A Review of the Nigerian Energy Industry

Worsening power situation impacts negatively on investments in Nigeria

blackout31 May 2013, Lagos – ECONOMY over the past two years: Economic growth trend, measured by the performance of the Gross Domestic Product, GDP, has been generally positive over the last two years, averaging about 6.5 per cent. This is good compared to growth conditions in most economies around the world.

However, there remains a major concern about the weak impact of the growth performance on private sector and the welfare of the Nigerian people. Virtually all business segments lamented the harsh operating environment in recent years. The power situation deteriorated as we now have a relapse into a chronic power failure. The refineries are still underperforming; unemployment level is still high and cost of fund is still high.

Sectors that posted good growth performances as at December 2012 were telecommunications, 31.8 per cent; Hotel and Restaurants,12.2 per cent; Solid Minerals, 12.5 per cent; Building and Construction, 12.6 per cent; Real Estate 12.4 per cent; and Wholesale and Retail Trade, 9.6 per cent. However, the contributions of most of the sectors to GDP are not significant.

Indigenous participation
Respective contributions are as follows: telecommunications, 7 per cent; Solid Minerals, 0.4 per cent; Hotel and Tourism, 0.6 per cent; Building and Construction, 2.2 per cent; Real Estate, 1.9 per cent. The character of growth explains the limited impact of growth performance on welfare of citizens. Local value addition and indigenous participation in many of the sectors is still very low.

Nigeria, according to the International Monetary Fund (IMF) was ranked number 36 on account of the GDP, estimated at $273 billion in 2012. But it ranked 153 in its Human Development Index by the UNDP; 127 in Global Competitiveness Ranking of the World Economic Forum; and 131 in the Ease of Doing Business Ranking of the World Bank. This underscores the disconnect between economic growth, investment climate and the welfare of citizens in Nigeria. This picture also underlines the challenges we face as a nation – making economic growth inclusive.

Macroeconomic Fundamentals: The Macroeconomic fundamentals of the Nigerian economy over the past two years are good. The components of these fundamentals include the naira exchange rate, inflation and foreign reserves. Exchange rate was generally stable during the period ranging from N155 to N160. For an import dependent economy, exchange rate stability is crucial for the stability of prices and crucial for strategic planning for investors and brings a lot value to the economy generally.

It is remarkable that inflation rate is on downward trend; it was 9 per cent in January and increased slightly to 9.5 per cent in February. This is a positive development for the economy and private sector. Low inflation is good for the perseveration of real incomes in the economy and the welfare of citizens. At 49.7 billion USD in March 2013, the foreign reserve was relatively robust as it could cover 13 months of imports.

The growth in reserves represents 12.7 per cent increase over the status at the end 2012. Robust reserves are important for the economy as it helps to stabilise the exchange rate and inspire the confidence of investors. The improved accretion to reserves could be ascribed to high crude oil prices in the global market. The reserve build up could have been better but for the resurgence of vandalization of pipelines and crude oil theft.

Challenges: It is one thing to have good Macro-Economic fundamentals; it is another matter for the business environment to be conducive for investors.

Credit Situation: The Credit Situation remains a major problem for investors in the economy. Many small and medium scale enterprises still have serious challenge in accessing credit even at this high rate. The tight credit situation is a major inhibiting factor to the capacity of domestic enterprises to take advantage of the robust Nigerian market. This position was corroborated by our Business Confidence Survey for the second quarter of this year. The credit challenge was identified as the factor with the biggest negative impact on business confidence.

Power Situation: The Power situation improved slightly towards the close of last year 2012. However, this situation has since deteriorated. This development impacted negatively on investment during the quarter with increased expenditure on diesel and petrol by enterprises. This also comes with the consequences of declining productivity and competitiveness.

Security Situation: The Security situation in the country deteriorated in the last two years. It impacted on investment risk, worsened our perception and image at the global level. Access to markets in the troubled parts of the country has reduced for many enterprises and this is already affecting sales and profitability.

Also many enterprises have re-located with the inherent challenges. Also related to this is the escalating oil theft and the vandalisation of pipe lines. Billions of dollars have been lost in revenue; many lives have been lost as well. The environment of affected communities had suffered serious degradation as a consequence of this problem. Indeed, the oil and gas sector suffered negative growth on the back of this challenge.

Constraints to real sector
The Nigeria business environment is generally not conducive for manufacturing enterprise which is why the risk of industrial investment is high and continues to increase. The various policy interventions have not had the desired impact on the sector. Unless there is an effective and sustained protection and support for the sector, it is only a matter of time for the sector to become extinct.

This scenario has played out in the tyre manufacturing, the textile industries, the assembly plants, the battery industry, the steel plants and many more. Manufacturing business is perhaps the most challenging in the economy today. The trend has grave implications for the economy. An economy dominated by buying and selling cannot boast of a bright future. Production is critical to economic progress, value addition and job creation.

It is impossible to have a vibrant manufacturing sector in the face of rampant dumping of cheap imports in the country. Some of these imports are landing at 50 per cent of the cost of products produced locally. Besides, manufacturers have to worry about high energy cost because the power improvement is yet to be sustained; they have to worry about high interest rates – 20 per cent and above; they have to worry about a multitude of regulatory agencies making different demands on them; they have to worry about massive smuggling and under invoicing of imports and many more. The multinationals and other conglomerates in the sector may have the resilience to cope. But for most manufacturing SMEs, it is a nightmare.

The stagnation of the manufacturing sector is one of the tragedies of the Nigerian economy. Yet production is critical to an enduring economic and social stability. The way forward is to address the fundamental constraints to manufacturing competitiveness in the Nigerian economy. The manufacturing contribution to GDP is still less than 5 per cent and this had been the trend for over a decade. This of course reflects in the capacity of the sector to retain existing jobs and create new ones.

The reality is that job losses in the sector have been on the increase over the years as productivity declined on the back of the harsh operating environment. However, the multinationals and conglomerates have shown some positive trend in performance and resilience, especially in the foods and beverage sector as well in the cement industry. Even then, they would do much better if the operating environment were better.

If the power sector reform delivers the desired outcome, the fortunes of the sector would definitely improve. The manufacturing intervention fund of N200 billion had a positive impact on the few firms that benefited. It was a restructuring and refinancing facility which gave a significant relief to the firms and enhanced their cash flow. The interest rate was 7 per cent and the tenure was 15 years. But the fund was evidently inadequate and has since been exhausted.

The Bank of Industry also played a remarkable role in funding industries; but the beneficiaries were few compared to the financing gap that exists in the industrial sector. Meanwhile, credit remains a major challenge for manufacturing enterprise. Access to credit is difficult and cost of credit is outrageous. The problem is particularly acute for the small and medium manufacturing enterprises. Policy inconsistency is also a major problem for industries. This is more pronounced in trade policy.

Tariffs are adjusted in ways that are inconsistent with the nation’s aspiration of rapid industrialization. For instance, the collapse of the tyre industries in the country was the outcome of inconsistent trade policy. The patronage of made in Nigeria products is more at the level of rhetoric than concrete actions. Yet an effective patronage policy could make a whole lot of difference in the fortunes of the manufacturing sector.

Being a review of Nigeria’s economy over the past two years by the Lagos Chamber of Commerce and Industry

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