Nigeria’s Macroeconomic Environment and Its Negative Impacts on Manufacturers

The Manufacturers Association of Nigeria’s MCCI showed worrisome downward indicators and call for urgent and constructive interventions that will alleviate the groaning of the sector’s operators, writes Dike Onwuamaeze

The macroeconomic environment in Nigeria had significant negative impact on the manufacturing sector in the first quarter of 2023.   This was revealed by a report on the survey of 400 chief executive officers in the manufacturing sector that was published in the “MAN CEO’s Confidence Index (MCCI) Q1 23.”

During the period under review, the Aggregate Index Score (AIS) of MCCI declined to 54.1 points in the first quarter of 2023 from 55.0 points recorded in the fourth quarter of 2022. This followed the decline in all the standard diffusion factors that were studied in the survey. For instance, the current business condition declined to 50.4 points in Q1’23 from 52.7 points in Q4’22. Similarly, the business condition for the next three months also declined to 59.6 points from 60.1 points. In addition, current employment condition, which is the rate of employment in the manufacturing sector, also dropped to 50.7 points from 51.3 points. Furthermore, the employment condition for the next three months also lowered to 47.8 points from 48.8 points while production level for the next three months also dropped to 61.8points from 62.2 points.

The MCCI stated that, “employment decision by manufacturers has been so difficult due to the unpredictability and difficulty in macroeconomic environment.”

These difficulties, according to the MCCI, included “acute shortage of foreign exchange (FX) and depreciation in the Naira’s value, cost of energy and limited supply of electricity, speculation about the effect of redesigning of the Naira, the national elections and the lingering adverse effect of Russian-Ukrainian war were major concerns of manufacturers in the quarter.”

The figures, as revealed in the MCCI’s report, showed that production and distribution costs escalated by 24 per cent in the quarter under review, which was much higher than the 19 per cent increase that was witnessed in the preceding Q4’22. In the manner, capacity utilisation nosedived further by 5.0 per cent in the quarter under review similar to the contraction witnessed in the preceding quarter.

The MCCI also reported that the volume of production contracted by 13 per cent in the quarter under review against the 1.0 per cent growth that was recorded in the previous quarter (Q4’22).

Similarly, manufacturing investment dropped by 3.0 per cent in the first quarter of 2023 from 2.0 per cent increase recorded in preceding quarter.

Moreover, manufacturing employment reduced further by 3.0 per cent in the first quarter of 2023 from 2.0 per cent contraction recorded in preceding quarter.

In addition, sales volume plummeted by 13 per cent in the first quarter of 2023 against the stable record witnessed in the preceding quarter.  

The MCCI said: “A critical evaluation of the analysis above provides an inference that the manufacturing sector’s performance in the first quarter of 2023 was much lower than what was obtained in the last quarter of 2022.

The report stated clearly that all the “major performance indicators of the manufacturing sector recorded unfavorable changes.” No thanks to “the harsh business-operating environment evidenced by poor macroeconomic indices, the underperformance was largely driven by the nationwide cash crunch in the first quarter of the year. The economic turmoil significantly crushed consumer patronage and costly disrupted the manufacturing value chain in most periods of the quarter.”

MACROECONOMIC PERFORMANCE

This section of the report portrayed the effect of macroeconomic trend of FX, lending rate, commercial bank loans and federal government’s capital expenditure on the perceptions of CEOs of manufacturing companies within the first quarter of 2023. It highlighted that manufacturing activities continued to suffer due to persisting scarcity of FX and unfavorable Naira exchange rate parity.

The MCCI said that only 28.3 per cent of manufacturers enumerated claimed that the rate at which FX was sourced improved in the first quarter of 2023; 53.9 per cent disagreed while 17.8 per cent were not sure if FX sourcing had improved in the quarter under review.

“The lingering FX scarcity and continuous depreciation of the Naira have left manufacturers bleeding and limited their capacity utilisation since the importation of non-locally produced critical input has become a nightmare,” the report said.

Furthermore, the MCCI’s report stated that interest rate charged to manufacturers by the commercial banks appeared to have deteriorated the productivity of the manufacturing sector in the quarter under review.

It said that only 20.3 per cent of manufacturers interviewed agreed that bank lending rate has improved in the first quarter of 2023 as against 30.4 per cent that agreed in the fourth quarter of 2022.

According to the report, “About 65 per cent disagreed that the rate at which banks lend to manufacturers encouraged productivity in the first quarter of 2023, which is greater than the percentage recorded in the previous quarter.”

It further stated, “Highly exorbitant double-digit lending rate of about 30 percent has rendered a number of manufacturers uncompetitive and contributed to declining investment in the sector.”

It added that, “the size of loans given to the manufacturing sector by commercial banks is grossly inadequate and as such does not encourage productivity in the sector. Over 60 per cent of manufacturers that were enumerated (in the survey) disagree that commercial bank loans to the manufacturing sector encouraged productivity.

“Unfortunately, while credit to public sector has soared over the years, credit support for the private sector in general and manufacturers in particular has been abysmally low.

“Incidentally, 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. The implication is low investment, limited capacity utilisation and low production level in the sector.”

The report said that the federal government did not invest in areas that would enhance the productivity of the country’s manufacturing sector. Insight provided in the report showed that “about 53 per cent of manufacturers enumerated in the survey disagreed that government’s capital expenditures have encouraged productivity in the manufacturing sector. Less than 30 per cent of those enumerated agreed, while about 18 per cent were not sure.”

The MCCI’s report expressed the view that “government’s capital expenditure should address the issues of economic infrastructure such as road, electricity, water, etc. that supports industrial sector businesses.”

It noted that the absence of these economic infrastructures have contributed significantly “to the high-cost of operating environment which obstructs the development of manufacturing in Nigeria.”

OPERATING ENVIRONMENT

The perspectives of manufacturers on the implication of the operating environment on manufacturing activities in the first quarter of 2023 were also measured. The measurement focused multiple regulation, multiple taxes, access to the national ports, local sourcing of raw materials, inventory of unsold manufactured goods, and patronage of Nigerian manufactured goods by government’s ministries, departments and agencies (MDAs).  

MANUFACTURERS’ CHALLENGES

The MCCI report also identified and ranked the current challenges of the manufacturing sector in order of severity of impact. It showed that multiple taxes/charges/levies were the topmost manufacturing challenges during the period under review. Other challenges were inadequate power supply, low patronage/poor sales that were exacerbated by consumers’ low purchasing power, unavailability of raw materials, delay in receiving imported raw materials, high cost of raw materials and scarcity of FX as well as high exchange rate and poor allocation of FX.

Other challenges that militated against the manufacturing sector during the period were high cost of diesel, energy and gas, high cost of production due to high inflation rate and high operating cost, and the severe Naira scarcity and cash crunch that prevailed in the first quarter of 2023 amongst other host of challenges.

Yet, despite these hosts of challenges, MCCI’s index score of first quarter of 2023 remained above the 50-point benchmark at 54.1 points, which indicated that manufacturers maintained their confidence in the economy. “They remain resilient despite the far-reaching implications of high inflation, multiplicity of taxes, erratic power supply, high cost of energy, as well as worsened credit and FX shortages, which continued to deter the sector’s prospect of catalysing the country to its desired stage of industrial development.

“Nonetheless, marginal contraction in the index score portends that the untoward hardship meted on the manufacturers is growing overwhelming and diminishing the resilience of the sector. Therefore, tackling the challenges of the manufacturing sector must be at the front burner of the new administration.

“President Bola Ahmed Tinubu 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.”

However, across sectoral groups, operators in electrical and electronics as well as those in motor vehicle and miscellaneous assembly with respective index scores of 49.7 and 48.6 exhibited gross loss of confidence as they fell below the 50-point benchmark. These sectoral groups were adversely affected by erratic electricity supply and instability of macroeconomic indicators that have significantly worsened sales performance in these sectoral groups.

Similarly, among industrial zones, activities in Kaduna (49.5 points), Abuja (48.6 points), Rivers/Bayelsa (46.2 points) and Cross-Rivers/Akwa-Ibom (43.9 points) were depressed by the high-cost of operating environment in the first quarter of 2023 as underlined by their index scores which fell below the benchmark points.

The report also recommended that government should initiate measures that would improve availability of FX, prioritise FX intervention through the official market, particularly to support the raw materials and machine needs of the industries and improve FX allocation to industrial sector.  

It further recommended the granting of concessional FX allocation at the official market to industries for importation of productive inputs that are not locally available.

The report’s recommendation also included improving electricity supply to the industry, commitment to upscaling electricity generation by at least 10,000MW, noting that Egypt built 10000MW in two years, the sustenance of the eligible customer initiative to improve electricity supplied to the manufacturing sector; resuscitate the existing national refineries to produce fuels locally; allow gas to be supplied to domestic users including manufacturers at international export price plus $1; that $3.2+$1 rather than the current $8.76 per cubic metre.

The report highlighted that, “manufacturing activities in the first quarter of 2023 was adversely affected by escalation in the Consumer Price Index (CPI), continuous erosion in Naira value and difficulty in accessing FX, high cost of energy, naira crunch, exorbitant taxes, high lending rates, persisting insecurity and the consequences of lingering Russian-Ukrainian war. Manufacturers are extremely groaning in pains due to these issues that are frustrating their contribution to the economy.”  

Sequel to above trends, it is highly expedient that the government strive to ensure the harmonization of fiscal and monetary policies that will pave way for a stable macroeconomic environment needed to promote productivity in the manufacturing sector and improve the ease of doing business especially at a time when the Dangote Refinery stands to benefit the economy via improved forex management and availability of energy.