive macroeconomic ambience and the ripple effects of the first lockdown that witnessed the closure of about eight sectoral groups for months. They added that the persisting effect of COVID-19 and lingering backlashes of the End-SARS demonstration equally contributed to it.

Import bill saga

The high cost import bill for the productive inputs decreases manufacturing working capital and feeds into manufacturing commodities prices, thereby making the sector less competitive. In addition, COVID-19 rode on the wings of the low international commodity prices, particularly crude oil prices to trigger the prevailing FX crisis. The acute shortage of FX resulting in the erosion in Naira parity has been a major operational nightmare to manufacturers in the country. In the current survey (Q4 2020 MCCI), most manufacturers reported not being able to adequately source FX for importation of productive raw-materials and machinery that are not available locally. Most worrisome is the inability of manufacturers to meet transactional obligations with oversea suppliers as required.

FX review

Moreover, because sourcing FX in the official market has become extremely difficult, operators are daily approaching the BDC segment notwithstanding the high cost implication. It is important therefore, that the available FX policies and guidelines should be appropriately reviewed to support manufacturing to import inputs that are not available locally, particularly in this precarious time. The issues of usage of FX, exclusion of items from the official FX window, concessional FX allocation to critical manufacturing sector and the introduction of Wholesale Dutch Auction System (WDAS) should be thoroughly considered to ensure a productive FX management in the country.

Last line

With the rising cost of production and distribution of products in the country, it is apt and sacrosanct that government and CBN act swiftly for the benefit of all.

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