Already buffeted by myriad challenges caused by the prevailing harsh operating environment, there are fears that the resurgence of the COVID-19 pandemic and the economic recession may have set the stage for more turbulence in the real sector of the economy this year. Operators and experts, however, say that putting in place robust policies and comprehensive support systems to encourage scale and lower cost of production could wade off the impending turmoil. The Nation looks at some of the issues that will shape the real sector, performance in 2021.
IT took outcry by members of the Organised Private Sector (OPS), including Manufacturers Association of Nigeria (MAN), Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture (NACCIMA), Lagos Chamber of Commerce and Industry (LCCI), and Nigerians generally, to force the hand of the Federal Government to put the implementation of last week’s upward adjustment of electricity tariff on hold.
This followed Power Minister Mamman Saleh’s Thursday directive to the National Electricity Regulatory Commission (NERC) to inform the Electricity Distribution Companies (DisCos) to suspend the implementation of the tariff review pending the conclusion of the Joint Ad-Hoc Committee’s work at the end of January 2021.
However, while the Federal Government may have bowed to pressure and pulled the breaks on the implementation of the vexatious and widely condemned upward adjustment of electricity tariff, the tariff hike was seen as foretaste of the challenging times that lie ahead for real sector operators in 2021.
For one, the upward review of tariff between N2 per kilowatt and N4 per kilowatt was to have taken effect from January 1, 2021, barely three months after the NERC increased tariffs on September 1, 2020. Also, the reversal did not foreclose another tariff hike. In fact, Saleh said the new electricity tariff would take effect at the end of this month after the end of talks between the Federal Government and Labour.
What this means is that members of the OPS must prepare for an increase in electricity tariff and its resultant increase in cost of production. This reality was not lost on them. This was why they were quite vociferous in condemning the tariff hike, describing it as “outrageous,” “ill-timed,” “not manufacturing friendly,” and calling for its suspension.
The Director-General of MAN, Mr. Segun Ajayi-Kadir, put the grouse of manufacturers over the tariff increase in perspective. He said, for instance, that inadequate electricity supply topped the list of challenges confronting the manufacturing sector and has been largely responsible for its lackluster performance for some decades now.
According to him, electricity-related expenses of a manufacturing concern constitute about 40 per cent of the production overhead in some sub- sectors. He said with the sector employing over five million workers, directly and indirectly, and contributing 8.93 per cent to the Gross Domestic Product (GDP), the electricity tariff increase was not growth friendly and was antithetical to competitiveness.
The MAN DG added that the suspended tariff increase came at the commencement of the African Continental Free Trade Agreement (AfCFTA) and barely three months after a huge increment was imposed on electricity consumers on September 1, 2020. “It (tariff hike) appears to be insensitive to the prevailing precarious situation of the sector. The increase is coming at a wrong time and would clearly reverse the little gains in the recent past.
“This is against the background of prevailing harsh operating environment, the increasing burden of taxes, the enormous spending on self-generated electricity up to the tune of N70 billion (excluding hundreds of billions of naira spent on settling monthly electricity bills) and the ailing state of a sector that is just recovering from a lockdown occasioned by the ravaging COVID-19 pandemic,” he lamented.
Ajayi-Kadir expressed worries that the recent increase in price of electricity will have overwhelming negative impact on the economy, especially the manufacturing sector. The trickle-down effects, he said, include decrease in foreign exchange earnings from the sector, as high cost of production feeds into export commodity prices.
He listed other effects to include reduction in government tax revenue occasioned by drop in sales, as a lesser quantum of disposable income will be available to purchase manufactured goods; reduction in capacity utilisation; further decline in GDP, large scale unemployment across the 76 manufacturing sub-sectors and possible increase in crime rate.
The MAN boss also expressed fears that the tariff increase will trigger reverse-multiplier effect as cost of production escalates and the headways already made in the sector is eroded.
“This is because most of MAN-member companies are classified in the ‘D’ categorisation (D1, D2 and D3) where tariff is the highest.
“Manufacturing sub-sectoral groups with higher energy consumption which include Basic Metal, Iron and Steel and Fabricated Metal Products; Domestic & Industrial, Rubber and Foam; Non-Metallic Mineral Product; and Chemical & Pharmaceuticals sectoral groups would be worse-off,” he explained.
Ajayi-Kadir pointed out that the manufacturing sector, as the engine of sustainable growth, was still struggling with the debilitating impact of the COVID-19 pandemic and was yet to recuperate.
He, therefore, said operators expect that government will continue to provide stimulus packages that will aid the sector’s recovery and avert the shutdown of factories nationwide.
“We expect that NERC, as the regulator, will ensure improved electricity generation, transmission and distribution that will lead to adequate and reliable electricity supply in the country rather than squeezing the mere 4000MW to meet all revenue needs of key sharing stakeholders.
“We equally expect NERC to make regulations that will ensure that 80 per cent of consumers are metered to ensure consumption reflective payment; aid inflow of investment in the energy industry in order to increase generation capacities and usher in large scale production of electricity,” he said, insisting: “The recent absurd tariff increase does not support these desirable propositions.”
Heartache over COVID-19, economic recession
However, inadequate electricity supply and incessant increases in tariff without a commensurate improvement in generation, transmission and distribution is not the only problem that will confront real sector operators this year. This is so considering the fragile nature of the economy, which slid into a recession in 2020.
Nigeria slid into its worst economic recession in over three decades, recording a GDP contraction of 3.62 per cent in the third quarter of 2020, according to the National Bureau of Statistics (NBS). It was the second consecutive quarterly GDP decline since the recession of 2016.The cumulative GDP for the first nine months of 2020 stood at -2.48 per cent.
The collapse in oil prices coupled with the COVID-19 pandemic plunged the Nigerian economy into a severe economic recession, the worst since the 1980s. Now, there has been a resurgence of the deadly virus across the globe.
Although the authorities have ruled out the possibility of another lockdown to contain the second wave of the virus, there are fears that its rapid spread may force a rethink in favour of a lockdown. This could spell trouble for real sector operators if, and when it happens.
Given the challenging economic conditions, operators and experts say that key policy reforms are imperative to support and sustain macroeconomic stability.These include a foreign exchange management framework that reflects the market fundamentals and the acceleration of the economic diversification agenda.
Others are the normalisation of Lagos ports environment, the oil and gas sector reform, especially the petroleum industry bill; reduction in the cost of governance at all levels; improvements in the domestic revenue (particularly independent revenue) to reduce volatilities of government revenue, among others.
The Director-General, Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture (NACCIMA), Ambassador Ayo Olukanni, said, for instance, that in the reality of COVID-19 and its impact on the economy, manifesting as economic recession, a continuous increase in the cost of production (which would be the result of the periodical electricity tariff increases) will impede the growth of the real sector.
“Business concerns will attempt to pass-on some of these costs to consumers by increasing their prices, demand would drop, and the vicious-cycle will continue,” he said.
The NACCIMA DG, therefore, said: “Our counsel to the government remains the implementation of policies (even if it is in the short term) that increase the productive capacity of the real sector, as well as the disposable income of the general populace, as this is the time-tested approach to exiting a recession.”
Ajayi-Kadir also said it is imperative that the performance of the manufacturing sector is enhanced through a pro-manufacturing policy that will encourage scale and lower unit cost of production rather that throwing fiery darts that will worsen its performance this year.
AfCFTA opens window of opportunity for operators
However, as dicey as the situation appears to be for the real sector, the commencement of the implementation of the African Continental Free Trade Area (AfCFTA) on January 1, 2021, promises to be a game-changer. With Nigeria’s ratification of the trade liberalisation deal last November, the belief is that the stage is set for the economy’s enhanced competitiveness.
The implementation of the AfCFTA Agreement will form a $3.4 trillion economic bloc with 1.3 billion people across the continent and is expected to probably double intra-Africa trade through better harmonisation and coordination of trade liberalisation.
According to the African Union (AU), the AfCFTA will offer the continent an opportunity to reconfigure its supply chains, reduce reliance on others and speed up the establishment of regional value chains which will boost intra-Africa trade.
However, Nigeria, Africa’s largest and most populous economy is tipped to benefit more from the free trade deal given its large market and population.
