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Nigeria needs to strengthen industrial and consumer sectors 07 Jun 2016

For Nigeria to achieve long-term economic growth, the country's faltering industrial and consumer sectors must be strengthened. This need to bolster the performance of these vital sectors has become even more urgent after the National Bureau of Statistics (NBS) reported that Nigeria's GDP contracted by 0.36 percent in the first quarter of 2016.
    
The industrial and consumer sectors have been two of the hardest hit sectors in the current economic downturn caused by the slump in global oil prices. The decision of Central Bank of Nigeria to impose stiff foreign exchange controls amidst low oil receipts, and the long period of standstill on the 2016 budget, have been particularly damaging to these sectors. The CBN's move restricted the importation of vital raw materials and machineries needed to stimulate industrial production, consumption, and economic growth. On the other hand, the absence of the federal budget for the first five months of the year put further pressure on private sector balance sheets, leading to job losses.

Except for a modest improvement in March this year, Nigeria's Purchasing Managers Index – which measures the health of the manufacturing sector – has fallen consistently since December 2015. Similarly, all the indexes at the Nigerian Stock Exchange – including the benchmark All Shares Index – have declined in 2016. But the indexes that measure industrial production and consumer sectors have declined the most.

Between January and April, the NSE Industrial Index fell 15 percent from 2167.48 points to 1843.99 points. Equally, the NSE Consumer Goods Index fell 15.5 percent from 723.49 points to 611.05 points. Given the fact that these two sectors are vital contributors to the GDP, it becomes clear that non-oil sectors growth could not compensate enough for low oil production and revenue decline; hence the contraction of the economy.

In order to return Nigeria to the path of long-term economic growth, stimulating the industrial and consumer goods sectors must become a priority. It's even more essential considering what is now known empirically about the influence of oil on Nigeria's economic growth, industrial production, and consumption. Oil prices above $100 per barrel have had a positive impact on Nigeria's economic growth given the 6 percent average GDP growth rate the country recorded in the last decade of the oil price super-cycle. However, this growth hardly passed through to the average Nigerian in the bottom of the economic pyramid. This is clearly evident in the fact that Nigeria's poverty rate increased over the last decade despite high oil prices. In fact, the NBS reports that 60.9 percent of Nigeria's 160 million-strong population lived below the poverty line in 2010, compared with 54.7 percent in 2004.

Ironically, low oil prices, on the other hand, have a faster pass-through to the bottom-of-the-pyramid (BOP) Nigerians, compared with higher oil prices. This is amplified by the current adverse economic conditions in which double-digit inflation rate and rising unemployment rate – induced by low oil price – have made life very difficult for majority of Nigerians. BOP Nigerians more quickly feel the impact of reduced government spending during periods of low oil prices than the effects of higher government spending during periods of high oil prices. Today, no fewer than 15 out of 36 states in Nigeria owe their workers several months' salaries because of reduced government revenues disbursed by the Federation Accounts Allocation Committee.

Unfortunately, the recovery of oil prices, which seems to be underway already, would prove inadequate to improve the quality of lives of Nigerians who have been impacted negatively by recent economic conditions. This, therefore, calls for deliberate policy interventions to spur industrial production and consumption. The good news is that this imperative appears to be on the minds of our policymakers in Abuja and some states of the federation, going by their plans for capital and social investments. However, the policy measures have to be implemented effectively, and fast, too.

On the monetary side, the CBN has announced a new plan to stimulate the productive sectors in Nigeria's economy, including agriculture. The CBN and the Federal Ministry of Agriculture are reportedly working on a N750 billion intervention fund that will disburse credit at below-market rate to boost agriculture. This fund adds to other CBN agriculture and industrial intervention funds for power, manufacturing, mining and SMEs that are targeted at improving real sector credit penetration. For agriculture, the expectation is that agro-processing should receive special attention because of its closer links to various industries and ability to create jobs in the value-chain.

One of the biggest hindrances to the effectiveness of CBN's interventional financing has been low disbursement rates by Nigerian banks. Since 2009, it is estimated that businesses have only accessed N819.16 billion or 52 percent of the N1.57 trillion provided in CBN's intervention funds. In March this year, however, the CBN moved to resolve this conundrum by slashing its intervention financing rates for banks from 3 percent to 1 percent. By the implication of this, it is expected that banks have now been further incentivized to increase disbursement of CBN's financing to the real sector, especially the industrial and consumer sectors.

Apart from interventional funding, the CBN should also ensure that the industrial and consumer goods sectors receive priority in the allocation of foreign exchange through its upcoming special forex window for critical transactions. President Muhammadu Buhari, during his recent Democracy Day speech which also marked his first anniversary in government, enjoined the CBN to “offer more fiscal incentives for business that prove capable of manufacturing products that are internationally competitive.” If the CBN does as the president has advised, these sectors would regain access to forex to purchase raw materials and machineries needed for industrial production and thus arrest the steady decline in the productive sectors of the economy.

Apart from access to forex liquidity, access to electricity is also a critical factor in enhancing the productivity of the industrial and consumer sectors. Nigeria's power generation, which is transmitted to power stations for distribution to homes and businesses, has dropped from a peak generation level of about 5,070 MW in February this year to below 2,000 MW as a result of criminal vandalisation of gas pipelines and facilities owned by oil and gas companies operating in the Niger Delta region.

To quickly address and forestall further loss in economic growth, the CBN recently disbursed N55.5 billion to 24 entities in the power sector including three distribution companies (DISCOs), 14 generation companies (GENCOs), one service provider and six gas companies. This brought the total disbursement of the apex bank under the Nigerian Electricity Market Stabilization Facility (NEMSF) to N120.2 billion. About N213 billion has been earmarked for the power sector intervention facility.

On the fiscal side, the federal government has budgeted N500 billion for a social spending programme to improve consumption by creating jobs for some 500,000 teachers, conditional cash transfers to most vulnerable population, school feeding programme, and special capital disbursements to artisanal production and trade.

There is also an ambitious plan to invest in infrastructure. Although almost the first half of the year has rolled by without the implementation of the capital expenditure in the 2016 budget getting underway, hope must be kept alive that the budget will be implemented. So much depends on the capital expenditure plan in the short-term. Moreover, studies have long-linked the provision of infrastructure – roads, bridges, schools, hospitals, etc – to long-term economic growth. The Minister of Finance, Kemi Adeosun, has even linked the implementation of the 2016 capex to the restoration of jobs in the construction industry.

Given Nigeria's much-talked-about desire to diversify her economy away from oil, boosting industrial production and consumption must take centre stage. Fortunately, the government has several policy options at its disposal to fulfill this ambition. It's time to put them to work.