Manufacturers Reel under Deteriorating Business Environment

Harsh business environment is having significant negative impacts on the manufacturing sector, decreasing   productivity and competitiveness and foisting N1.5 trillion losses on the sector, writes Dike Onwuamaeze

This is not the best of time for industrialists in Nigeria. Macroeconomic variables such as exchange rate, inflation rate and interest rate as well as some fiscal and regulatory policies appeared to have been lined up against their fortunes since May 29, 2023.  

Last week, the Managing Director/CEO Nigerian Breweries Plc, Mr. Hans Essaadi, declared that the country’s tough business landscape that is characterised by double-digit inflation rates, Naira devaluation, foreign exchange challenges and diminished consumer spend, has taken its toll on many businesses in Nigeria.

This harsh operating environment has also constrained the Nigerian Breweries to reorganise its operation, which included shutting down two out of its nine brew plants in the country.

Essaadi said: “This is why we have taken the decision to further consolidate our business operations for efficient cost management and optimal use of our resources for future sustainable growth.

“We recognise and regret the impact that the suspension of brewery operations in the two affected locations may have on our employees.

“We are committed to limiting the impact on our people as much as possible by exhausting all options available including the relocation and redistribution of employees to our other seven breweries; and providing strong support and severance packages to all those that become unavoidably affected.”   

Last year, the former Chief Executive Officer of Guinness Nigeria Plc, Mr. John Musunga, told journalists President Bola Ahmed Tinubu’s decision to unify the foreign exchange rates   had significant unintended consequences on the operation of the company. 

Musunga said: “When President Tinubu announced new policies that resulted in currency devaluation, we were carrying huge foreign exchange exposure that we have to revalue, which removed us from very healthy profit position which we were going to report in June. If that announcement had been made on July 1, 2023, we would have made quite a bit of profit. But because it was made in June and our year closes in June we made N19 billion loss because of that revaluation.”

A similar view was expressed by the Managing Director/Chief Executive Officer (CEO) of BUA Cement, Mr. Yusuf Haliru Binji, on March 21, 2024, when he commented on the impact of the prevailing business environment in the country on businesses. Binji remarked that “the operating environment in 2023 was largely challenging but still affords some joyous moments.

“As you are aware, we faced quite a few headwinds ranging from currency redesign policy to its impact on currency in circulation and also the devaluation of the Naira,” he said.  

A report by Meristem on “Impact of Currency Depreciation on Coverage Companies 2023FY & Q1:2024,” which was published last month stated that the depreciation of the Naira by 49.42 per cent to N907.11/Dollar in 2023FY had a diverse impact on companies’ operations and profitability.

Most of these companies, especially those in the manufacturing sector, posted underwhelming results because of the impct escalating input costs and revaluation of foreign currency debt obligations due to FX volatility had on their profitability.

The report projected that given the continued depreciation in Q1:2024, which was 43.86 per cent year to YtD to N1,615.94/Dollar on the NAFEM window as of March 13, the financial performance of some companies in Q1:2024 would mirror that of 2023FY.   

According to the report, Nestle Nigeria Plc, Cadbury Nigeria Plc, Dangote Sugar, Flourmill Nigeria PLC and BUA Foods would be negatively affected by the prevailing foreign exchange situation in the country even into the Q1’24 while Dangote Cement and BUA Cement would be moderately impacted.

For Dangote Cement, the report stated that “the depreciation of the Naira could lead to further rise in the cost of settling foreign currency obligations” even though shareholders’ funds would “remain positive but low.”

It also said that the BUA Cement’s “re-pricing of dollar-denominated loans and foreign transactions” would lead to foreign exchange losses due to Naira devaluation but “shareholders’ funds will remain positive but low.”

The report projected that manufacturers in the healthcare sector like Fidson, May and Baker and Neimeth would experience minimal impact, reduced profitability and higher costs of raw materials, especially for active pharmaceutical ingredients.    

Their declining fortunes were precipitated by President Bola Ahmed Tinubu’s unilateral declaration during his presidential inaugural address on May 29, 2023, which unified the multiple foreign exchange rates an exposed the Naira to the vagaries of the market forces and exposed the manufacturing sector to savage inflationary pressure that skyrocketed input costs, eroded consumers’ purchasing power and left manufacturers with large stock of unsold products.

Also, the Central Bank of Nigeria (CBN) unending monetary tightening through regular hiking of its Monetary Policy Rate (MPR) in a bid to stem inflation has not helped the manufacturers’ fortunes. It has kept their cost of credits going upward and hurting their competitiveness.

The Manufacturers Association of Nigeria (MAN) projected recently that its members have lost at least N1.5 trillion in the last six months to forex-related transactions. This was disclosed by the Director-General of MAN, Segun Ajayi-Kadir.

Ajayi Kadiri said that the Nigerian economy has encountered a range of challenges in recent years, such as foreign exchange instability, escalating energy prices and food insecurity that have worsened the inflationary pressures and grossly eroded the consumers’ purchasing power.

These issues, according to him, have negative impacts on the manufacturing sector, leading to decreased productivity and reduced competitiveness.

He said: “The higher cost of doing business will be further exacerbated by the decision of MPC, thereby worsening competitiveness of Nigerian products in the global market, which is evident in the drastic reduction in global demand for these products.

“Data provided by the World Trade Organisation, revealed that South African manufacturing export value was $46 billion, while that of Nigeria was $3billion in 2022. Clearly, this is over 15 times greater than Nigeria’s manufacturing export value in that year.

“The reduction in global demand for Nigerian products was further buttressed by NBS report that confirmed that manufacturing export value of Nigeria plummeted by 166 per cent, from N2.07 trillion in 2019 to N778.44 billion in 2023.

“In addition, the exorbitant lending rate of over 30 percent has contributed largely to a drop in the share of manufacturing export to non-oil export from 82.4 per cent to 24.8 per cent in 2019 and 2023 respectively.”

It should be recalled that the Monetary Policy Committee of the CBN on March 25 decided to further tighten its monetary policy by raising the MPR by 200 basis points to 24.75 per cent from 22.75 per cent; adjust the asymmetric corridor around the MPR to +100/-300 basis points; retain the Cash Reserve Ratio (CRR) of Deposit Money Banks at 45.0 per cent; adjust the Cash Reserve Ratio of Merchant Banks from 10.0 per cent to 14.0 percent and retain the Liquidity Ratio at 30.0 percent.

These decisions, according to MAN, would limit credit interventions, increase the cost of loans, raise production cost, and reduce access to funds as well as manufacturing investment and competitiveness.

Ajayi-Kadir said: “The resultant increase in the cost of servicing loans is a threat to the financial stability of manufacturing companies. The increase will destabilize manufacturers through the disruption of production plans, avoidable stock-out situations, and decreased capacity utilization. Clearly, all of these could lead to downsizing of workers, closure of more companies, upscaling of social vices and insecurity in Nigeria.”

As if these were not enough, the federal government last week approved 300 per cent increase in electricity tariffs. This would have a telling effect because power constitutes about 50 per cent of the cost of manufacturing in Nigeria.

Last week, the Lagos Chamber of Commerce and Industry (LCCI) issued a statement on the rising cost of doing business in Nigeria where it expressed grave concerns that the recent hikes in electricity tariff and MPR would make the cost of living and doing business in Nigeria unbearable.  

The chamber said that feedback from businesses and analysts suggested that these moves would inflict severe pain on the private sector and further exacerbate the already challenging economic environment.

According to the LCCI, the private sector, which is the primary driver of growth and employment generation in Nigeria, is currently plagued with increased borrowing costs, reduced investment incentives, heightened uncertainties in our policy environment, and a pressured foreign exchange market.    

The Director General of LCCI, Dr. Chinyere Almona, said: “We acknowledge that the removal of the subsidy on electricity supply may have been in line with attracting foreign investors into the sector with a cost-reflective tariff.

“We have also advocated that we subsidise production instead of consumption. However, our major concern is seeing businesses pay heavily for the services that they do not enjoy optimally. It is a grave concern that with a higher cost of power, companies are still not having access to the service.”    

Beyond the effects of harsh regulatory frameworks, infrastructure deficits and bureaucratic bottlenecks, the Country Representative for United Nations Office on Drugs and Crime (UNODC), Dr. Oliver Stolpe, has identified corruption, insecurity and slow judicial process as major obstacles to the ease of doing business in Nigeria.

Stolpe, who spoke recently at the LCCI’s event on ease of doing business pointed out that corruption and insecurity is creating additional expense of $500 million on shipping liners that pass through the Gulf of Guinea that has to do with Nigeria and Principe.

He said that a survey by the UNODC and the National Bureau of Statistics (NBS) in 2019 also revealed that N675 billion was recorded in 2019 as petty bribes paid by Nigerians, adding that half of this sum was collected on Nigerian roads, which was additional cost to operators in the transport and logistics sector of the economy.

According to him, “insecurity and corruption are factors that affect the ease of ease of doing business in Nigeria and foreign direct investment.     

“When we look specifically at the shipping industry it is estimated that the shipping industry at the Gulf of Guinea, which is Principe and Nigeria Corridor, incurs an additional $500 million due to insecurity in the Gulf of Guinea due to increased freight rate and additional security and staff related costs that shipping companies incur in order to secure their vessels.”  

The President of LCCI, Mr. Gabriel Idahosa, said that Nigeria is endowed with abundant resources and a vibrant population, and currently stands at a critical stage in its economic history.

However, while the country’s potential is undeniable, the ease of doing business has remained a crucial determinant of its ability to harness this potential fully.

Idahosa said that the journey towards enhancing the ease of doing business in Nigeria must address regulatory frameworks, infrastructure deficits, bureaucratic bottlenecks, and most importantly, offers support towards boosting entrepreneurship that drives our economy forward.

He said: “We should also become more careful about uncertainties regarding the workings of our monetary and fiscal agencies in their policy interventions.

“Investors need to have clear outlook and direction about our policies and how these affect their investment decision making.”