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Indisputably, the place of the manufacturing sector in the development of any nation’s economy cannot be over-emphasized. It is a great catalyst to over-all econmic development and as a matter of fact, a major contributor to per capita income and gross domestic product (GDP) including other developmental indices.
Pathetically, Nigeria, as a case in question, has been different, as the manufacturing sector still accounts for a very low percentage of the GDP. This untoward development is a cause for worry especially against the backdrop of the nation’s quest to becoming a leading world economy by 2020.
Indeed, industry watchers had expected that by now Nigeria should have been among the league of industrialised countries of the world like Brazil, Malaysia, India, Singapore, Indonesia and so on, taking to cognisance the huge potentials of the country’s resources and capabilities.
The sector is riddled with multifarious challenges. Outside infrastructure, the other main challenges are the suffocating high interest rate and banks’ un-willingness to lend to the sector.
Figures from the apex bank showed that relative to December 2011, aggregate domestic credit (net) declined by 2.73 per cent in June 2012 and 5.46 per cent when annualised.
This is why the attention of the manufacturers was focused on the outcome of the recent Monetary Policy Committee (MPC) meeting of the Central Bank of Nigeria (CBN).
Outcome of MPC meeting
At the last meeting, the MPC retained the MPR at 12.00 per cent with symmetric corridor of +/-200 basis points. It also increased the Cash Reserve Requirement (CRR) from 8.0 per cent to 12.0 per cent with effect from July 25. The CBN has kept rates on hold since November, after six successive hikes last year, including a 275 basis point rise in October to 12 per cent.
MPR is the interest rate at which the commercial banks borrow from the CBN. The MPR sets the benchmark for the interest rate in the money market.
According to the apex bank, retail lending rates remained high in June 2012 as the average maximum lending rate remained unchanged at 23.44 per cent during the period.
In view of these developments, the Committee reiterated its earlier call to put in place an appropriate mechanism for reducing the interest rate spread, while stabilising interbank rates to sustain liquidity and facilitate intermediation in the banking system.
In taking this decision, the MPC said it was confronted with basically three choices: first, lower the MPR in the face of sustained slowing domestic output growth and concerns about global growth prospects.
The MPC viewed that lowering the rates in the face of sustained slower growth of output and global growth prospects could further weaken the exchange rate and adversely affect reserves at a time when the country needs to build up buffers against external shocks. It also reiterated its view that the growth challenge was a result of poor record of implementation of structural reforms and the capital budget.
It was, however, conscious of the impact of higher interest rates on small businesses and the potential for higher non-performing loans on the books of banks, adding that it was important to leave room and flexibility for further tightening should conditions so warrant in the near future.
Against the foregoing, therefore, the MPC stated the need to choose a policy trajectory that would have the least negative impact on the wider economy.
CBN, banks and manufacturing Sector
Ironically, CBN which is the apex regulatory body of the banks, has been at the forefront of those calling on banks to lend to the manufacturing sector. The banking watchdog has been vociferous on the need for banks to align with its effort to stimulate activities in the sector.
At a public forum recently, the CBN governor, Lamido Sanusi, lamented that the apex bank was handicapped as it could not force banks to lend.
He said that rather than lend to the real economy, the banks had continued to take advantage of high yields on government securities to direct credit away from the core private sector, stating that the liquidity of banks had provided an opportunity for speculative activity in the foreign exchange market.
He explained that MPC in taking the decision was conscious of the impact of higher interest rates on small businesses and the potential for higher non-performing loans on the books of banks.
Sanusi maintained that the Committee’s decision was based on the need to choose a policy option that would have the least negative impact on the wider economy, and one whose longer-term benefits to the economy far outweighed the short-term costs.
Sanusi’s call was reinforced by the Coordinating Minister of the Economy and Minister of Finance, Dr (Mrs) Ngozi Okonjo-Iweala, at a recent parley with the organised private sector (OPS) in Lagos. She called on banks to open their doors to manufacturers to access credit, stating that was the only way to achieve the much-desired growth in the economy.
However, the banks insist they are doing all it takes to support the sector. Recently, the Group Managing Director, Access Bank, Aigboje Aig-Imoukhuede said they would continue to support the sector.
Analysts posited that though the MPC took good decisions, the implication was that the CBN was encouraging people to save which also means that the cost of credit from banks is expected to go up as their lending rates are moderated by the CBN.
According to analysts, the stance of the banking watchdog was to strengthen the naira, which has been hit by fall in oil price.
With the new development, questions have come up based on the fact that how will the manufacturing sector fare in the face of the daunting challenges of trying to raise money in the light of the prevailing lending rates.
Coupled with inconsistencies in government’s economic plans and policies, has made planning by the manufacturing industry difficult which has not encouraged good investment in Nigeria.
According to the Director-General of the Lagos Chamber of Commerce and Industry, (LCCI), Mr Muda Yusuf, the high level of interest rate of between 16-25 per cent in the country, is a constraint to credit delivery to the economy.
The DG cited tight monetary policy which has affected liquidity and delivery of credit; Cash Reserve Ratio (CRR) of eight per cent; Liquidity Ratio (LR) of 30 per cent and Monetary Policy Rate (MPR) of 12 per cent as major constraints to liquidity and consequently delivery of affordable credit to the economy.
“Many businesses suffered the increasing difficulty of access to credit and high cost of fund. Rates are between 16-25 per cent. This gives clear advantage to offshore investors; many banks demand high collateral cover, which is sometimes up to 150 per cent; credit conditions by banks are too strict for many SMEs; high cost of government borrowing, as reflected in the yield on treasury bills and Federal Government bonds, worsened the credit crisis through the crowding out effects on the private sector and erosion of liquidity in the banks.
“The high operating cost in banking operation in the country is affecting profit margins the state of the economy and infrastructure condition has adverse affect on the quality of loan assets just as CBN’s prescribed provisioning level for loans have become too high and is affecting lending by banks,” he said.