Oil prices rise but economy still down, mass retrenchment looms

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At over $84 per barrel, Nigeria is earning a lot of income from crude oil at levels well above budgetary projections. In effect, more money should be in the economy and manifestly reflect in higher consumer spending. But all this seems academic for the country even at this festive period of Easter. The warehouses of manufacturing companies are bursting to the seams with inventory of unsold goods.

The paradox has spurred questions about the management of the economy and income distribution while mass retrenchment caused by even lower capacity utilisation now seems inevitable as manufacturers struggle to adjust to these tough times.  Low purchasing power of Nigerians, failed infrastructure, especially power, prolonged credit squeeze and the near paralysis in governance in the aftermath of President Umaru Yar'Adua's ailment have been identified as factors that depressed consumer demand.

In the first quarter of this year, the average price of crude oil stood at $79 a barrel with the nation's daily production level hitting over 2.2 million barrels while the budget was benchmarked at $57 per barrel. However in the midst of the seeming high revenue profile, manufacturers who are not seeing the impact on their warehouses are resorting to borrowing to pay salaries with hope that things would soon change. But they have warned that if this continues for another month, they would begin cutting down on staff numbers. In fact, Businessday learnt that labour and the management of a large manufacturing company are already negotiating the terms for staff reduction. 

Bashir Borodo, president of the Manufacturers Association Nigeria (MAN), attributed the problem of low sales to low purchasing power of the people which arose from failed basic infrastructure, especially the crippling power crisis and the rising cost of refined petroleum products which has consistently increased the cost of production. He also identified excise duty, finance, high interest rates, high exchange rate, and smuggling of banned products, as some of the causes of the drastic decline in capacity utilisation.

According to him, some companies were currently doing one shift instead of two shifts, making their installed capacity to slump from 95 percent to about 50 percent. Borodo's disclosure was corroborated by Abdul Mohammed, national president, Chemical and Metallic Products Senior Staff Association, who disclosed that most companies have started to cut down production capacity as a result of low sales of manufactured products.

One of the reasons for this development is low purchasing power of Nigerians and for some products; it is the problem of not being able to compete in the market. For instance, sources close to Nigerite Nigeria plc, one of the major producers of asbestos roofing sheets in Nigeria, have revealed that it is currently experiencing low sales in the market as Nigerians now prefer aluminium roofing sheets to asbestos. Eternit Nigeria Ltd, another asbestos producer, has already embarked on rationalization of staff while Nigerite is planning to toe the same line. 

Our association is already discussing with the companies involved in the area of taking care of those that lose their jobs. He added that manufacturing companies in the country no longer produce at full capacity. It is feared that this situation may lead to the closure of many more companies, job losses and even lower purchasing power and demand for goods and services in the economy. Femi Deru, president, Lagos Chamber of Commerce and Industry (LCCI) said reduction in effective demand of manufactured goods was not surprising. 

"People are losing their jobs especially in commercial and microfinance banks, as a result family members that still have their jobs have more mouths to feed and they concentrate on purchasing only the basic things such as foodstuffs. The salaries of many of those still in employment are being delayed and all these affect purchasing power."

Oil prices rise but economy still down, mass retrenchment looms

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