Clobbered by lingering scarcity of Foreign Exchange (forex) and continuous depreciation of the Naira, which made the importation of critical input a nightmarish experience for manufacturers, the manufacturing sector’s performance in the first quarter of 2023 was everything but inspiring. Added to these, the nationwide cash crunch forced by the naira redesign policy and other familiar challenges, manufacturers literarily bled profusely in the quarter under review. To boost the sector’s productivity going forward, they are now calling for harmonisation of fiscal and monetary policies to pave the way for a stable macroeconomic environment. Assistant Editor CHIKODI OKEREOCHA reports.
The real sector, particularly manufacturing, is widely acknowledged as the economy’s growth engine; because of its dominant transmission link to the overall economy, the manufacturing sector is credited with having the greatest capacity to create jobs, revive the economy by contributing immensely to the Gross Domestic Product (GDP) and also setting the path to inclusive and sustainable development.
Sadly, however, efforts to rev that engine of economic growth and ultimately, unleash its capacity to offer these mouth-watering deliverables have continued to be undermined by Nigeria’s unstable macroeconomic environment, resulting, predictably, in the poor and uninspiring showing of key manufacturing indicators in successive quarters.
Unsurprisingly, virtually all the key performance indicators of the manufacturing sector including capacity utilisation, production and distribution cost, volume of production, investment, employment, sales volume cost of shipment and others remained troubled in the First Quarter of 2023 (Q1 2023).
The protracted nationwide cash crunch foisted on various economic actors following the implementation of the Central Bank of Nigeria (CBN) currency redesign policy in the first quarter of the year also contributed largely to the manufacturing sector’s underperformance.
The protracted cash crunch caused by the policy, which the Chief Executive Officer (CEO) of the Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf said was “a consequence of huge capacity gaps in monetary policy formulation and management,” forced many operators in the informal sector to shut down, with corresponding job losses in hundreds of thousands. Millions of Nigerians also slipped into penury.
Manufacturers’ production and distribution costs also took the hit, escalating by 24 per cent in the quarter under review. This was much higher than the 19 per cent increase witnessed in the preceding quarter. Production volume also contracted by 13 per cent against the one per cent growth recorded in the previous quarter.
Manufacturing investment dropped by three per cent in the first quarter of 2023, from a two per cent increase recorded in the preceding quarter that is Q4 2022. The same for manufacturing employment which reduced further by three per cent in the first quarter of 2023 from two per cent contraction recorded in the preceding quarter.
Manufacturers’ sales volume also plummeted by 13 per cent against the stable record witnessed in the preceding quarter, while the cost of shipment rose by as much as 20 per cent in the first quarter of 2023.
This was a slowdown from the 22 per cent increase recorded in Q4 2022.
The aforementioned depressing figures were contained in the Manufacturers’ Association of Nigeria (MAN) Chief Executive Officers (CEO’s) Confidence Index (MCCI) for the First Quarter of 2023 released by MAN, last week and made available to The Nation.
The MCCI is an index created by MAN to measure changes in the quarterly pulsation of manufacturing activities in relation to movement in the macro-economy and government policies. The Index is, therefore, a barometer used by MAN to aggregate the views of CEOs of manufacturing companies on changes in the economy.
The MCCI has a baseline index of 50 points, which suggests a stationary point in the economy. Therefore, any index point above 50 points indicates that manufacturers have confidence in the economy and improvement in manufacturing performance, while any index point below 50 points indicates otherwise.
But as it turned out, the Index Score (IS) of MCCI declined to 54.1 points in the first quarter of 2023 from 55.0 points recorded in the fourth quarter of 2022.
In other words, the Index Score (IS) of the first quarter of 2023 nosedived to 54.1 points, which is 0.9 points less than the 55.0 points recorded in the last quarter of 2022. Commenting on the MCCI Q1 2023 Report, the Director-General of MAN, Segun Ajayi-Kadir said although the quarter recorded marginal contraction in IS, the performance indicated that manufacturers maintained their confidence in the economy since the index remained above the 50-point benchmark.
The MAN D-G, therefore, did not mince words when he said: “Tackling the challenges of the manufacturing sector must be at the front burner of the new administration. The President Bola Tinubu-led administration must exhibit his articulate reasoning and compassion to act differently by hitting the ground running with a value system that can rescue manufacturers from these inflictions.”
He even put forward a number of recommendations, which, according to him, hold the prospect of rescuing the struggling manufacturing sector.
Some of the recommendations include prioritising forex availability, and electricity supply to the industry, reducing the number of taxes payable by sectors, improving the availability of local raw materials, improving access to credit by industries, and stabilising the macro-economy, among others.
How harsh macroeconomic environment hobbled manufacturers
Interest rates charged to manufacturers by the commercial banks appeared to have undermined the sector’s productivity, with only 20.3 per cent of CEOs of manufacturing companies interviewed agreeing that bank lending rate improved in the first quarter of 2023 as against 30.4 per cent that agreed in the fourth quarter of 2022, for instance.
The Nation also learnt that while credit to the public sector has soared over the years, credit support for the private sector in general and manufacturers in particular, has been abysmally low.
Even when credit is available, it is usually on short-term tenure which does not adequately support the medium to long-term gestation required in the manufacturing sector.
Indeed, the absence of economic infrastructure especially electricity supply contributes significantly to the high-cost operating environment which obstructs the development of manufacturing in Nigeria. Despite being a major component of successive administrations’ promise of economic prosperity for Nigerians, they have evidently failed to turn around the fortunes of the power sector.
For instance, electricity distribution in Africa’s largest and most populous economy has continued to hover around 4,000 Megawatts (MW).
Expectedly, this has been taking a huge toll on manufacturers and other business operators across sectors, manifesting in rising costs of production.
While electricity takes only about 10 per cent of production cost in some other countries, it gulps between 40 and 50 per cent of Nigerian manufacturers’ cost of production, and this has forced many factories to curtail output or even shut down.
MAN brought this reality nearer home when it lamented that as of the second half of 2022, manufacturers’ expenditure on alternative energy sources stood at N76.7 billion.
According to the Association, the N76.7 billion spent on alternative energy sources increased from the N45.04 billion recorded in the corresponding half of 2021, indicating a N31.66 billion or 70 per cent increase over the period.
It also increased by N8.9 billion or 13 per cent when compared with N67.8 billion was recorded in the preceding half. A survey of the manufacturing sector by MAN for the second half of 2022 indicated that a huge expenditure was incurred on the procurement of diesel, gas, generators and spare parts, inverters and UPS, and others.
As if this is not enough to strangulate manufacturers, their activities continued to suffer due to the persisting scarcity of forex and unfavourable Naira exchange rate parity. The lingering forex scarcity and continuous depreciation of the Naira have left manufacturers bleeding and limited their capacity utilisation.
Operators rattled by multiple taxes, unfavourable policies, others
In the quarter under review, multiple taxes, charges, and levies ranked top in order of severity of major challenges tossed on manufacturers’ paths. This was accordingly followed by inadequate power supply, low patronage/poor sales/low purchasing power, unavailability of raw materials/delay in receiving imported raw materials/high cost of raw materials and scarcity of forex/high exchange rate/poor allocation of forex.
Nigeria’s bloated N77 trillion debt also
It wasn’t for nothing that Nigeria’s rising debt profile was the special focus of the MCCI Q1 2023 Report. Titled “MAN at the Receiving End of National Debt Crisis,” MAN drew attention to the fact that in the absence of commensurate infrastructural development and significant success in poverty-reduction and industrialisation programmes, Nigeria’s debt profile, which has ballooned to over N77 trillion has become a source of worry.
The Association said as of December 2022, the country’s total debt had escalated to N46.25 trillion, marking about a 17 per cent surge from the record of December 2021, noting that while domestic debt stock accounted for 59.6 per cent of the total debt, external debt stock contributed 40.4 per cent.
MAN, however, said the country’s debt profile has ballooned to over N77 trillion following the approval of the securitisation of the Ways and Means advances.
The Association expressed worries that the huge debt profile may leave the new administration to continue the borrowing spree or incapacitated to provide critical infrastructure needed to boost the manufacturing sector and kick-start the recovery of the economy.
According to Ajayi-Kadir, rising domestic debt was highly crowding out private investment in the manufacturing sector by reducing credit availability and forcing a hike in lending rates.
He also lamented that external debts were mostly serviced in foreign currencies; hence high demand for foreign currencies further depreciates the naira and makes the importation of non-locally produced critical inputs costly for manufacturers.
Higher debt repayment requires increased revenue
Ajayi-Kadir further said the government has continued to breed a harsh business environment by its indiscriminate imposition of high and multiple taxes on manufacturers, all in a bid to generate revenue. “A major point of reference is the recent exponential hike of the excise duties on beverage and tobacco goods,” he said.
The MAN D-G also said huge public debt led to low foreign investment and foreign capital inflow which worsens the forex scarcity.
The immediate past National President of the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Ide J. C. Udeagbala, could not agree less with Ajayi-Kadir on the need to widen the tax net as opposed to increasing taxes.
Udeagbala counselled all levels of government, especially the legislative and the executive branches to consider other sources of funding, such as a preference for an increased tax base over increased taxes, and also leverage public-private partnerships for tax credits spread over time.
He pointed out that while a pro-debt argument that Nigeria’s public debt is relatively sustainable at 25 per cent of her GDP, “it is now generally accepted that the current levels of debt service payments are considerably high and unsustainable given dwindling government revenues.”
With regard to the lingering shortage of forex, the former NACCIMA boss said the government should look to non-traditional sources of forex such as foreign direct investment and remittances from Nigerians in the Diaspora.
Members of the OPS and other businesses have also intensified their advocacy around the need for strict implementation of the Voluntary Assets and Income Declaration Scheme (VAIDS) through the Federal Inland Revenue Service (FIRS) including identifying and amending the loopholes in the country’s tax laws in order to reduce tax revenue leakages.
Other recommendations put forward by operators include ensuring the rehabilitation of local refineries and removing the humongous annual subsidy in phases while ensuring they are backed with appropriate palliatives for households and businesses; ensuring proactive judicial investigation into allegations of oil theft and stamp duty fraud.
They have also called on the government to embark on mechanisms that promote coordination and confidence among creditors in order to be granted the opportunity for debt restructuring; prioritise debt management and transparency to control risks and reduce the need for restructuring.
Will the current administration, working with the OPS members particularly manufacturers, address the identified challenges holding the manufacturing sector down from living to its billing as the economy’s growth engine? Will it muster the necessary political will to implement recommendations tabled before it by industry operators and experts?
While the administration may have put the right foot forward when, from the onset, it declared the obnoxious fuel subsidy regime over and also unified the exchange rates to allow the floating of the Naira, among other fiscal and monetary policy measures, the consensus of operators and experts in diverse sectors is that sustainability and diligent implementation are key to the success of the administration’s renewed push to remake the economy.
Manufacturers’ Challenge Ranking
Multiple taxes/charges/levies/unfavourable government
policies/same tax policy for local producers and importers 1st
Inadequate power supply/unstable power supply/frequent power outage 2nd
Low patronage/poor sales/low purchasing power 3rd
Unavailability of raw materials/delay in receiving imported raw materials/high
cost of raw materials 4th
Scarcity of forex/high exchange rate/poor allocation of forex to the economy 5th
high cost of diesel/energy/gas 6th
High cost of production/high inflation/high operating cost 7th
Naira scarcity /cash crunch 8th
Over-regulation by government agencies 9th
High cost of transportation/high cost of logistics/increase in
cost of distribution 10th
Foreign competition/high importation 11th
Corruption 12th
Insecurity problem/political instability 13th
Gridlock at the national ports 14th
High cost of credit/inadequacy of loanable funds 15th
Shortage of skilled labour/moral value 16th
Poor road infrastructure / Multiple check point 17th
Scarcity of genuine machine parts/high cost of maintaining machines 18th
Production of sub-standard goods / smuggling 19th
High inventory of unsold manufactured goods 20th
