The development, which assumed ascendancy in the last six weeks, has been traced to, amongst other factors, the continuous fall in oil prices in the international spot market, and the slide in the foreign exchange rate of the naira, when compared against the dollar and other hard currencies.
The fear among stakeholders in the Organised Private Sector (OPS), some of who spoke in confidence, is that the unfolding development snowballs into a major economic crisis, if no steps are taken urgently to stem the tide.
Besides the falling oil prices on which the nation relies for over 85 per cent of its federally revenue, an official of one of the special interest groups pointed out, the devaluation of the naira and the non-inclusion of raw material inputs in sourcing foreign exchange from the bi-weekly Royal Dutch Auction System (RDAS), have grave implications for manufacturing, which depend on inputs from overseas.
The official, who stressed that his identity must be veiled, said what is playing out now, is reminiscent of the events of 1986 when the naira was devalued by the then military government, which resulted in the steep rise in prices and caused collateral damage to manufacturers of consumer products, “the effects of which the nation has not recovered from.”
In his view, the naira’s purchasing power will drop and cost of inputs will increase. The effect, said the source, would be that goods emanating from Nigeria will command higher prices, as against imported ones, “and this is sounding a death knell to the indigenous manufacturers, or whatever is left of that sector.”
While acknowledging the fact that the scenario was unanticipated, the official, nevertheless called for a shock therapy, saying the response to the challenge, especially by manufacturers and other segments of the OPS, might result in production cuts and price adjustments, with its attendant consequences, adding that one of the most painful unintended outcome of the measures manufacturers might adopt to keep afloat, would be to lay off some of their workers. “This will be at variance with the government’s often trumpeted agenda, which is that of creating jobs,” he said.
The official said since the economy had come under so much stress, the Federal Government should, as a matter of urgency, consider postponing the implementation of the proposed ECOWAS Common External Tariff (CET).
The effects of the oil price slide and the woeful standing of the exchange rate of the local currency against the greenback are also telling on the prices of consumer items and building materials.
An official of a leading publishing outfit expressed his frustration about a car he intended to procure, and on which he had reached a financing deal with his bank. He said: “ We had agreed on a loan of N4 million but, to my surprise, they have re-valued it to N5.6million, holding the exchange rate of the naira, responsible.”
It was also learnt, that prices of building inputs, especially cement, have equally skyrocketed. A random survey of cement prices from dealers, was most revealing. A 50kg bag of the 42.5 grade cement, which sold for about N1,500 just last weekend, is now going for between N2,100 and N2,250 – without prejudice to the brand.
Responses to The Nation inquiry from one of the leading manufacturing outfits, whose official asked that both his identity and that of his organisation be veiled, showed that the prevailing economic circumstances, are responsible.
He said: “Besides the cost of energy, which is enormous, the cost of money and the exchange rate regime, have simply compounded the situation,” adding that he is aware that the cost of newsprint which Customs agent procured for client, has shot up to N185,000 per tonne, representing an increase of over N28,000, the official said.
Against this background, the Manufacturers Association of Nigeria (MAN) has gone into a strategy meeting on how to deal with the situation and mitigate the consequences of the pending economic gloom.
Crude oil is not just Nigeria’s principal export commodity, but every aspect of the country’s life revolves around it, hence the yearly budget is predicated on the price of crude in the international market.
Manufacturers depend largely on imported raw materials and the naira, fast depreciating against the dollar makes it undeniable for prices of goods and services to go up.
Some sectors have reacted to the reality of consequential crippling budget shortfalls. For instance, banks have increased their interest rates to avoid liquid erosion. Players in the Fast Moving Consumer Goods (FCMG) are reviewing their prices. Just last Monday, banks reportedly increased their interest rate from 25 to 26 per cent. Other manufacturing companies have also jerked up their prices.
Mrs. Ngozi Okonjo-Iweala, the Finance Minister and Co-coordinating Minister of the Economy, has warned in the wake of the unsavoury development that Nigeria needed to brace for tougher times ahead, by reviewing its expenditures and building economic buffers through budgets that would be based on modest oil prices.
An economic expert, Joel Bisola, noted with regret that the situation had put manufacturers in a tight corner because the government’s reaction to the falling price of oil will lead to the lowering of the purchasing power of the local currency and increase in cost of inputs.
He also pointed out that the effect would be that goods emanating from Nigeria will command higher prices, as against imported ones. This, Bisola added, “will sound a death knell to the indigenous manufacturers, or whatever is left of that sector”.
It was gathered that following series of complaints by members, MAN summoned an emergency meeting of its Economic Policy Committee (EPC) in Lagos to discuss the way forward. Sources said members lamented the severe impact of the erosion of the local currency’s purchasing power on their businesses and the increase in prices of their raw materials, machinery, spare parts and all other import-dependent procurements.
The meeting, it was learnt, concluded that the development had led to very significant increase in the cost of production, leading to the un-competitiveness of local products, especially in the face of the impending implementation of the ECOWAS Common External Tariff (CET) in January 2015. The CET will allow goods from any other part of West Africa into Nigeria without the imposition of any tax, import duty or levy.
One of the top managers of a manufacturing company who is a member of MAN’s EPC, summed up their frustration, when he said the Naira is going to end up at 200 to a dollar, equivalent of 33 per cent depreciation.