2022: A Year of  Shocks, Threats, Risks for Manufacturers

Year 2022 would be remembered by operators of Nigerian manufacturing sector as a year marked by shocks, risk and turbulence, writes Dike Onwuamaeze

Right from the outset, the operators of the Nigerian manufacturing sector knew that 2022 would be a bumpy ride. In the first quarter of the year, the President of Nigeria Employers’ Consultative Association (NECA), Mr. Taiwo Adeniyi, told THISDAY that he perceived that navigating through the Nigerian economy during the year would be turbulent.

Adeniyi stated that “in the first half of this year, we are going to drive the economy and almost drive it ‘crazy’ in the sense that there will be so many unusual things happening and we are beginning to see them.”

Among the things he saw that were happening was the commencement of warfare between Russia and Ukraine that was dislocating global supply chain and spiraling energy prices, especially the price of diesel in the Nigerian domestic market from N280 in January to N750. Currently, it hovers around N1,000 in some part of the country.

He added: “And a lot of this will happen within the first six months of the year. You are going to see a lot of things happening with lots of dramatic changes and people will be ruffled. But I can assure you that the second half of this year will be likened to a stiff abandoned engine that has been lubricated. I can assure that by the second half of this year … there will be a change. And it will drive us till a new administration comes in in 2023.”

Challenges

But the President of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Michael Olawale-Cole, in his review of the economy on December 1, 2022, simply described 2022 as a very eventful and challenging year that was characterised significantly by trends of shocks and disruptions from the Russian-Ukraine war, climate change impacts, and the lingering threats from the COVID-19.

Olawale-Cole said: “All through the year, the world economy, including Nigeria, continued the battle with record high inflation rates, high energy costs, and supply chain disruptions.”

The resultant effect of the shocks and disruptions AS the latest report from the National Bureau of Statistics (NBS) has shown was that Nigeria’s Gross Domestic Product (GDP) grew by 2.25 per cent year-on-year in real terms in the third quarter (Q3) of 2022. This represented a 1.78 per cent decline compared to the 4.03 per cent growth recorded in Q3 2021.

The Q3 figures that reflected the slowdown in economic growth were attributed to the impacts of challenging economic conditions. “It is expected that the annual GDP growth will close on a positive note for 2022. However, it should be noted that emerging shocks, threats, and risks have created fears of slowing growth and even recession in the coming quarters going into the New Year 2023,” Olawale-Cole said.

He added that growth might shrink as production bases came under siege due to the worsening security challenges in some parts of the country, forex scarcity, and high energy costs during the year under review. 

Need for confidence-building policies

The president of the LCCI, therefore called on the fiscal and monetary sides of the economy to promote growth-enhancing and confidence-building policies that would encourage private capital flows into the economy.

According to him, “fiscal and monetary authorities must develop a medium-term growth plan anchored on boosting local production, supporting ease of doing business, attracting private investment, developing physical and soft infrastructure, business-friendly regulatory policies, economic diversification, and employment generation among others.”

Commenting on the economic environment in 2022 and its effects on the manufacturing sector, the Director General of the Manufacturers Association of Nigeria (MAN), Mr. Segun Ajayi-Kadir, stated that despite the higher oil prices as well as the improvement in terms of trade, the expansion of the growth of the Nigerian economy remains sluggishly above the population growth rate.   

Economic turbulence

The economic turbulence experienced in 2022 forced the manufacturing to record negative growth of -1.91 per cent in the Q3 of the year. The contribution of the manufacturing sector to the GDP also declined from 8.96 per cent in Q3 2021 to 8.59 per cent of real GDP in the third quarter of 2022.  

“On a year-on-year basis, the sector grew by -1.91 percent in the third quarter of 2022 compared to 4.29 percent in the third quarter of 2021 and 3 percent recorded in the second quarter of 2022. This represented a -6.2-percentage point and -4.91 percent point decline from the growth witnessed in 2021 Q3 and 2022 Q2 respectively.

“The overall decline in both aggregate and sectoral performances could have far-reaching adverse effects on the manufacturers.”

Dominant among these is lower manufacturing turnover. The GDP growth slowdown will most likely result in higher unemployment rate. Coupled with high inflation rate, the economy is likely to face higher misery index that worsens the poverty level and further shifts consumers away from elastic manufactured goods. This will eventually result in drastic reduction of patronage and lower sales turnover.

In addition, the forex crisis bedeviling the sector is not likely to be resolved anytime soon, which would impact negatively on the drive to diversify the local economy through improve manufacturing activities

Ajayi-Kdri said: “The negative growth of the sector’s GDP sends a strong signal to potential investors in the sector. The impending result is negative investors’ sentiments and pessimism against provision of critical raw materials, technology and technical know-how required to promote the industry.”

He pointed out that Nigeria’s path to economic growth, industrialisation and sustainable development has been compromised by inadequate attention to the numerous pressing challenges of the manufacturers who are meant to be the propellers of its long-term economic agenda.

Therefore, achieving a stable rapidly-growing economy would require taking head-on the daily bottlenecks confronted by business owners within the manufacturing sector, considering its active inter-linkages with other key sectoral drivers of the economy.

The director general of MAN also listed forex scarcity, multiple taxation, and exorbitant interest rate, high-cost business operating environment, smuggling, insecurity, energy crisis and epileptic power supply among the leading challenges facing manufacturers in the country. 

Need to Reduce Importation  

He called on the government to promote measures that would reduce the country’s reliance on imported products and raw materials by encouraging local sourcing through a comprehensive and integrated incentivised system since Nigeria is largely bearing the brunt of imported inflation.  

A report by MAN that reviewed the fortunes of the manufacturing sector in the first half of 2022 showed a decline in the utilisation of local raw materials by Nigerian manufacturers from 53 per cent in 2021 to 52 per cent (year-on-year) in the first half of 2022, thus, indicating 1.0 percentage point decline over the period. 

This was attributed to limited investment in domestic production of raw materials for utilisation in most of the sub-sectors, which is as result of limited funding and policy incentives in the country.

The basic industrial chemical sub-sector, according to MAN, “faced severe inactivity in the first six months of 2022 due to lack of domestic production of basic chemicals. This, therefore, demands for the need to resuscitate the local refineries to encourage   investment in petrochemical development in the country.”

Yet, the manufacturing sector was able to generate 8543 new jobs in the first half of 2022, higher than 8508 jobs achieved in the second half of 2021. The marginal increase in jobs created in the sector in the period under review was due to positive and continuous adjustments in manufacturing activities to accommodate the current economic hardship and sustain production by manufacturers.

“In the line with the outcomes of surveys conducted by the Association since 2013, the total cumulative direct jobs created in the manufacturing sector was estimated at  1,679,984 as at the end of   the first half of 2022.   Specifically, eight thousand, five hundred and forty three (8543) jobs were created in the first half of  2022 as against 7602  jobs recorded in the corresponding half of 2021  and 8508 in the second half of 2021,” the MAN said.

For the Chief Executive Officer of the Centre for the Promotion of Private Enterprises (CPPE), Dr. Muda Yusuf, it was shocking that the Food and Beverage sub-sector were among the sectors that posted negative GDP growth Q3’22 by contracting by 4.05 per cent.

Yusuf said: “A striking feature of the GDP Q3 report was the contraction of the manufacturing sector which shrunk by 1.91 per cent. This is the first quarterly contraction of the manufacturing sector since 2020 when the economy slipped into recession. Of greater concern was the slump in the food and beverage sector which contracted by 4.05 per cent. This is the first contraction of the sector since the recession of the second quarter of 2020.   

“This development is a reflection of a major setback for the Nigerian manufacturing sector, which called for an emergency response by the government. The plunge in the manufacturing sector performance has profound implications for food inflation, food security and employment. The food processing sector has the biggest impact on jobs because of the strong backward integration content and high multiplier effect in the agriculture value chain.”

NECA’s View

These might have accounted for the reason the Director General of NECA, Mr. Adewale-Smatt Oyerinde, described 2022 as a very challenging year for the organised private sector of the Nigerian economy.

Oyerinde said: “Year 2022 remained one of the most challenging years for organised businesses. The pandemic-inflicted leadership and sustainability challenges forced organisations to take extraordinary measures in real time, with zero planning” as things changed drastically and dramatically, leaving no industry across the world unaffected.

He said that Nigerian enterprises were forced to operate under excruciating circumstances, made worse by inherent systemic contradictions during the year.

“As organisations faced sustainability issues, they, at the same time, had to deal with rising energy cost, regulatory gangsterism, inconsistencies and contradictions in the fiscal and monetary policies, which has made doing business unattractive and created clogs in the wheel of attracting Foreign Direct Investment (FDI), rising inflation and increasing cost of doing business, which invariably reduced the capacity utilisation of industries,” he said.

While noting that some of these challenges were not peculiar to Nigeria alone, Oyerinde stated that “government’s approach to solving them has remained suspect and does not inspire confidence.”

He, therefore, argued that the incoming government in 2023 must reform the tax system to create incentives for payers and expand the tax net rather than the current over-burdening of legitimate businesses.

He said: “Consistency in the tax policy will improve stakeholders’ confidence rather than the short-sighted attempt to sabotage the established roadmap set out in the 2022 Fiscal Policy Measures and Tariffs Amendments (FPM 2022), which covers 2022-2024.

“While it was gladdening to hear that government had jettisoned the proposed increases in excise tax, a more collaborative and evidence driven approach should be adopted for future changes.”.

Oyerinde stated that “it is no gainsaying that the country faces enormous challenges, mostly self-inflicted. We, therefore, urge the current and incoming Government to explore policy options as suggested and adopt a more robust, all-inclusive strategy, focusing not only on the diversification of the economy but also on the imperative to urgently reform the current fiscal structure to reflect fiscal federalism, promote healthy competition and drive productivity.

“Government also should address short term appropriation for long term infrastructure to avoid white elephant projects and create a template for assessing and evaluating the performance of regulatory agencies to national and business sustainability, among others.”