Manufacturers Rising Confidence amidst Difficult Operating Environment

Report by the Manufacturers Association of Nigeria showed rising operators’ confidence in Q1’24, even though emerging policies may imperil this positive showing, writes Dike Onwuamaeze

The Manufacturers CEO Confidence Index (MCCI) in the Nigeria’s macroeconomic environment grew for the first time since the Q3 2022 in the first quarter of 2024 (Q1’24). This was revealed by the MCCI’s survey, which showed that the Aggregate Index Score (AIS) of the MCCI increased by 1.7 points to 53.5 points in Q1 2024 from 51.8 points recorded in Q4 2023.

The President of the Manufacturers Association of Nigeria (MAN), Mr. Francis Meshioye, who unveiled the report to journalists, said: “This report sheds light on the current state of the industry, its challenges, and the opportunities that lie ahead.”

Also, the Director General of MAN, Mr. Segun Ajayi-Kadir, noted that the report interestingly confirmed a moderate improvement in the AIS. “Notwithstanding, this performance shows that the manufacturing sector is set on the path of restoration and recovery, at least to the level recorded in Q3 2022 with the hope of improvement in the next quarter.

“This is further buttressed by mild performance recorded at the sectoral and zonal levels as well as the positive projections of confidence indices for the next quarter, even though emerging policies are pointing to the contrary and may imperil this positivity,” Ajayi-Kadir said.

Weighted mean

According to the report, which was issued in May by the MAN, the AIS of MCCI is the weighted mean of the observed and expected changes in business conditions, employment and production level in the economy based on the perceptions of manufacturers in the quarter under review.  

The MCCI stated, “All the standard diffusion factors increased due to the positive effect of selective reforms and the consistent appreciation of the Naira in the greater part of the last month (March) of the quarter by about 22 per cent and 28 per cent in the official and parallel markets respectively. This moderately reduced the cost of imported raw materials and machinery as well as the import duty payments during the later part of the quarter.”

According to the report, other factors that contributed to the improved perception of manufacturers during the quarter included the expectation of easing diesel prices, which accounts for 48 per cent of manufacturers’ expenditure on alternative energy.

The report stated that the current business condition (CBC) rose from 44.7 in Q4 2023 to 46.2 points in Q1 2024 while the business condition in the next quarter is projected to rise from 57.8 points to 59.2 points.

“Similarly, the current employment condition (CEC), which is the rate of Employment, also improved from 45.9 points in Q4 2023 to 47.5 points in Q1 2024 and it is projected to improve to 51.2 points in the next quarter. 

“In the same vein, the production level forecast is expected to move upward from a confidence level of 60.7 points to 63.5 points, “it stated.

CBC, CEC Below Threshold

However, the report highlighted that a cursory observation would reveal that indices of the CBC and the CEC remained below the 50-point threshold.

This, it stated, was due to the lingering effect of the rising inflation, escalated energy prices, exchange rate instability and unstable customs duty rates, especially in the months of January and February.

It said: “The tepid rise in the Aggregate MCCI was largely occasioned by the instability in the price of gas, exchange rate and customs duty that limited the gains associated with the naira appreciation.”

Sectorial Group Performance

The report covered 10 sectoral groups of MAN using the same diffusion factors such as business condition, employment condition and production level.

Analysis of the survey’s report showed that eight of the sectors recorded confidence levels above the 50-point threshold. Nevertheless, the Electrical & Electronics Sectoral Group dipped from 56.9 points recorded in Q4 2023 to 53.3 points in Q1 2024. This was majorly attributed to the instability in the exchange rate and customs duty as well as the erratic power supply that limited the household demands for electrical appliances during the quarter under review.

The two sectors that performed below the 50 point threshold were the Chemical & Pharmaceutical and the Motor Vehicle & Miscellanies Assembly sectoral groups. They recorded confidence indices below the threshold at 49 points and 42.5 points respectively.

Apart from forex limitations, the report said that the Chemical & Pharmaceutical sectoral group was challenged by the global shortage of Active Pharmaceutical Ingredients (API), the reduced sales arising from skyrocketed drug prices, lack of strategic procurement process and the imposition of high tariffs on imports.

In the same manner, the Motor Vehicle Assembly & Miscellaneous sectoral group was plagued by low patronage by the government and the relatively higher demand for Nigerian used vehicles by consumers.

The sector is also yet to fully recover from the poor sales arising from the drastic fall in the usage of personal cars since the removal of fuel subsidy.

Zonal performances

The breakdown of the MCCI by industrial zone showed that five industrial zones showed low manufacturers confidence in the economy by recording indices that were less than 50 points during the period under review. These zones are Bauchi/Benue/Plateau (43.8); Kano (44); Rivers (44.3); Oyo/Ondo/Ekiti/Osun (47.1) and Cross Rivers/Akwa Ibom (48). This implied that majority of the operators within these industrial zones were decimated by the volatility in the exchange rate and the customs duty rates as well as the surge in gas prices, especially in the month of February.

Conversely, nine industrial zones recorded index scores that were above the 50-point standard during the quarter under review. These zones were Kwara/Kogi (62); Edo/Delta (61.6); Apapa (60.6); Ogun (60); Kaduna (58); Imo/Abia (57.7); Ikeja (56.3); Abuja (53) and Anambra/Enugu (52.3).

“However, manufacturers operating in Kwara/Kogi, Imo/Abia and Ikeja industrial zones recorded waning business confidence quarter-on-quarter. The diminished business confidence is mainly attributed to foreign exchange rate instability, high cost of doing business, reduced patronage and sudden change in government policies,” the report said. 

Macroeconomic Performances

This section of the report showed the perspectives of CEOs on the effect of macroeconomic trend of forex, lending rate, commercial bank loans and federal government’s capital expenditure on the manufacturing companies within Q1 2024.

It showed that manufacturing activities continued to suffer due to persistent forex scarcity and exchange instability. Only 16.8 per cent of manufacturers surveyed affirmed that access to forex improved in Q1 2024 while 62 per cent disagreed. But 21.2 percent were not sure if forex sourcing had improved.

Despite the Central Bank’s clearance of forex backlogs and the re-introduction of dollar sales to the Bureau de Change (BDC) operators, the report stated that the invalidation of about $2.4 billion forex forward contracts and the revocation of over 4,000 BDC’s licenses intensified the scarcity of forex during the quarter. This is in addition to the lingering impact of the forex limitation imposed by the introduction of the Price Verification Portal (PVP) in the third quarter of 2023.

The report also said that only 22.1 per cent of manufacturers interviewed agreed that bank lending rate encouraged their productivity in the in Q1 2024 while 69.3 percent disagreed.

But 26.1 per cent of manufacturers interviewed agreed that the size of commercial bank loans to the manufacturing sector encouraged productivity in Q1 2024 when compared to 46.6 per cent that agreed in Q4 of 2023.

According to the report, “Manufacturers’ access to credit was further limited by the aggressive hikes in the benchmark interest rate consecutively by 600 basis points from 18.75 per cent in January to 22.75 per cent in February and to 24.75 per cent in late March.

“Sequel to the decision of the Monetary Policy Committee (MPC) in the first quarter, average prime lending rate and maximum lending rate for the manufacturing sector rose exorbitantly to 20.65 per cent and 30.25 per cent respectively.

“The upward adjustment of the Cash Reserve Ratio (CRR) to 45 per cent in February also had a remarkable adverse impact on the size of available credit to the manufacturing sector.

“In addition, the narrowing of the asymmetric corridor from +100/-700 in February to +100/-300 in late March is set to further reduce the incentives of Deposit Money Banks (DMBs) to lend to the manufacturing sector.

“The contractionary monetary policy changes during the quarter greatly increased the cost and reduced the size of investments in branding, cost-saving technology, and production expansion.”

Operating Environment Performance

The perspectives of manufacturers on the implication of the operating environment on manufacturing activities in Q1 2024 were also measured focusing on 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 MDAs.

The analysis of the MCCI showed that 82.2 per cent of the manufacturers that responded to the survey confirmed that over-regulation by the government depresses manufacturing productivity. Moreover, 85.1 per cent attested that multiple taxation depressed productivity in the sector and 66.7 per cent affirmed that port gridlocks negatively affected productivity in the sector.

Furthermore, 51.8 per cent of the respondents confirmed that local sourcing of raw materials improved in the sector under review while 46.9 per cent agreed that the implementation of the Executive Order 003 has been beneficial to the sector.

Also, 56.4 per cent of the manufacturers surveyed agreed that the inventory of unsold manufactured goods had reduced in the last three months. The report, however, stated that persistent inflationary pressure contributed immensely to the increase in the value of unsold finished goods.  

Challenges of Manufacturers

During the survey, manufacturers identified and ranked the challenges facing their operations in order of severity. The top 10 on the list of manufacturers’ challenges included unstable and high exchange rate/scarcity of forex; inadequate power supply/frequent power outages; high inflation/ high operating cost (of raw materials, labour, equipment and maintenance); high cost of energy (petrol, diesel, gas); high and multiple taxes, charges, levies. Others include insecurity; over-regulation and policy inconsistency; high interest rate/inadequate access to credit; poor infrastructure and distribution channels / multiple check points/gridlock at the national ports and high cost of transportation/ logistics costs.

These were accordingly followed by high inventory of unsold manufactured goods/low patronage/poor sales; high and unstable import duty; unavailability of raw materials/delay in receiving imported raw materials; frequent change in customer demand/ inaccurate demand forecasting; influx of sub-standard goods / smuggling; shortage of skilled labour; scarcity of genuine machine parts; corruption/lack of moral value and poor business plan/inventory & supply chain management.