Familiar domestic operating challenges and externally-induced shocks combined to pose existential threat to manufacturers and other private sector operators in the year. Assistant Editor CHIKODI OKEREOCHA looks at some of the critical issues that conspired to undermine the productivity and competitiveness of real sector operators and their efforts to weather the storm.
But for their patriotism and resilience, which remained the primary driving force for sustaining production, many manufacturers and other private sector operators would have probably fizzled out of the industrial and business landscape, considering the scale and severity of domestic and externally-induced shocks tossed on their path in 2022.
The Director-General, Manufacturers Association of Nigeria (MAN), Segun Ajayi-Kadir, put manufacturers’ resilience in managing the crises in perspective when he said some of the strategic measures embarked upon by most manufacturers to minimise the impact of the inclement operating environment on their activities included cost cutting, product selection and prioritisation.
Some manufacturers, according to him, also suspended the production of certain products to concentrate on more competitive ones, while others expanded their investment in the development and production of raw materials locally, even as MAN collaborated with the Raw Materials Research and Development Council (RMRDC) to optimise localisation.
Ajayi-Kadir, presenting a paper on ‘Manufacturing: Despite FX and Energy Crisis’ at a workshop organised by Commerce and Industry Correspondents Association of Nigeria (CICAN) in Lagos, on November 3, 2022, added that manufacturers also increased their resort to self-energy generation and energy mix to complement the inadequate electricity supply from the national grid.
Indeed, such survival measures became inevitable given the severity of the inclement operating environment that confronted manufacturers and was compounded by backlashes from the COVID-19 pandemic down to the on-going Russia-Ukraine war. The confluence of familiar operating challenges and externally-induced crises posed what is arguably, the greatest existential threat ever to local manufacturers in the year.
It is easy to see why this was so. Backlashes from the COVID-19 pandemic and the Russia-Ukraine war forced global inflation to escalate, disrupted supply chains and triggered rising unemployment, among others. Although it was hoped that the recovery from the pandemic achieved in 2021 following the removal of movement restrictions to contain the virus will be advanced in 2022, its effects lingered.
However, the Russian invasion of Ukraine in early 2022, precisely from February 24, dashed all economic projections for 2022 with negative impacts on supply chains, energy cost (diesel and gas), cost of agro-allied raw-materials (wheat, fertiliser and fertiliser inputs, etc), freight logistics, trade and global inflation.
For instance, increase in cost of energy, in particular, pushed up global inflation which affected the cost of importation across the world, including Nigeria. With limited Foreign Exchange (forex) inflow from crude oil sales, forex demand pushed over the bounds of supply and contributed to the depreciation in the value of the local currency, the Naira.
Manufacturers in Nigeria had to contend with these challenges while struggling to sustain production. And it is easy to see why this was so. Both Russia and Ukraine are major exporters of energy and commodities. Russia is the second-largest exporter of crude oil in the world, making its oil supplies major determinant in the direction of crude oil prices. It also boasts one of the largest producers of natural gas and clean energy globally.
Ukraine, on its part, is one of the main suppliers of wheat, sunflower oil and corn. It is also one of the main European producers of fertilisers. But the war stopped the production of these items, as 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.
Sadly, the pandemic and the Russia-Ukraine war exposed Nigeria’s vulnerability, as Africa’s biggest and most populous economy is still largely import-dependent, and does not have functional institutions and strong internal economic mechanisms to respond appropriately to both shocks.
This was why the global spike in inflation and energy cost induced by the conflict in Europe manifested badly in Nigeria already battling record inflation even before the outbreak of the conflict. For instance, inflation rate in Nigeria soared to an all-time high of 21.47 per cent in November 2022, from 21.09 per cent in October, according to the National Bureau of Statistics (NBS).
The NBS’s ‘Consumer Price Index (CPI) and Inflation Report November 2022’ released on Thursday put Nigeria’s headline inflation rate in November 2022 at 1.39 per cent. This was 0.14 per cent higher than the 1.24 per cent rate recorded in October 2021. In November 2022, on a year–on- year basis, the headline inflation rate was 21.47 per cent,” the NBS said.
Pointing out that this was 6.07 per cent higher compared to the rate recorded in November 2021, which was 15.40 per cent, the NBS said: “On a month-on-month basis, the headline inflation rate in November 2022 was 1.39 per cent, which was 0.15 per cent higher than the rate recorded in October 2022 (1.24 per cent).”
The Bureau said the percentage change in the average CPI for the 12 months period ending November 2022 over the average of the CPI for the previous 12 months period was 18.37 per cent, indicating a 1.39 per cent increase compared to 16.98 per cent recorded in November 2021.
Before the latest inflation figure, the Director-General, Lagos Chamber of Commerce and Industry (LCCI), Dr. Chinyere Almona, had lamented that 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.
Yet, soaring inflationary pleasure was just one out of several familiar challenges that confronted manufacturers and other businesses in the year even before the crisis in Europe exacerbated them. Apart from rising inflation, other domestic challenges that affected manufacturing operation included high cost of local and imported raw materials, insecurity within the industrial areas, shortage of skilled manpower, high cost of transportation, inconsistency in government policies and foreign exchange difficulty.
There was also a shift in the government attention from the economy to next year’s general elections, rising unemployment, low consumer purchasing power, deficit infrastructure, particularly inadequate electricity supply, and high cost of funds, among others.
For instance, the Director-General, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Olusola Obadimu, lamented that the nation’s interest rate gap was a challenge. “For you to get a loan, optimistically maybe, it’s like 25 per cent interest rate for productive purposes,” he told The Nation.
Obadimu argued that it does not make economic and investment sense to put money in a savings account in a bank, which is supposed to be an investment in itself, and get two per cent interest. “You can’t be lending to people at 25 per cent and be paying interest on deposit at two per cent,” he charged.
The Nation learnt that despite the avalanche of funding windows rolled out by the Federal Government, through the Central Bank of Nigeria (CBN), to address the credit challenge of operators in the real sector particularly manufacturers, only about 20 per cent of the funds were accessed by manufacturers till date.
The immediate past President of MAN, Mansur Ahmed, who confirmed this at a recent event in Lagos, said: “This situation (20 per cent access to funds) calls for deliberate effort to make the funds accessible to manufacturers, especially at this period of global economic difficulty.”
He said operators in the manufacturing sector were contending with inadequate credit supply and high cost of borrowing for so long, which grossly affected investment and utilisation of available capacity in the sector.
Mansur, therefore, urged the CBN to take rigorous monetary management measures that would encourage reduction in lending rates on loans to the productive sector by commercial banks.
He said cost of funds in Nigeria, which is usually at double digit, has always been one of the core challenges of the manufacturing sector, and this is because it tells directly on cost of production and the sector’s competitiveness.
Obadimu said the same problem of high cost of funds witnessed in the year under review relates to the disparity in the forex rates, where the government’s forex window that wasn’t even available to manufacturers with export potential, was available for people going on pilgrimages, for instance.
While insisting that “Such people (i.e. those on pilgrimage) were not paying taxes; they were not employing anybody, but were getting the preferential rate,” he said. Because manufacturers and other operators in the productive sector could not get enough forex, “they were sourcing part of their forex needs from the parallel market at N770/$ to N780/$”.
The NACCIMA chief also lamented the nation’s decrepit infrastructure, which, according to him, was responsible for operators’ high cost of production and inflation. Hear him: “Of course, if infrastructure is not good, you spend more. And that’s why we have this cost-push inflation.
“The costs of input are rising. If you produce your power (diesel is expensive), your roads are not good, you have to spend more money to maintain your vehicles etc. All these costs will be built into your cost of production and nobody will sell below his production cost.”
Almona lamented that for manufacturers, input prices spiked as prices of items such as diesel, which most firms depend on for powering their factories, continued to rise, causing unbearable rise in cost of production. She further said rising cost of production also translates to higher consumer prices.
Confirming the role poor infrastructure, particularly lack of electricity supply, played in constraining the manufacturing sector’s performance in the year, Ajayi-Kadir said: “Nigeria’s energy crisis was worsened by the poor supply of electricity and a bumpy road to renewable energy deployment.”
The other critical issue that hobbled the productive sector in the outgoing year, according to Obadimu, was pervasive insecurity. “Without security, what can you do?” he asked.
He added: “You produce in Ilorin, Kwara State, and you want to sell in Lagos, you don’t know whether your driver will be kidnapped on the way and they will be asking for N100 million ransom.
“Maybe your company’s total turnover is not up to N100 million, where are going to get the money? If you close the company, some people are working there. So, security is critical. I don’t know how you are comfortable travelling by road these days because some people are scared. Can everybody afford plane travels? I am not sure. Has every village got an airport? I am not sure.”
The harsh macro-economic environment in Nigeria coupled with externally-induced headwinds were believed to be responsible for the unfavourable movements in manufacturing indicators, such as capacity utilisation, contribution to real GDP, investment, employment, cost of production, and competitiveness, during the year under review.
Ajayi-Kadir, therefore, said it is important that forex and energy, as well as other manufacturing challenges confronting the sector are adequately address, going forward, to arrest further degeneration in its performance.
