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AfCFTA: rising energy cost, forex crisis threaten local manufacturing

AfCFTA: rising energy cost, forex crisis threaten local manufacturing

Punch | 11th January 2023

By Sami Tunji

The African Continental Free Trade Area is one of the most significant trade agreements since the establishment of the World Trade Organisation. The over 54 countries that are a part of it are home to over 1.3 billion people and generate over $3tn in annual GDP. A continent long associated with poverty may look forward to a new era of economic prosperity, industrialisation, and sustainable development. Thanks to these abundant opportunities inherent in the AfCFTA. According to the UN Economic Commission for Africa, if the agreement is well implemented, intra-African trade could expand by 52 per cent by 2022 compared to 2010 levels, narrowing the gap with the intraregional trade quotas currently characterising Asia (51 per cent), North America (54 per cent), and Europe (67 per cent).

The AfCFTA is seen as pivotal in achieving the goals of poverty alleviation, enhanced company competitiveness, and increased intra-African trade and investment. Small and medium-sized businesses, which make up 80 per cent of Africa’s GDP, stand to gain the most from this deal.

In addition, it would assist in accelerating the industrialisation of the African economy, which would benefit these business owners, young people and others by providing them with more job opportunities.

The AfCFTA drops 90 per cent of tariffs and includes policies aimed at eliminating nontariff barriers such as customs delays. So, the long-term benefits of AfCFTA are likely to be substantial and larger than the potential losses.

However, some countries and sectors would likely be impacted negatively in the short term. Despite widespread excitement over AfCFTA’s potential benefits, some people would certainly be at the losing end. The local costs of conducting business and the capability of infrastructure are two examples of many factors that could contribute to this uneven distributional impact.

On July 7, 2019, Nigeria, Africa’s most populous country and economic powerhouse, became the 34th member of the AfCFTA by signing the agreement. The Federal Executive Council ratified the country’s membership of the AfCFTA on November 11, 2020.

Nigeria stands to benefit greatly from the trade and investment opportunities that would arise as a result of the AfCFTA. In terms of population and human resources, Nigeria has everything it needs to make the most of the deal. The country is home to around 206 million people. Although there have been some apprehensions about increased international competition and the dumping of low-quality goods, Nigeria’s small and medium-sized enterprises are generally positive about the potential presented by the AfCFTA.

About 1,804 small and medium-sized enterprises in Nigeria were surveyed in 2020 by the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture, and six in 10 companies said that they anticipate the AfCFTA would result in lower prices, larger markets, greater customer demand, and increased production capacity. Although only 20 per cent of the surveyed SMEs were aware of the existence of the AfCFTA, more than half of the enterprises surveyed were worried about the competitiveness of local products.

High power costs

Manufacturers and the country, in general, have suffered huge economic losses due to unreliable power supply in Nigeria. In 2021, the World Bank said businesses in Nigeria lose about $29bn annually due to the country’s unreliable electricity supply. It also observed that Nigeria had the largest number of people without access to electricity worldwide, as one in 10 people without access to electricity currently resides in Nigeria. The bank’s positions were contained in a Power Sector Recovery Programme fact sheet.

The PUNCH report showed that rising energy costs disrupt productive activities in Africa’s most populous country as factories self-generate more than 14,000 megawatts of electricity due to poor supply from electricity distribution companies. According to documents compiled by The PUNCH from the Manufacturers Association of Nigeria, member companies spent N639bn on alternative energy sources between 2014 and 2021.

The PUNCH gathered that many manufacturers are no more relying on electricity distribution companies, popularly known as Discos, for electricity supply in their production units or factories. They have switched to gas or Low Pour Fuel Oil to avoid suffering losses arising from a power outage during production activities. Based on The PUNCH’s findings, some companies that have abandoned the Discos include Flour Mills of Nigeria; Dangote Group; Cadbury; Haffar; Kam Industries; Qualitec Industries; among others. It was gathered that some manufacturers only use public electricity supply in offices but utilise alternative power sources in the production lines.

It was also reported that some SMEs spend up to N3,000 per day on diesel. The price of diesel has more than doubled from around N300 a litre to over N600 per litre in one year. The Russian invasion of Ukraine has skyrocketed gas prices, forcing up production costs.

A professor of Ceramics Engineering, who understands energy economics, Patrick Oaikhinan, said Nigeria would hardly become a manufacturing hub or industrialised without a steady power supply.

“In ceramics, we use heat to process solid minerals. Without power, you can’t meet your capacity, and the country cannot achieve industrialisation,” he said.

He noted that several small-scale manufacturers were struggling to cope and shut down due to high energy costs in the country, stressing the need for manufacturers to explore renewable energy.

The Managing Director of Zubnol Global Link Industries, Chukwubuike Nnoli, noted that big machines required steady power and things could go awry if there were power failures. He stressed the need for the country to have a steady power supply in industrial clusters in order to power industries. He explained that the power expenditure of SMEs was becoming very high.

The Chairman of MAN Gas Group, Dr Michael Adebayo, noted that power was a major problem for manufacturers, noting that his own company, Haffar Industries, where he is a director, uses gas, black oil, and diesel to power its production.

“Energy is a major issue in the manufacturing sector. By the time you spend money on gas, black oil, diesel and other energy sources, your production cost will be so high,” he said.

The Chairman, Board of Directors, Manufacturers Power Development Company, Ibrahim Usman, noted that the high cost of power supply puts manufacturers at a disadvantage point.

He said, “In some countries, power takes only about 10 per cent of their production cost. In Nigeria, power, sometimes, takes up to 50 per cent of our production cost. So, how can we be competitive? There is no way our goods can be competitive. The African Continental Free Trade, which is coming up, is a very big challenge for Nigeria. Our goods cannot be competitive when electricity alone can take up to 40 per cent of your production cost. It is a very big challenge.

“If our products are not competitive, we are going to be the losers at the African Continental Free Trade. We will not win because countries like Egypt, South Africa, and Morocco with good stable power are ahead of us.

“When the cost of manufacturing gets high, the prices of goods will get high, and our goods will not be competitive. So, when we go to into African Continental Free Trade, they will beat us. South Africa, Egypt, Morocco, and Tunisia will beat us to it. Even Ghana will finish us. Our goods will not sell competitively in those countries because they will be too expensive.”

Forex scarcity

The foreign exchange crisis combined with high energy costs threatened Nigeria’s manufacturing sector. A dollar exchanges at over N700 at the parallel market and more than N440 at the official window. More than 50 manufacturers have exited the Nigerian market due to the forex crisis, The Punch’s earlier report stated.

Nigerian manufacturers struggle to access the foreign exchange needed to import raw materials, spare parts and machinery. Most of them look up to deposit money banks, where a dollar sells for around N440, but the banks themselves do not have sufficient dollars to meet their needs.

The Chairman of MAN Gas Group, Dr Michael Adebayo, told The PUNCH, “There is no foreign exchange anywhere. If you request $100,000, they will give you only $1000, and this may take you 90 days.

“Banks would break the amount requested into pieces for months for the manufacturers due to lack of forex,” he said.

Consequently, manufacturers have resorted to the parallel market, where a dollar goes for as high as over N700, but this has had a severe impact on their production costs and the country’s inflationary trend.

More than 50 Nigerian manufacturing companies have shut down in the last five years due to forex and power supply issues in the country, according to investigations by The PUNCH. Some manufacturing companies that have exited the industry in the last five years include Surest Foam Limited; Mufex; Framan Industries; MZM Continental; Nipol Industries; Moak Industries; and Stone Industries. Others are Solo Industries; Quick Born Industries; Supercor Industries; Arabi Industries and Rola Industries.

The Chief Executive Officer of Moak Enterprises, a bottled water company that shut down in 2021, Olatunde Akintunde, revealed that the high cost of raw materials made his company fold up, berating the current regime for poor management of the foreign exchange market. “I have not seen this kind of economic management in my life. Things were better before the administration came on board, which was why I started this business in 2014. But it is very difficult to understand what is going on now.”

The Chief Executive Officer of Kenfrancis Farms, Ifeanyi Okeleke, said he also shut down his small-scale agro-processing firm when it was impracticable to continue operations due to the foreign exchange crisis.

 source: Punch