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As Multinationals’ Withdrawal Shifts Nigeria’s Economic Landscape
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This is certainly not a good time for the nation’s manufacturing sector as a combination of exchange rate volatility and the attendant high cost of production, poor infrastructure and falling purchasing power are frustrating multinationals out of Nigeria. How the federal government intends to respond to the crisis in a way that encourages local operators will make a difference, writes Festus Akanbi
For the successive administrations’ inaction in the nation’s manufacturing sector, the chickens have finally come home to roost as the list of multinationals exiting the economy keeps expanding.
The manufacturing sector in Nigeria today faces significant challenges, marked by the departure of several multinational corporations in recent years. This departure has had profound implications on the economy, causing a reduction in foreign direct investment, job losses, and a decline in the sector’s overall productivity.
Industry affairs analysts said the absence of these multinational companies has created a void in technological expertise, infrastructure development, and supply chain networks, hindering the sector’s growth potential.
Recently, Procter & Gamble, with a portfolio valued at $85billion announced its exit plans. Other multinational firms that have also left Nigeria in 2023 include Unilever (home care and skin cleansing division), GlaxoSmithKline, Sanofi and Bolt Foods.
Nothing best describes the current pathetic situation in the nation’s manufacturing sector than the steep performance of some of the operators in recent times. For instance, Cadbury Plc recorded pre-tax losses of N10.24 billion during the nine months, a 355 per cent decline from the figure recorded in the corresponding quarter in 2022.
On its part, Dangote Sugar Refinery posted a net loss of N27,013.89 million compared to a net income of N24,838.45 million a year ago. Nigerian Brewery Plc’s operating profit declined by 23 per cent from N36billion in 2022 to N28 billion in the current period, while International Breweries’ Net loss was N4,947.03 million compared to N3,145.64 million a year ago.
According to the Chief Operating Officer of the Centre for the Promotion of Private Enterprise (CPPE), Muda Yusuf, “The impact of the market on the company’s overall net worth is due to two key factors – intensified competition within the industry and a declining consumer purchasing power.”
He added that the recent devaluation of the naira poses significant challenges for any business with substantial foreign exchange exposure, highlighting the current reality of the Nigerian market.
There are reports that rising interest rates and naira devaluation have continued to impact negatively on the operations of the manufacturing sector.
The naira devaluation has led to increased operating costs for multinationals whose major costs, including finance costs, are denominated in foreign currencies.
Meanwhile, the Central Bank of Nigeria (CBN) increased the monetary policy rate, also known as its benchmark interest rate, for the eighth consecutive time in July by 25 basis points to 18.75 per cent.
This puts more pressure on the margins of FMCG companies already dealing with double-digit inflation rates and the weak purchasing power of cash-strapped consumers.
Expectedly the challenging environment is taking its toll on the nation’s job market as reports showed that the number of jobs lost in the manufacturing sector rose to the highest in three years for the first half of 2023, according to the Manufacturers Association of Nigeria (MAN).
In the association’s latest half-yearly review report, the number increased by 108.7 per cent to 3,567 in H1 2023 from 1,709 in the same period of 2022. It also grew by 31.7 per cent to 2,708 in H2 of last year.
The number of jobs created in the sector declined by 32.8 per cent to 6,428 from 9,559 in H1 2022.
Unfriendly Business Environment
According to MAN, the decline in the number of jobs created in the sector during the period further highlighted the unfriendly business environment resulting from the hasty policies and the residual effect of the currency redesign policy that led to the naira crunch.
The trend is reflected in the increased cost of producing consumer goods, which are mostly essential commodities used regularly by households.
These include foods and beverages, toiletries, over-the-counter medicines, cleaning and laundry products, plastic goods, and personal care products, among others.
Reports showed that while the companies increased the prices of their products in response to the inflationary pressures on their operating cost, this has resulted in a low volume of patronage from the consumers whose income has equally been eroded by inflation.
The situation has now combined with losses they recorded in foreign exchange revaluation just as the higher exchange rate also increased the cost of foreign input forcing them to either close some production lines or scale down output below break-even points.
Apart from the problem of foreign exchange revaluation which has continued to keep both local and multinational companies on their toes, another issue giving operators sleepless nights is the difficulty in repatriating their FX funds to their headquarters. This is similar to the grouse of foreign airline operators, which were confronted with the inability to raise the foreign currency required for their operations as over $792 million of the funds were trapped before the recent gradual clearance by the apex bank.
The National President of the Association of Small Business Owners of Nigeria (ASBON), Femi Egbesola, was quoted as saying that about 25 per cent of manufacturing businesses “has gone under” this year because of the multiple challenges facing Micro, Small and Medium Enterprises, particularly manufacturers.
MAN Cries Out
On its part, the Manufacturers Association of Nigeria said the situation is so bad that more firms would shut down operations if the federal government failed to address the challenges such organisations face in the country.
The Director General of MAN, Segun Ajayi-Kadir, who disclosed this attributed it to the numerous challenges manufacturers face in the country’s difficult operating environment.
“We received the news with sadness but it was not unexpected.
“Manufacturing in any economy is a strategic choice and the government must decide if it wants the country to be industrialised. If so, it must take all necessary steps to remove the binding constraints that hinder the sector’s performance. Nigeria has not done so, so we see closures.”
Ajayi-Kadir stressed that the exit of P&G is just the latest in a string of manufacturers leaving the country. He noted the need for the government to take immediate action to address issues like poor infrastructure, inconsistent policies, and limited access to finance.
“Gamble, it’s news because it’s GlaxoSmithKline; it’s news because they have been in the country for a very long time,” he said. “But several others have quietly closed down, and the reasons are avoidable.”
Time to Focus Attention on Local Manufacturers
The MAN chief however believed the time had come for Nigerian policymakers to focus attention on local producers to fill the vacuum being created by the exit of large multinationals.
While expressing regret over the departure of the large companies, Ajayi-Kadir said it was an opportunity to focus on promoting local manufacturers. He believes empowering existing manufacturers will result in a more sustainable and enduring industrial sector.
“I think there is a strong lesson to be learnt there which is the fact that the big ones that are exiting are those multinationals and I think this will send a clear signal to the government that regrettable as it is, it should guide future actions, we need to be strategic in what we promote,” he said.
“So, what this means is that if you have a challenged local manufacturer, he is not likely to go anywhere.
“That is why we are saying that foreign direct investment is excellent, it has led to phenomenal improvement in the performance of the manufacturing sector for so many economies but it should come secondary to empowering the local investor, the existing manufacturers because that is what is enduring.”
It was because of the current travails of the nation’s manufacturers that the CPPE director raised the alarm that the recent decision by the Central Bank to increase the customs exchange rate from N783 to N952/$ would worsen the already prohibitive production and operating costs for businesses in the country.
Yusuf said the decision would also inflict more pain on the citizens, erode profit margins, reduce purchasing power and put the survival of businesses at an elevated risk.
This is why the current administration should as a matter of urgency remove all hindrances to the manufacturing sector. Apart from the issue of multiple taxation, the policy on foreign exchange allocation to this important sector of the economy should be a top priority.