Manufacturing Sector’s Tale of Declining Fortunes  

The bi-annual economic review of the Manufacturers Association of Nigeria for the H2 of 2022 showed a worsening condition of manufacturing activities in the country in almost every parameter, writes Dike Onwuamaeze

Nigerian manufacturing sector suffered a 4.1 per cent decline in capacity utilisation in the second half of 2022. This was stated in the Executive Summary of H2 2022 Bi-Annual Economic Review of the Manufacturers Association of Nigeria (MAN). The review said that year-on-year capacity utilisation in the manufacturing sector declined to 54.9 per cent from 59 per cent recorded in the corresponding half of 2021.

The review further stated that quarter-on-quarter, capacity utilisation declined by 3.0 percentage points when compared with 57.9 percent recorded in the first half of the year.

It stated that manufacturing capacity utilisation averaged 56.4 per cent in 2022 as against 55.9 percent average of 2021.  The review attributed the decline in manufacturing capacity utilisation in the period to the adverse effect of high cost of energy and the Russian Ukrainian war, the grave effects of the Naira Redesigning policy and other perennial challenges such as acute shortage of foreign exchange for importation of raw materials and machines, high cost of borrowing and many more.

Similarly, the value of manufacturing sector’s factory output declined to N2.68 trillion in the second half of 2022 from N3.73 trillion recorded in the corresponding half of 2021. This represented N1.05 trillion or 28 per cent declined over the period under review.  It also declined N1.31 trillion or 32 percent when compared with N3.99 trillion recorded in the preceding half.

Manufacturing Production Value

The bi-annual economic review further showed that the value of manufacturing production totaled N6.67 trillion in 2022 as against N7.39 trillion recorded in 2021.

It noted that manufacturing production was severely affected in the second half of 2022 by absence of implementation of new capital project by the government as they focused on the election.

“Production in the sector was also negatively affected by limited purchases by households due to the Naira redesign policy, the high inflationary pressure in the country, high cost of energy, particularly diesel and gas, acute shortage of forex for importation of raw materials and machinery needs of the sector that are not locally manufactured in the time being and many more.

“Unfortunately, the issues of the basic metal group whereby duty of Annealed Cold roll was reduced to 5.0 per cent from the previous 45 per cent; the suspension of motorcycles in some areas across states, the increase in the duty of paper from 5.0 percent to 20 per cent and so on are still effective. 

“These challenges, in addition to the perennial issues, contributed enormously to the dip in the production of the sector in the period under review,” the review said.

Local Raw-Materials Sourcing

Manufacturing sector local raw materials sourcing averaged at 52.8 per cent in 2022 as against 51.5 per cent it recorded in 2021. The increase in the local raw materials utilisation in the sector during the period is due to increased difficulty in sourcing forex, which compelled manufacturers to look more inward for raw materials notwithstanding the associated huge cost.

“It is, therefore, important for the government to re-evaluate its role in local development and production of raw materials in terms of funding. 

“For instance, the development and production of Active Pharmaceutical Ingredients (APIs) has continuously eluded due to limited funding of the Raw Materials Research and Development Council (RMRDC) by the government. The absence of local production of APIs has been having dire consequences on the pharmaceutical production, particularly in the current situation of acute shortage of forex,” MAN said.

Unsold Inventory of Finished Products

However, the inventory of unsold finished products in the manufacturing sector increased to N282.56 billion in the second half of 2022 up from N169.75 billion recorded in the corresponding half of 2021; thus, indicating N112.81 billion or 66 percent increase over the period.

It also increased by N85.46 billion or 51 per cent when compared with N187.1 billion recorded in the first half of the year. 

The review said that “inventory of unsold goods in the sector totaled N469.66 billion in 2022 as against N384.58 billion recorded in 2021. The high inventory recorded in the period is attributed to low purchasing power in the economy due to declining real income of household following the continuous increase in inflationary pressures in the country.”

This was worsened by the Naira redesign policy of the Central Bank of Nigeria (CBN), which began in the last quarter of 2022.  The MAN stated that “the withdrawal of large amount of the ‘old Naira’ without commensurate replacement with the ‘new notes’ resulted to cash crunch in the economy with very limited means of purchasing items by households across the country.”

Manufacturing Investments

Manufacturing investment totaled N323.98 billion in 2022 as against N305.02 billion recorded in 2021. A breakdown showed that manufacturing sector’s investment dipped to N145.59 billion in the second half of 2022 down from N160.88 billion recorded in the corresponding half of 2021. This showed a decline of N15.29 billion or 10 per cent over the period.  It further declined by N32.8 billion or 18 percent when compared with N178.39 billion recorded in the first half of the year. 

The review said that “investment in the period was affected by the high debt profile of the government, which particularly deters foreign investment, high cost of borrowing, high cost of energy, low consumption during the period and many more.”

Manufacturing Employment  

Based on MAN survey since 2013, cumulative manufacturing employment was estimated at 1,686,725 at the end of 2022.   However, in the second half of 2022, manufacturing employment dipped to 6,741 down from 8,508 and 9,559 recorded in the corresponding half of 2021 and the first half of 2022 respectively.

The decline in the number of jobs created in the sector during the period under review corroborated the poor operating business environment that was perverse with high energy cost, exorbitant cost of borrowing, high inflation, low sales due to limited cash and many more.

Electricity Supply to Industries

Electricity supply to the industries from the national grid declined marginally to 11 hours per day from 12 hours recorded in the preceding half. However, average number of outages per day stabilised at four times in the second half of 2022 as it was recorded for the first half of the year.

“Irrefutably, the trends shows that power supply to the industry is still a huge challenge, which accounts for huge investment of manufacturers in self-energy generation.

“Consequently, expenditure of alternative energy source increased to N76.7 billion in the second half of 2022 from N45.04 billion recorded in the corresponding half of 2021; thus, indicating N31.66 billion or 70 percent increase over the period.  

“It also increased by N8.9 billion or 13 percent when compared with N67.8 billion recorded in the preceding half. The expenditure was incurred on procurement of diesel, gas, generators and spare parts, inverters and UPS, etc.,” the report said.

Cost of Funds to Manufacturers

In the second half of 2022, average lending rate to the sector  from the commercial banks slowed to 22 percent from 24 percent  recorded in the  corresponding half of 2021 and the first half of 2022  respectively. The trend showed two percentage points declined over the periods.

The reported noted that commercial bank lending rate to the industries was grossly influenced by the incessant increase in Monetary Policy Rate (MPR) in quest to maintain an appreciable real interest   in order to attract foreign investment inflow. 

In the last quarter of 2022, the MPR was retained at 16.5 per cent; CRR was 32.5 per cent; and liquidity ratio, 30 per cent.

The MAN observed in retrospect that the effect of the Russian war in Ukraine on the Nigerian economy was quick in the second half of 2022 as the cost of wheat and other food inputs increased. In addition, prices of fuels, particularly diesel rose by over 50 percent; cost of transportation logistics including shipping escalated even as the effect of COVID-19 pandemic is yet to fully die down.

Moreover, the CBN policy on redesigning the Naira, which aimed at bringing N3 trillion of cash in circulation in the economy into the control of the banking system created a cash crunch that debilitated economic activities in the last quarter of 2022.

“This particularly affected the manufacturing sector adversely as it was extremely difficult to sell most of the fast-moving consumer goods and other commodities by the sector in the period.

Therefore, the performance of the manufacturing sector based on the outcome of the survey is corroborated by the GDP reports of National Bureau of Statistics, which showed that output growth of the sector declined to -1.91 percent in the third quarter of 2022 from 3.0 percent recorded in the second quarter before moving up to 2.83 percent in the fourth quarter of the year.

Recommendations 

Consequently, it is critically important that the challenges identified by manufacturers in the course of the survey are adequately addressed, especially by improving forex availability to the manufacturers via the official windows.

The MAN recommended the prioritisation “of forex intervention through the official market, particularly to support the raw materials and machine needs of the industries; improve forex allocation to industrial sector and enhance the capacity of designated banks to  efficiently process  application  of  forex by manufacturers; grant concessional forex allocation at the official forex market to industries  for importation of productive inputs that are not locally available and the unification of the various forex windows in the country.”

It also recommended the development and implementation of a roadmap for improved power supply that would focus on off-grid solutions and independent power projects by the private sector to ensure adequate supply of energy for production and also attract and expand investment.

The association also urged the government to “carry out further investment in the electricity value chain and commit to adding 10000MW to the current electricity distributed in the country.”

It also called on the government to “embrace and support significant development of energy mix and renewable: the country has huge potentials for solar and wind while commissioning the resuscitation of the existing national refineries to produce fuels locally.”