Again, Down Goes the Fortunes of Manufacturers

A report of a survey carried out by the Manufacturers Association of Nigeria showed that manufacturers were groaning as their fortunes declines due to harsh operating environment, writes Dike Onwuamaeze

For the umpteenth time, the Manufacturers Association of Nigeria (MAN), has lamented the deteriorating fortunes of its members in the first half of 2023.

It latest lamentation was published last week in the MAN CEO’s Confidence Index (MCCI) that reviewed manufacturers’ confidence in the economy in the second quarter of 2023 (Q2’23). The report was titled, “In Focus: How Naira Scarcity Took a Toll on Manufacturing Businesses.”

It said that sequel to the Naira redesign and the new cash withdrawal limits by the Central Bank of Nigeria (CBN), the scarcity of both old and new Naira notes across all banking halls and electronic payment channels in the country meted severe hardship on manufacturers that they made slow progress to recover from in the Q2’23.

According to the MCCI report, “the prolonged crisis nearly crippled manufacturing companies with about 20 per cent and 30 per cent decrease in sales for consumer goods and cement respectively.”

It went further to say that the cash crunch “crisis impacted negatively on the manufacturers by directly limiting their working capital, thus halting their daily business operations.

It added, “In addition, the Naira scarcity crushed the consumer patronage of manufacturing firms and resultantly escalated their volume of inventories, especially for retail goods.

“By exposing the highly cash-based distributive trade sector to great risk, the economic crisis had severe consequences on the manufacturing value chain and cost of logistics.”

It further stated that the substantial reduction in money velocity left opportunity for speculation and ignited the creation of a Naira black market that compounded the woes of manufacturers already plagued by insufficient foreign exchange (FX) problem. 

“The Naira scarcity clearly wiped out numerous small and medium manufacturing businesses whose transactions were cash-based, especially those within the agro-allied industries who regularly deal with local farmers in remote towns where no formal banking is in sight.

“More unfortunately, the exorbitant POS charges on such cash constrained the operations of resilient manufacturing SMEs and worsened their cost of doing business, ”the report said.

Cashless economy

The report also highlighted out that the country’s transition to a cashless economy required no urgency or policy aggressiveness considering that a lot of progress has already been made.

A comparative analysis of the country’s cashless status has shown that while the ratio of cash to GDP in Europe, United States of America and South Africa are about 10 per cent, 6.0 per cent and 3.5 per cent respectively, Nigeria’s ratio is impressively below 1.5 per cent.

Therefore, achieving a full cashless economy should not be the pressing issue when there are tougher challenges of insecurity, exchange rate volatility, skyrocketing inflation, energy disruption, over bloated fiscal debt, dwindling foreign reserves, business collapses and daily divestments to contend with.

It moaned that, “the idea of throwing policies of subsidy removal and a free floating exchange rate at Nigerians within a short space of time could result in another policy somersault that sets to drag back the economy without any hope of recovery and could result in the failure of President Ahmed Bola Tinubu’s promise of a renewed hope.

“The abrupt removal of fuel subsidy without appropriate palliatives is already beginning to wane on the confidence of Nigerians in this new administration.”

The MAN stated in the report that its members groaned in pain as all the major performance indicators of the sector declined in the Q2’23 due to slow recovery from the dire impact of the Naira crunch.  

The report stated that “manufacturers are extremely groaning in pain due to these issues that are frustrating their contribution to the economy,” and caused a decline in the  Aggregate Index Score (AIS) of the MCCI to 52.7 points in the second quarter of 2023 from 54.1 points it recorded in the first quarter of 2023.

It further stated that the operating environment impacted most negatively on the activities of the motor vehicles and miscellaneous assembly, which deteriorated further below the benchmark of 50 points from 48.6 to 46.7 points, adding that “these operators were adversely affected by the exorbitant new premium rate for motor insurance and the abrupt subsidy removal which significantly worsened sales performance and increased the consumer’s preference for fairly used vehicles as a result of low purchasing power.”

Major indicators

Commenting on the major indicators that altered negatively in the Q2’23, the MCCI said: “Production and distribution costs escalated by 17.3 per cent in the quarter under review. 

“Capacity utilisation nosedived further by 5.6 per cent in the quarter under review from a contraction of 5.0 per cent witnessed in the preceding quarter.

“Volume of production contracted by 6.1 per cent in the quarter under review from a contraction of 13 per cent recorded in the previous quarter.

“Manufacturing investment dipped further by 5.6 per cent in the second quarter of 2023 from 3.0 per cent contraction recorded in preceding quarter.

“Manufacturing employment reduced further by 5.7 per cent in the second quarter of 2023 from 3.0 per cent contraction recorded in preceding quarter.

“Sales volume plummeted by 6.3 per cent in the second quarter of 2023 against the 13 per cent contraction witnessed in the preceding quarter.

“Cost of shipment rose by 14.3 per cent in the second quarter of 2023 though witnessed a slowdown from the 20 per cent increase recorded in the first quarter of 2023.”

It, therefore, concluded that, “a critical evaluation of the analysis above provides an inference that major performance indicators of the manufacturing sector all recorded unfavorable changes.”

It attributed the deterioration the manufacturing sector experienced to the harsh business-operating environment evidenced by poor macroeconomic indices.

“The underperformance was largely driven by the slow recovery from the cash crunch, high cost of energy, high transportation cost and partially by the abrupt removal of subsidy that took effect towards the end of the second quarter of 2023.

“The economic turmoil disrupted the manufacturing value chain, escalated cost of manufacturing operations and resulted in reduction in manufacturing patronage,” the report said.

The MCCI added that, “sequel to the Naira redesign and the new cash withdrawal limits by the Central Bank of Nigeria (CBN), the scarcity of both old and new Naira notes across all banking halls and electronic payment channels in the country meted severe hardship on manufacturers.  

“In addition, the Naira scarcity crushed the consumer patronage of manufacturing firms and resultantly escalated their volume of inventories, especially for retail goods.

“By exposing the highly cash-based distributive trade sector to great risk, the economic crisis had severe consequences on the manufacturing value chain and cost of logistics.”

In addition, the report noted that manufacturing activities in the second quarter of 2023 was adversely affected by escalation in the Consumer Price Index (CPI), continuous erosion in Naira value and difficulty in accessing foreign exchange, as well as high cost of energy, exorbitant taxes, high lending rates, persistent, insecurity, domino effects of the lingering Russian-Ukrainian war, slow recovery from the cash crisis.

The report warned that, “achieving a full cashless economy should not be the pressing issue when there are tougher challenges of insecurity, exchange rate volatility, skyrocketing inflation, energy disruption, over bloated fiscal debt, dwindling foreign reserves, business collapses and daily divestments.”

The effect of the deteriorating business environment is that only the electrical and electronics sector witnessed an improved performance from 49.7 to 51.4 points during the period under review due to increased supply of electricity, which encouraged production and patronage in the sector during the period under review.

The performance of other sectorial groups declined, including food, beverage and tobacco (57.6); textile apparel and footwear (50.5); wood and wood products (50.2); pulp, paper, printing and publishing (51.9); chemical and pharmaceutical (56.6); non-metallic products (50.2); domestic/industrial plastic and rubber (57.6) and basic metal, iron and steel (54.6).   

They all suffered a decline although their indices stood above the 50-point benchmark, which suggested that manufacturers operating in the groups remained confident in the macro economy perhaps due to the expectation of more favourable business reforms by the new administration.    

Zonal Index

The zonal breakdown of the MCCI showed that six out of the 14 industrial zones performed negatively by scoring points that were below the 50 points benchmark. These zones were Abuja (40), Rivers/Bayelsa (40.5), Cross-Rivers/Akwa-Ibom (45), Kano (46.2), Kaduna (47.8) and Oyo/Ondo/Ekiti/Osun (48.6). They have low confidence in the economy by recording index scores that were less than 50 points. “They were depressed by the high-cost operating environment in the second quarter of 2023 as underlined by their index scores which fell below the benchmark points,” MCCI said.

However, Apapa (63.9), Ikeja (63.7), Ogun (61.1), Kwara/Kogi (60.4), Edo/Delta (60.1), Imo/Abia (57.4) and Bauchi/Benue/Plateau (53.1) recorded index scores above the 50-point standard in the quarter under review.

The report said that “with the exception of Ikeja, they reflect incremental changes from the figures recorded in the previous quarter, hence, indicating continuous improvement of the confidence of manufacturers operating in the six zones.”

Macroeconomic Performance 

This section of the report portrayed the effect of macroeconomic trends like FX, lending rate, commercial bank loans and federal government’s capital expenditure on the perceptions of CEOs of manufacturing companies within the second quarter of 2023. It showed that manufacturing activities continued to suffer due to persisting scarcity of FX and further depreciation of the Naira.

“Only 14.7 per cent of manufacturers enumerated claimed that the rate at which FX was sourced improved in the second quarter of 2023; 66 per cent disagreed while 19.3 per cent were not sure if FX sourcing had improved in the quarter under review. The lingering FX scarcity and continued 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. Despite the recent reform to unify all FX windows, the exorbitant premium that persisted between the official and parallel exchange rates has further stalled manufacturing operations.

“Similarly, the interest rate charged to manufacturers by the commercial banks appeared to have deteriorated the productivity of the manufacturing sector in the quarter under review. Only 10.1 per cent of manufacturers interviewed agreed that the bank lending rate had improved in the second quarter of 2023 as against 20.3 per cent that agreed in the first quarter of 2023.

“About 84 per cent disagreed that the rate at which banks lend to manufacturers encouraged productivity in the second quarter of 2023, which is greater than the percentage recorded in the previous quarter. Highly exorbitant double-digit lending rate of about 30 per cent has rendered a number of manufacturers uncompetitive and contributed to declining investment in the sector.

“In addition, 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 67 per cent of manufacturers enumerated disagreed that commercial bank loans to the manufacturing sector encourage productivity, “the report said.

It added, “Unfortunately, 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. Incidentally, when credit is available, it is usually on short-term tenure, which do not adequately support the medium to long-term gestation required in the manufacturing sector. The implication is low investment, limited capacity utilization and production level in the sector.”

The manufacturers advised that “it is highly expedient that the government should strive to ensure the harmonisation of fiscal and monetary policies that will pave the way for a stable macroeconomic environment needed to promote productivity in the manufacturing sector and improve the ease of doing business.”