A confluence of familiar operating challenges and externally-induced crises, including backlashes from new COVID-19 variants, and the Russia-Ukraine war has forced global inflation to escalate, disrupted supply chains and triggered rising unemployment, among others. Without robust internal economic mechanisms to respond appropriately to the headwinds, local manufacturers feel the heat more, with many on the brink of collapse. Operators call for concerted efforts to address the domestic operating challenges and create anticipatory policy framework to mitigate global shocks. Assistant Editor CHIKODI OKEREOCHA reports.
Manufacturers and other real sector operators in Nigeria are facing the greatest existential threat ever. They are currently at risk of fizzling out from the industrial landscape, with dire consequences for the overall economy. Already hobbled by a barrage of familiar operating challenges, the impact of externally-induced crises, such as the lingering backlashes of the COVID-19 pandemic and its emerging variants, and now, the raging Russia-Ukraine war, have compounded their woes.
The cascading and intersecting effects of these globally-induced crises have been manifesting and taking a huge toll on manufacturers in Nigeria and indeed, other players in various sectors. This is so because Nigeria, sadly, does not boast functional institutions and strong internal economic mechanisms to respond appropriately to the shocks. As fallouts of these crises, global inflation has escalated; there has been serious shortfall in the global supply chain, followed by rise in energy cost, fertilizer and fertilizer inputs, wheat grain etc. With Nigeria still a largely import-dependent economy, fears are rife that an existential threat is dangling on operators in the nation’s industrial sector.
Such fears are not without justification. For one, the real sector, which comprises manufacturing and agriculture, is widely acknowledged as the economy’s growth engine, because it is credited with having the highest multiplier effect to the economy compared to other sectors. Manufacturing helps raise living standards more than any other sector. It generates more economic activities than other sectors, and many services exist because of manufacturing; and many service jobs, not a few operators fear, will disappear if manufacturing disappears.
However, this economic growth engine has been wobbling over the years, severely battered by numerous familiar challenges that have limited its performance and global competitiveness. The Director General of Manufacturers Association of Nigeria (MAN), Mr. Segun Ajayi-Kadir, puts the challenges in perspective when he said they have plummeted the number of industries in Nigeria and converted industrial hubs in many parts of the country to warehouses of imported goods and event centres.
Some of the challenges confronting the sector, according to him, include high operating cost environment occasioned largely by inadequate electricity supply and the high cost of alternative sources, rising inflation and energy cost, exchange rate volatility, and pervasive insecurity. Others are excessive regulation and taxation, declining consumer purchasing power, and inadequate supply of foreign exchange (forex) for importation of raw materials, spare parts and machinery that are not locally available etc. “All these have culminated into the lackluster performance of the sector,” Ajayi-Kadir lamented.
At the core of the existential threat currently steering manufacturers in the face, The Nation learnt, is the fact that most, if not all, of the afore-mentioned issues have yet to be significant addressed before concerns related to COVID-19 pandemic, which is now in its third year, and its Delta and Omicron variants were thrown into the mix. Prior to the deadly virus, which was first identified in China in late 2019, most Nigerian manufacturing companies imported a significant percentage of their materials from China, but the pandemic disrupted the global supply chain, leaving Nigeria, which is largely import-dependent, badly affected. China is the second largest economy in the world, after the United States. The Asian giant is a major supplier of inputs for manufacturing companies around the world, including Nigeria.
With over 70 per cent of Nigeria’s raw material said to be imported, and China representing Nigeria’s biggest trading partner, with about 19 per cent of its imports sourced from the country, the severity and scale of the disruption of local manufacturers’ supply chain come into bold relief. For instance, since the outbreak of the deadly virus, many Nigerian manufacturers and service providers have been experiencing acute shortage of raw materials and intermediate inputs for their operations. This, according to the Managing Director, Centre for the Promotion of Private Enterprise (CPPE), Mr. Muda Yusuf, has implications for manufacturers’ capacity utilisation, employment generation [and retention] and adequacy of products’ supply to the domestic market.
Yusuf, who was former Director General of the Lagos Chamber of Commerce and Industry (LCCI), also said the situation has implication for inflation, and the pressure has since been mounting. For manufacturers and operators in virtually all the sectors, including ordinary Nigerians, the fear of soaring inflation is perhaps the beginning of wisdom, as Africa’s largest and most populous economy has been witnessing persistent increase in inflation rate. For instance, at the last count, inflation in Nigeria surged to a depressing 17-year high of 19.64 per cent in July 2022, according to recently released Consumer Price Index (CPI) report for the month of July 2022, by the National Bureau of Statistics (NBS). The figure compared to the 18.6 per cent recorded in the previous month of June 2022. And the last time Nigeria’s inflation rose above 19.64 per cent was in September 2005 when it hit 24.32 per cent.
LCCI Director General, Dr. Chinyere Almona, said Nigeria had six consecutive months of increased inflation, attributing the high inflationary rate to rise in food and energy prices and forex scarcity for imports of critical raw materials. She also said constrained production due to insecurity in some agricultural sites across the country contributed to the high inflationary rate.
Her counterpart at MAN, Ajayi-Kadir, could not agree more. He, however, said apart from the insecurity and conflicts in the food producing areas, the disruption of supply chain activities due to COVID-19 pandemic and instability in the exchange rate market and management, among others, also compounded the inflationary pressure. The MAN DG said often times when disruption occurs in any part of the global economy, only countries with functional institutions and strong internal economic mechanisms will be able to respond appropriately to such external shocks. According to him, the current increase in prices of crude oil and other refined petroleum products such as diesel is one of such disruptions occasioned by external shocks that confirm the interwovenness of economies in the world. “No doubt, the recent short supply and over 200 per cent increase in the price of Automotive Gas Oil (AGO), otherwise known as diesel, are part of the backlashes from the ongoing invasion of Ukraine by Russia,” Ajayi-Kadir said.
Confirming the precarious state of the manufacturing sector, Ajayi-Kadir said even if domestic food production increases and supply and distribution constraints are eased, a combination of exchange-rate management problems, shortages of hard currency, expansionary monetary policy, and the monetary funding of the fiscal deficit will continue to generate inflation pressures. He also said a slow recovery with increase in criminality due to high unemployment rate erodes the investor confidence in the capacity of the authorities to sustain adequate macro-economic activity that will support the economy’s post-pandemic recovery.
Dr. Almona brought the current realities as they affect manufacturers nearer home when she lamented that for manufacturers, input prices have spiked as prices of items such as diesel, which most firms depend on for powering their factories, have continued to rise, causing unbearable rise in cost of production. She further said rising cost of production also translates to higher consumer prices. “Nigeria’s energy crisis is worsened by the poor supply of electricity and a bumpy road to renewable energy deployment. The continuous increase in general prices of goods in Nigeria and its multiplier effects on the standard of living of the citizens are a threat to the nation’s growth and economic recovery post-COVID-19. The double-digit inflation rate is frustrating efforts towards economic recovery, eroding the purchasing power of consumers and increasing the poverty rate in the country,” Ajayi-Kadir stressed.
Backlashes from Russia-Ukraine war
Like a stone thrown in the middle of a river, the ripple effects of Russia’s invasion of Ukraine are being felt in the outermost bounds of the globe, including Nigeria. Since the launch of an all-out military invasion of Ukraine by Russia on February 24, 2022, the world has never known peace. However, the financial and economic impacts of the on-going war are more telling. The war, now in its sixth month, has caused food, fuel and fertiliser prices to skyrocket. It has also disrupted supply chains and global trade, and roiled financial markets, fueling the threat of a global food crisis.
It is easy to see why this is so. Russia is the second-largest exporter of crude oil in the world, which makes its oil supply a major determinant in the direction of crude oil prices. It also boasts being one of the largest producers of natural gas and clean energy globally. Ukraine, on the other hand, is one of the main suppliers of wheat, sunflower oil and corn. It is also one of the main European producers of fertilisers. However, the production of these items stopped because of the war. Some manufacturers do not have the raw materials and even the ability to work – due to the threat of Russian missile strikes and other consequences of hostilities.
For Nigeria and other developing countries that have been battling record inflation, rising interest rates and huge debt burdens, among other headwinds, the outbreak of the war exacerbated their economic and financial problems. The current face-off between Russia and Ukraine has worsened the challenges around the global supply chain particularly to Nigeria, following the imposition of sanctions by the US and other European countries on Russia. As a result of the sanctions on Russia, most commodities prices touched multi-year highs with price of Nigeria’s crude oil, for instance, reaching US$100.2 per barrel as at Thursday, August 25, 2022. With Russia as the second-largest producer of oil globally, the conflict in the region is said to have disrupted oil supplies, reduced output and triggered higher prices.
“Already, oil price is above $100, and the impact on energy prices is already being felt around the world,” Dr. Yusuf said, adding that “In Nigeria, the deregulated components of petroleum products (diesel, aviation fuel, and kerosene and gas) have witnessed sharp increases.”
For instance, diesel has been deregulated over a decade now, but the war has forced its price to hit the roof top. From selling at N290 per litre at the beginning of the year, diesel now costs about N850 per litre. He said the escalation of the costs of diesel and other petroleum products have serious inflationary implications across sectors. Dr Yusuf projected an upsurge in Nigeria’s petrol import and subsidy bill as the landing cost of petrol increases on the back of the rise in crude oil price. The renowned economist said since Nigeria remains a major importer of petroleum products, and typically when oil prices increase, petrol import bill and subsidy payment also increase. He, however, added that there would be a positive investment effect on companies in the upstream segment of the oil and gas sector.
Other significant macro-economic fallouts of the war, according to experts, include heightened fiscal deficit, growing debt levels, spike in debt service payments and money supply growth. There are also fears around depreciation of the local currency, the naira, and of course, more intense inflationary pressures. The cost of flour, bread and other confectioneries has also skyrocketed, with bakers threatening to down tools over rising cost of flour, for instance. A loaf of bread, which originally cost between N400 and N500, now costs as much as between N800 and N1, 000, depending on the size.
Imperatives to push back headwinds
At the moment, the Nigerian economy, particularly the manufacturing sector, appears to be between the rock and the hard place. The economy is completely dependent on importation of refined petroleum products including diesel and other vital manufacturing raw materials. The fact that there are currently no sufficient alternatives locally to maneuver and keep their factories running may have boxed manufacturers to a corner. There are also no visible and strong internal economic mechanisms and buffers to wade off externally-induced shocks. Expectedly, the precarious situation has prompted operators to come up with a number of policy options and measures to pull the nation’s manufacturing sector back from the brinks and position it to play its traditional role as economy’s growth engine.
For Ajaiyi-Kadir, the need for the government to intentionally create an anticipatory policy framework that will facilitate automatic stabilisation of the economy in the event of domestic or global shocks has never been compelling. The MAN DG said the development of a sustainable national anticipatory policy measures to shield the economy and the manufacturing sector from global headwinds should be done; while at the same time address the familiar operating challenges hurting the sector’s performance. “The effect of the Russia-Ukraine war clearly underscored the popular maxim that the world has become a global village. The occurrence of an incident in a part of the world, notwithstanding how specific we may think, can actually become a global issue.
“Therefore, apart from the need for ardent management of global peace, the series of global occurrences and the lessons learnt demand that national governments should begin to take drastic measures to manage these phenomena proactively going forward,” he said, in a statement made available to The Nation.
The urgent need for government to prioritise “the development of a National Response and Sustainability Strategy to address challenges emanating from the on-going invasion of Ukraine by Russia is not the only option put forward by MAN to salvage the situation.”
MAN President, Engr Mansur Ahmed, also said as part of the federal government’s efforts to mitigate the impacts of the Covid-19 pandemic and its variants on the economy, the Central Bank of Nigeria (CBN) should extend its financial support to the supply of forex to the manufacturing sector at pre-Covid-19 rates. This must be why Dr. Almona advised on the need for a good mix of both fiscal and monetary policies to tackle the core drivers of inflation scourge in Nigeria. She also called for targeted financing for critical sectors like agriculture, food processing, aviation fuels, transport, and forex availability for manufacturing inputs. According to her, it is obvious that the government’s intervention so far has not impacted the inflationary pressures that keep rising till now. “Without concrete and quick steps to intervene, the rising tide of the inflation rate may continue into the end of the year,” she warned.
The Chamber, she said, has consistently recommended the need for special interventions in critical sectors and especially focusing on subsidising production to reduce the burden of rising cost of production. She criticised the Godwin Emefiele-led Central Bank of Nigeria (CBN’s) reversal of concessionary interest rate of five per cent on its intervention loans to nine per cent effective 20th July 2022. Dr Almona argued that CBN’s action does not show sensitivity to the burden on businesses at this time when they are struggling with sourcing forex, rising fuel costs, and massive disruptions to production lines due to insecurity. She urged the CBN to look beyond hiking rates to taking definite and articulated actions that address the factors driving the inflationary pressures.
For Yusuf, appropriate policy choices are needed to attract equity domestic and foreign private sector capital for infrastructure financing. According to him, the government needs to look beyond tax credit in its quest for complimentary funding sources for infrastructure. “We should be looking more in the direction of equity financing. But for this to happen the policy and regulatory environment must be right,” he said.
With energy accounting for more than 40 per cent of manufacturers’ cost of operation, according to Mansur, the power sector is, undoubtedly, one of the priority areas yearning for such infrastructure financing, especially as repeated collapse of the national grid has been causing acute electricity shortage in the country, especially for manufacturers. The consensus of industry operators and stakeholders is that government pluck up the necessary political will and financial resources to address all the domestic concern plaquing manufacturers as well as building internal institutions and economic mechanisms to shield the sector and by extension, the economy from external shocks.
Already, the cascading and intersecting effects of the crises are exertion untold hardship on the manufacturing sector, leading to the closure of many industries, reduction in capacity utilisation, decline in the sector’s contribution to the nation’s Gross Domestic Product (GDP), large scale unemployment and increase in crime rate, among others