MAN CEO’s CONFIDENCE INDEX Q1 2023 (MCCI)

1.0 SPECIAL FOCUS: MAN at the Receiving End of National Debt Crisis
In the absence of commensurate infrastructural development and significant success in poverty-reduction and industrialization programmes, Nigeria’s bloated debt profile has become a source of worry. As of December 2022, the country’s total debt had escalated to N46.25 trillion, marking about 17 percent surge from the record of December 2021. The debt composition revealed that while domestic debt stock accounted for 59.6% of the total debt, external debt stock contributed 40.4%. Unfortunately, the country’s debt profile has ballooned to over N77 trillion following the approval of the securitization of the Ways and Means advances. A whooping debt service-to-revenue ratio of over 100 percent may spell doom for the new administration leaving it to continue the borrowing spree or incapacitated to provide critical infrastructure needed to boost the manufacturing sector and kick start the recovery of the economy.

The domino effects of escalating public debt on the manufacturing sector are endless. To start with, rising domestic debt is highly crowding out private investment in the manufacturing sector by reducing credit availability and forcing hike in lending rates. External debts are mostly serviced in foreign currencies, hence high demand for foreign currencies further depreciates the naira and makes importation of non-locally produced critical inputs highly expensive for manufacturers.

Moreover, higher debt servicing is consuming greater volume of forex and worsening the forex scarcity that has plagued the manufacturing sector for many years. Higher debt repayment requires increased revenue. The Nigerian government has continued to breed a harsh business environment by its indiscriminate imposition of high and multiple taxes on manufacturers all in a bid to generate revenue. A major point of reference is the recent exponential hike of the excise duties on beverage and tobacco goods.

Huge public debt led to low foreign investment and foreign capital inflow which worsen the forex scarcity that has remained a bone in the throat of manufactures. As public debt continues to grow unsustainably, it becomes increasingly difficult to cover salary payments and other recurrent expenditure in the civil service. The implication is more borrowing for government consumption or recurrent expenditure and less on infrastructure and other capital projects meant to boost manufacturing sector performance.

Contrary to the popular parlance in the government quarters that Nigeria has revenue problem, the country’s debt crisis is not a result of inadequate revenue and it is anti-growth to view manufacturing taxes as the last resort for curbing the debt problem. The manufacturing sector which has always been at the receiving end has not felt any significant impact of the debt finance on the numerous challenges that have bedeviled its performance in many years. Infrastructure decadence, forex scarcity, credit crunch and naira depreciation have become bones in the throats of MAN members despite the humongous increase of over 410% in the country’s debt profile in the last eight years.

Amidst multiple taxes, Nigeria’s real problem is not revenue generation or collection but the siphonage of collected revenue so that they do not reflect in the records. Contrary to popular believe, exorbitant taxes are also collected in the informal sector of the economy without adequate remittance into state coffers. MAN is of the view that debt worth of N77 trillion is an enormous burden to inherit and will most likely limit the achievements of the new administration unless the following recommendations are implemented:

, Increase the revenue base by widening the tax net through an enhanced data capture of business operators in the informal sector.

. Strictly implement the Voluntary Assets and Income Declaration Scheme (VAIDS) through the Federal Inland Revenue Service (FIRS).

. Further identify and amend the loopholes in the tax laws in order to reduce the leakage of tax revenues.

. Promote fiscal discipline by reducing the cost of governance and strictly complying with section 41 of the Fiscal Responsibility Act and section 38 (sub-section 2) of the CBN Act.

. Ensure the rehabilitation of local refineries and remove the humongous annual subsidy in phases while ensuring they are backed with appropriate palliatives for households and businesses.

. Ensure proactive judicial investigation into allegations of oil theft and stamp duty fraud.

. Embark on mechanisms that promote coordination and confidence among creditors in order to be granted opportunity for debt restructuring.

. Prioritize debt management and transparency to control risks and reduce the need for restructuring, which stands to benefit both debtors and creditors.

. Ensure proper management of capital and recurrent expenditure by determining the appropriate spending priorities that reflect the yearnings and aspirations of households and businesses within the limits of available resources.

. Establish incorruptible monitoring teams tasked to ensure effective budget implementation and detailed evaluation of budget performance.

. Set up a special court and reinvigorate the anti-graft agencies like the Economic and Financial crime Commission (EFCC), and the Independent Corrupt Practices Commission (ICPC) in order to strengthen the fight against corruption.

. Promote transparency and productivity in government expenditure by ensuring public funds are expended on feasible development projects in order to minimize wastage.

. Optimize the capability of the states to generate internal revenue given the abundant natural and human resources.

. Diversify the country’s revenue base by boosting critical sectors like manufacturing, agriculture, entertainment, tourism and ICT.

. Prioritize and incentivize critical sectors with low interest rate and improved infrastructure to enhance investment and productivity.

. Expend recovered loots on debt servicing and sustain the economy with internally generated revenue.

. Ensure highly effective exchange rate management to avoid exchange rate crisis that could threaten the sustainability of debt.

. Ensure the funds borrowed are highly purposeful, properly documented and studied along with the specific maturity date, negotiations and clauses, among others.

2.0 METHODOLOGICAL BACKGROUND
The Manufacturers Confidence Index (MCCI) is an index constructed by the Manufacturers Association of Nigeria (MAN) to measure changes in quarterly pulsation of manufacturing activities in relation to movement in the macroeconomy and Government policies. The Index is therefore barometer used by MAN to aggregate the views of CEOs of manufacturing companies on changes in the economy. The standard diffusion factors considered in the MCCI processes include the Current Business Condition, Business Condition for the next three months, Current Employment Condition (Rate of Employment), Employment Condition for the next three months and Production Level for the next three months.

MCCI also measures changes in key macroeconomic indicators including sector specific factors that represent Government activities and policy measures in the economy. Consequently, the effects of movements in Foreign Exchange, Lending Rate, Credit to the manufacturing sector and Capital Expenditure of the Government were also measured. In addition, it gauges the outcome of changes in business operating environment factors which include Over-regulation, Multiple taxes/levies, Access to seaports, Local raw-material sourcing, Government’s patronage of Nigerian manufactured goods and Inventory of unsold manufactured products.

The survey instrument used in the fieldwork of for MCCI is a structured questionnaire administered on the Chief Executive Officers (CEOs) of MAN member-companies across the six geo-political zones and Sectoral Groups of the Association through MAN’s branch networks. Since the first edition, MCCI has consistently provided experiential bases that are critical to strengthening the evidence advocacy dogma of the Association.

MCCI survey covered 400 Chief Executive Officers of MAN member-companies. They provided data on the afore-mentioned Diffusion factors, macroeconomic indicators and business operating environment variables which were analyzed descriptively using tables, simple percentage and charts. In addition, data provided by the CEOs on the Diffusion Factors were used to compute the Index (MCCI) which it the weighted average of percentage response (1=Positive, 0.5=Neutral and 0=Negative) of responses to the Diffusion Factors.
MCCI has a baseline index of 50 points which suggests a stationary point in the economy. Therefore, any index point above 50 points indicates that manufacturers have confidence in the economy and improvement in manufacturing performance, while any index point below 50 points indicates otherwise. By the design of the Diffusion Index, the more index points tend to 100 points the higher the level of confidence in the economy and improvement in manufacturing activity.

Source: MAN Survey 2023
The figure reveals that:
Production and Distribution costs escalated by 24% in the quarter under review much higher than the 19% increase witnessed in the preceding quarter;
Capacity utilization nosedived further by 5% in the quarter under review similar to the contraction witnessed in the preceding quarter;

Volume of production contracted by 13% in the quarter under review against the 1% growth recorded in the previous quarter;
Manufacturing investment dropped by 3% in the first quarter of 2023 from 2% increase recorded in preceding quarter;
Manufacturing employment reduced further by 3% in the first quarter of 2023 from 2% contraction recorded in preceding quarter;

Sales volume plummeted by 13% in the first quarter of 2023 against the stable record witnessed in the preceding quarter;
Cost of shipment rose by 20% in the first quarter of 2023 though witnessed a slowdown from the 22% increase recorded in the fourth quarter of 2022.
Source: MAN Survey 2023 Note: (-) =decrease otherwise increase

A critical evaluation of the analysis above provides an inference that the performance in the first quarter of 2023 was much lower than what was obtained in the last quarter of 2022. Major performance indicators of the manufacturing sector all recorded unfavorable changes. Amidst the harsh business-operating environment evidenced by poor macroeconomic indices, the underperformance was largely driven by the nationwide cash crunch in the first quarter of the year. The economic turmoil significantly crushed consumer patronage and costly disrupted the manufacturing value chain in most periods of the quarter.

5.0 MANUFACTURERS’ RECOMMENDATIONS
The Index Score (IS) of first quarter of 2023 nosedived to 54.1 points which is 0.9 points less than 55.0 points recorded in the last quarter of 2022. Although the quarter recorded marginal contraction in IS, the performance indicates that manufacturers maintained their confidence in the economy since the index remains above the 50-point benchmark. They remain resilient despite the far-reaching implications of high inflation, multiplicity of taxes, erratic power supply, high cost of energy, as well as worsened credit and forex shortages which continue to deter the sector’s prospect of catalyzing the country to its desired stage of industrial development.

Nonetheless, marginal contraction in IS portends that the untoward hardship meted on the manufacturers is growing overwhelming and diminishing the resilience of the sector. Therefore, tackling the challenges of the manufacturing sector must be at the front burner of the new administration. The President-elect must exhibit his articulate reasoning and compassion to act differently by hitting the ground running with a value system that can rescue manufacturers from these inflictions. To allay the manufacturing sector of the aforementioned hiccups, the following recommendations are imperative:

(1) Improving Forex availability
➢ Prioritize forex intervention through the official market, particularly to support the raw materials and machine needs of the industries;
➢ Improve forex allocation to industrial sector and enhance the capacity of designated banks to efficiently process application of forex by manufacturers;
➢ Grant concessional forex allocation at the official forex market to industries for importation of productive inputs that are not locally available;
➢ Unify the various forex windows in the country;
(2) Improving electricity supply to the industry
➢ Commit to upscaling electricity generation by at least 10,000MW; Egypt built 10000MW in 2 years.
➢ Encourage further investment in electricity value chain, Generation, Transmission and Distribution
➢ Sustain the Eligible Customer initiative to improve electricity supplied to the manufacturing sector;
➢ Embrace and support significant development of energy mix and renewables: the country has huge potentials for Solar and Wind energy sources;
➢ Resuscitate the existing national refineries to produce fuels locally;
➢ Allow gas to be supplied to domestic users including manufacturers at international export price plus $1; that $3.2+$1 rather than the current $8.76 per cubic metre.
➢ On the medium to long run, urgently commission the Chiyoda Groups Japan that built the national refineries originally to carry out a Turnaround Maintenance of the four refineries
(3) Improving electricity supply to the industries
➢ Increase the quantum of energy generation in the economy and encourage energy mix and energy efficiency within the private sector;
➢ Rehabilitate the four national refineries to resume domestic refining of crude oil into various fuels: PMS, DPK, AGO, and so on;
➢ Sell gas to the local industries at the export price of $3.25 per cubic metre;
(4) Reducing the number of taxes payable by industries
➢ Publish the list of approved harmonized taxes and levies for the manufacturing sector by the Joint Tax Board (JTB)
➢ Commence implementation of the harmonized taxes and levies project which should be monitored and enforced strictly by the Joint Tax Board (JTB);
➢ Jettison the proposed increase in Excise Duties.
➢ Develop a comprehensive and integrated framework that will facilitate the intentional movement of operators in the informal sector to the formal sector.
➢ Widen the tax net rather than increasing the tax base or the tax burden of existing tax payers.
(5) Improving the availability of local raw materials
➢ Re-invigorate the backward integration policy through the use of local resources to provide raw materials to the industries;
➢ Provide a structure inventive for potential investment in local development of raw materials;
(6) Improving access to credit by industries
➢ Set up a monitoring and evaluation platform with private sector representatives to oversee the disbursement of the various development funds meant for the industries;
➢ Provide a Credit guarantee for industrial loans from commercial banks;
➢ Create development funding windows for SMEs with liberal conditionality.
(7) Stabilizing the macroeconomy
➢ Through fiscal and monetary policy authorities’ joint effort, formulate and implement a national policy that would address the current high inflation in the country;

6.0 CONCLUSION
Manufacturing activities in the first quarter of 2023 was adversely affected by escalation in the Consumer Price Index (CPI), continuous erosion in Naira value and difficulty in accessing forex, high cost of energy, naira crunch, exorbitant taxes, high lending rates, persisting insecurity and the consequences of lingering Russian-Ukrainian war. Manufacturers are extremely groaning in pains due to these issues that are frustrating their contribution to the economy.

The Aggregate Index Score (AIS) of MCCI declined to 54.1 points in the first quarter of 2023 from 55.0 points obtained in fourth quarter of 2022. The index score of the current quarter though below that of the previous quarter, indicates that manufacturers generally show resilience and have confidence in the economy.

However, across sectoral groups however, operators in Electrical & Electronics and Motor Vehicle & Miscellaneous Assembly with respective index scores of 49.7 and 48.6 exhibited gross loss of confidence as they fell below the 50-point benchmark. These sectoral groups were adversely affected by erratic electricity supply and instability of macroeconomic indicators have significantly worsened sales performance in these sectoral groups.

Similarly, among industrial zones, activities in Kaduna (49.5 points), Abuja (48.6 points), Rivers/Bayelsa (46.2 points) and Cross-Rivers/Akwa-Ibom (43.9 points) were depressed by the high-cost of operating environment in the first quarter of 2023 as underlined by their index scores which fell below the benchmark points.

Sequel to above trends, it is highly expedient that the Government strive to ensure the harmonization of fiscal and monetary policies that will pave way for a stable macroeconomic environment needed to promote productivity in the manufacturing sector and improve the ease of doing business especially at a time when the Dangote Refinery stands to benefit the economy via improved forex management and availability of energy.