MADE IN AFRICA: Driving Sustainable Economic Growth

By Godspower Ike

 

Africa’s economic growth in 2016 was recently revised downwards to 2.4 per cent, from 2.9 per cent earlier projected. The reason for the downward revision was partly because of the global economic headwinds which is taking a huge toll on the economy of the continent. This article seeks to explore the many initiatives introduced by African countries to weather the challenges posed by the global downturn and how key countries in the continent is using manufacturing, among others, to drive sustainability, economic growth and development.

The global economic headwinds are having a negative impact on countries, hampering international commerce and engendering a slowdown in the global economy.

The headwinds was occasioned by a number of factors, ranging from the slowdown in the economies of China and Japan, volatility in the prices of crude oil, Britain’s unexpected exit from the European Union, EU, the unending crisis in Syria, Libya, South Sudan and some countries in the Middle East, as well as the activities of the Islamic State and other terrorist groups in some parts of the world.

Specifically, the World Bank had revised its 2016 economic growth forecast down to 2.4 per cent from the 2.9 per cent pace earlier projected in January.

The bank, in the forecast presented in its June 2016 report, titled, ‘Global Economic Prospects: Divergences and Risks’, disclosed that the revision was a consequence of the sluggish growth in advanced economies, stubbornly low commodity prices, weak global trade, and diminishing capital flows.

In the report, commodity-exporting emerging market and developing economies have struggled to adapt to lower prices for oil and other key commodities, noting that growth in these economies is projected to advance at a paltry 0.4 per cent pace this year, whereas growth in commodity import has been more resilient.

The World Bank report described its projections as subject to substantial downside risks, including additional growth disappointments in advanced economies or key emerging markets as well as rising policy and geopolitical uncertainties.

Commenting on the development, World Bank Group President, Jim Yong Kim, said, “In an environment of weak growth and eroding policy buffers, structural reforms have become even more urgent. Depressed commodity prices have slowed growth sharply in commodity-exporting emerging and developing economies, which are home to more than half of the global poor,” adding that “economic growth remains the most important driver of poverty reduction. This underscores the critical priority of pursuing growth-enhancing policies to eliminate extreme poverty and boost shared prosperity.”

Like the World Bank, the International Monetary Fund (IMF) had in July 2016, cut its global growth outlook for the next two years due to the uncertainty caused by Brexit.

Consequently, IMF now expects the world economy to grow by 3.1 per cent in 2016 and 3.4 per cent in 2017 – 0.1 percent down compared to the figures posted in April this year.

As a result of these gloomy forecasts, countries are beginning to look inwards in order to survive the expected downturn being expected globally in the days ahead.

African countries, as well as other emerging countries in the world, which had over the years, relied on developed economies for survival, are beginning to take steps to develop their local economies, putting in place to support businesses and encouraging wealth creation. A major sector that has been tipped to drive development in Africa is the manufacturing sector.

The Nigerian Angle

In Nigeria, the manufacturing sector has had to battle with a tough and unfavourable operating environment, brought about mainly by the policies of the Central Bank of Nigeria, CBN, and the lack of policy direction of the Nigerian Government.

Other factors hindering the manufacturing space in Nigeria include the scarcity of foreign exchange and the declining value of the naira against major international currencies, especially the dollar.

However, the manufacturing in the petroleum sector, which had been tipped to play a major role in the development of the African economy, is of great concern to all and sundry.

The oil and gas manufacturing sector has not been left out of the prevailing challenges in the economy, as over the last couple of months, there had been a lull in the sector. The volatility in the price of oil had forced many oil majors to suspend most of their large-scale projects, while local manufacturers of equipment utilized by these oil majors have been somewhat idle.

Some of the major manufacturing concerns in the oil and gas sector in Nigeria are concentrated in lubricants manufacturing, umbilical manufacturing and assembly, oil and gas piping fabrication, electrical wirings and manufacturing,

Others are Engineering, Procurement and Construction (EPC), onshore and offshore fabrication, ship building and repair; fabrication and installation of walk way bridges, wellhead jackets, decks, topsides and modules; construction, steel fabrication and erection of new mobile offshore drilling unit and shipbuilding.

The major factor constraining manufacturers is the difficulty in accessing foreign exchange- a challenge currently threatening their survival.

Manufacturers in the country had in recent past lamented the harsh policies of the Federal Government and the CBN which they claimed make their businesses difficult to thrive.

The Manufacturers Association of Nigeria, MAN disclosed recently that about 272 manufactures are either battling to stay afloat or have closed shop over the last couple of months, while thousands of jobs are being cut daily.

Specifically, Mr. Vincent Nwani, Director, Research and Advocacy, Lagos Chamber of Commerce and Industry, LCCI, called for an urgent review of the CBN’s policy on the restriction of access to foreign exchange placed on 41 items.

According to him, CBN has no option but to revisit and review the list, as about16 of the total items on the list, serve as critical raw materials for intermediate goods produced in Nigeria, especially as the country lacks the capacity to produce these items in sufficient quantity.

Specifically, Nwani said the policy had led to the loss of about 100,000 jobs over the last couple of months, with major blue chip companies in Nigeria relocating to neighbouring countries; while the ban on glass and glassware culminated in the loss of 80,000 jobs especially in the pharmaceutical industry.

He said, “Some of the items placed on the restriction list by the CBN should be restated until the country develops the capacity to produce them locally. Some of the items need a period of between three to seven years for the country to develop self-sufficiency in their production.

Speaking in the same vein, Executive Secretary of NASME, Mr. Eke Ubiji, stated that recently, about 222 of its members have either collapsed or are ailing, while he blaming lack of access to credit, foreign exchange challenges, high interest rate, multiple taxation and poor infrastructure, among others, for their woes.

Also speaking, Mr. Ambrose Oruche, Director, Economics and Statistics of MAN, said the unavailability of productive inputs is the major challenge confronting manufacturers, stating that this was as a result of the restriction placed by the CBN on certain items. In his words, the current operating environment in the country is harsh for many manufacturers to continue to operate, adding that some economic policies churned out by the Federal Government and the CBN are conflicting and are retarding the growth of the manufacturing sector.

He argued that the manufacturers were not consulted by the CBN and other regulators before the restrictions were placed on the items, noting that many of the products under foreign exchange restrictions are raw materials needed by manufacturers.

He said, “Presently, about 50 manufacturers have closed shop, while some have downsized. Some manufacturers are still producing due to their love for this country. Government policy on cement should have been adopted in this case. In the case of cement, Nigeria used to be a net importer of cement, but the government set up a policy over a five-year period, which made it possible that today, we are a net exporter of the commodity.”

Oruche further faulted the decision of the CBN to increase the Monetary Policy Rate, MPR, to 14 per cent, stating that it has made it difficult for manufacturers to access funds to finance their operations.

According to him, the fact that the economy is technically in recession ought to have drive CBN’s effort towards expanding the economy rather than contracting it.

He  listed high interest rates, poor patronage of local manufactured products, poor supporting infrastructure, such as poor power supply, policy somersault and policy inconsistency, among others, as the challenges confronting manufacturers.

In an apparent response to the lamentations of the manufacturers, the CBN had a couple of weeks ago, directed authorised dealers, mainly banks, to allocate 60 per cent of their total foreign exchange purchases from all sources, interbank inclusive, to manufacturers and 40 per cent to other users for the purpose of trade and other obligations.

This became necessary, as according to the apex bank, following the review of the returns on the disbursement of foreign exchange to end users, it was observed that only a negligible proportion of foreign exchange sales were being channeled towards the importation of raw materials for the manufacturing sector.

“Against this background and in order to address the observed imbalance, the authorised dealers are hereby directed to henceforth dedicate at least 60 per cent of their total foreign exchange purchases from all sources (interbank inclusive) to end users strictly for the purposes of importation of raw materials, plant and machinery. The balance of 40 per cent should be used to meet trade obligations, visible and invisible transactions,” the CBN said.

In its response to the CBN’s directive, MAN, said it sees the 60 per cent foreign exchange concession to its members as a welcome development capable of aiding efforts of government at reviving the industrial sector.

MAN President, Frank Jacobs, said the association commends the governor and management of the apex bank for the long awaited reprieve, adding that it would enable the sector to determine the exchange rate and stop the volatility. His words: “If we bid foreign exchange at N1 to a dollar, for example, the bank would have no choice than to sell. Our members should not over bid but rather see this as opportunity to grow the industry and the economy.”

Lamenting that about 56 of the members of the association had been forced to close down within the last one year as a result of the foreign exchange crisis; Jacobs noted that the concession was the first time the present government was responding positively to the yearnings of the sector.

He stated that MAN had been in the forefront of advocating a special consideration and allocation of foreign exchange to the manufacturing sector of the economy. “This is in view of its contribution to the development of the economy; job creation, and most importantly, the much needed diversification of the economy, which is one of the priorities of the present administration,” he said.

Jacobs added that MAN, among other demands, including revisiting the 41 raw materials items banned from the foreign exchange list, had urged the CBN to implore commercial banks to give priority attention to foreign exchange requirement of manufacturers for importation of raw materials, machines and spares.

He noted that to revive those companies that are moribund, government needs to reconsider its position on the 41 items ‎as well as subsidise interest rate to the manufacturers to as low as 5 per cent.

“Bearing in mind the contribution of the sector through job creation, ‎government should create a special interest rate regime for manufacturers at a single digit rate of not more than 5 per cent if we truly want to diversify the economy,” he said.

He equally charged the government to look into the issue of power and recapitalise the Bank of Industry (BoI)‎ to enable it provide funds for the real sector, noting that all the intervention funds ought to have been channeled to BoI for the development of the industry.

However, to further boost the fortunes of the sector through an effective research and development programme, the Federal Government, through a collaboration with the Nigerian Content Development and Monitoring Board (NCDMB), the Nigerian National Petroleum Corporation (NNPC), the Imperial College of London and four leading universities in Nigeria, are putting in place a framework for developing world class research for the Nigerian Oil and Gas Industry.

This is borne out of the crucial role research and development play in the manufacturing sector, especially in relation to innovation, growth and survival. It would also create linkages and synergy between research centres, educational institutions and the manufacturing sector.

The collaboration which spearheaded by  NCDMB seeks to establish a Centre of Excellence (CoE) for oil and gas research at the Federal Universities of Technology Minna, Niger State,  Akure, Ondo State,  Owerri, Imo State and the Niger Delta University Yenagoa, Bayelsa State.

The aim, according to the NCDMB, is to solve oil and gas industry challenges in Nigerian universities and local research centers thereby growing local research capacities and retaining huge sums which stakeholders normally spend on research overseas.

He listed other objectives to include developing a pool of capable researchers and world class research centers, linking the oil and gas industry to academia and local supply chain through research programs and creating employment and training opportunities for Nigerians on the back of research projects domiciled in-country.

With this, the Federal Government of Nigeria has shown commitment to growing the manufacturing sector and is also a realization that the sector is crucial to the development of the economy, capable of cushioning the country from the effect of the global economic squeeze.

The same is the case for other African countries, which have stepped up efforts and mapped out strategies and policies to help reactivate their various manufacturing sectors.

Manufacturing Saves South African Economy

In South Africa, industrial production measures the output of businesses integrated in the manufacturing sector of the economy. For instance, stronger performance in the manufacturing industry has helped in keeping South Africa’s economy out of a recession, and has led to a slight upward revision in annual growth forecasts, according to a report by the Oxford Business Group in September 2016.

Production in South Africa’s manufacturing industry was up 4.7% year-on-year (y-o-y) in June – marking the third consecutive month that annualised production figures increased, according to data released by Statistics South Africa (Stats SA).

The sector’s results were well above the 3.1% y-o-y market expectation for June, predicted by a Nedbank survey of economists, hand marked the highest level of growth recorded since July of last year.

Moreover, increased production in June was not driven by significant progress in one or two key segments, but by broad gains across most of the manufacturing sector, with eight of the 10 divisions covered in the survey reporting positive growth.

The OBG report clearly listed these expansion indices as being underpinned by, among others, higher output in petroleum, chemical products, rubber and plastic products (15.4%); wood and wood products, paper, publishing and printing (4.4%); and food and beverages (2%), corroborating these figures is the preliminary Stats SA data.

With manufacturing and mining together accounting for 20% of the country’s GDP, the spring and summer performance thus far – with June’s results coming on the back of improved results in the preceding two months – pushed the economy into positive territory, at 3.3% quarter-on-quarter (q-o-q) in the second quarter, offsetting the 1.2% q-o-q negative growth seen in the first quarter of the year.

The positive results led to an upward adjustment in growth forecasts. In September Lesetia Kganvago, governor of the South African Reserve Bank, announced that the bank had revised its growth predictions from zero to 0.4% for the year due to a “higher starting point”, with predictions of 1.2% and 1.6% for 2017 and 2018, respectively.

‘Manufacturing in sub-Saharan Africa tends to be overlooked, but African manufacturing is doing better than people think, says Dr Dirk Willem te Velde, Senior Research Fellow and Director of the Supporting Economic Transformation programme at ODI; ‘Production, employment, trade and foreign direct investment (FDI) in the region’s manufacturing sector have actually increased in real terms over the past decade – and faster than the global average – thanks to strong growth in parts of Africa, domestic policy and institutional improvements, and rising wages in China’.

The Research Fellow who spoke at the African Transformation Forum, which was held in Kigali Rwanda on 14 -15 March  2016, posited that sub-Saharan African manufacturing exports (including re-exports) overall, doubled between 2005 and 2014 to more than $100 billon. Asian countries have become more important destinations. African countries are also increasingly exporting manufactures to each other, from 20% of total manufacturing trade in 2005 to 34% in 2014’s.

‘And while the global economic slowdown led to a 30% decline in the value of non-manufacturing African exports to the EU, US, Japan and China in 2015, manufacturing exports – especially to China – held up much more positively. This is important: manufacturing offers African countries a chance to increase resilience to economic shocks’, says Dr Velde.

The evidence shows that African manufacturing is growing in real terms. Considering the data available, between 2005 and 2014, manufacturing production more than doubled from $73 billion to $157 billion, growing 3.5% annually in real terms. Some countries show particularly strong annual growth: Uganda’s manufacturing grew by 5% over 2010-2014; Zambia’s by 6% over 2008-2012; and Tanzania’s by more than 7% in the last decade.

Foreign Direct investment in African manufacturing is increasing from a low base, having risen in many countries between 2003-2006 and 2010-2014. And direct investment from one African country to another is now a significant source of FDI, ranging from 4% in Ghana, 25% in Mozambique and Tanzania, to more than 40% in Rwanda.

What can African countries do?

Ethiopia, Kenya, Nigeria, Rwanda and Tanzania are already relatively well positioned to attract manufacturing FDI. The ODI new Manufacturing FDI Potential Index highlights Ethiopia’s competitive labour costs, Rwanda’s investment climate, Tanzania’s transit location, relative production complexity in Kenya and Zambia, and the size of market in Nigeria as factors conducive for manufacturing investors. Well performing special economic zones in Ethiopia and Rwanda show that governments can succeed in attracting manufacturing FDI if they really set their minds to it.

So what are the essential elements of a coherent industrial strategy? Dr. Velde highlights the following: Continued improvements in the basics, including sound macroeconomic management, stronger general investment climate, support for the private sector, and development of public infrastructure and relevant skills; An export push, including regional trade and integration; Agglomeration through building and running efficient special economic zones and industrial parks; Active foreign direct investment promotion and building linkages with local firms; Supporting local small and medium enterprises to enhance productivity and access technology and long-term finance to help them venture into new or more sophisticated products; Improved coherence and implementation coordination within government; Strengthened consultation and collaboration between government and the private sector.

African governments also need to take an adaptive approach. Many used to set ambitious yet inflexible targets for large scale industrialisation. But as Rwandan president Paul Kagame said at the African Transformation Forum:  ‘Plans and frameworks should not become a barrier to action or course correction. Mistakes will be made along the way and money wasted. We have to stay adaptable and flexible.’

The United Nations expects that Africa’s population will double to 2.5 billion people by 2050. The middle class is rising, indicating an increase in consumption. Moreover, the population growth indicates a dramatic need for employment.

Africa has no alternative to developing a strong value-added manufacturing base. The continent, however, has a way to go: in 2014, 30 per cent of China’s GDP came from manufacturing, according to the World Bank. By comparison, Nigeria’s share stood at just 9 per cent, Kenya 12 per cent, Zambia 8 per cent.

According to Johan Aurik, managing partner and chairman of the board of the global management consulting firm A.T. Kearney,”Africa has ample opportunities to grow its manufacturing base in a broad range of industries. Local beneficiation of resources in for example oil and gas is one example. Moreover, the growth of the population will spur growth in direct consumer industries such as food/agriculture and beverage, home and personal care, apparel, and even automotive. Other likely target sectors include secondary industries such as building and infrastructure due to further urbanization and the need for infrastructure investments”, he said.

Africa has a massive opportunity. Multilateral collaboration across the continent and public-private partnerships locally will lead the continent on a path to success.

Above all it is important that African governments, business, labour unions, and communities work together to develop economic clusters. Companies that start on their own will have a difficult battle and need to have deep pockets to make all of the above happen. Organizing all stakeholders in the economy to develop industry clusters, which provide for local demand and can compete in international markets, will create the sustainable success the continent in longing for.

It is expected that these renewed tilt towards revamping the continent’s manufacturing sector would help push the continent towards industrialization and rapid economic growth and development.