Worrisome Drop in Manufacturing Contribution to GDP

The poor showing of the manufacturing sector in the recently released report of the Nigeria’s GDP by the National Bureau of Statistics has raised concern over the fortunes of the sector, writes Dike Onwuamaeze

The Nigerian manufacturing sector is passing through one of its most difficult times. The current reforms of the President Bola Ahmed Tinubu, especially the libralisation of the foreign exchange rate, the introduction of high electricity tariffs for industrialists that the Manufacturers Association of Nigeria (MAN) described as one of the highest in the world, and the manner the removal of petrol subsidy is being implemented is not giving any respite to firms in the manufacturing sector.

Moreover, the sector is reeling under high inflationary and interest rates, which are currently … respectively.

The corollary of these militating factors amongst others is the poor performance of the operator in the sector. In July 2024, the Chairman of the Federal Inland Revenue Service (FIRS), Zacch Adedeji, revealed that the FIRS might not be able to collect taxes from manufacturers in the next 10 years as “all manufacturing entity in Nigeria declared a total of N1.7 trillion losses.  

“It concerns the government because by our law, we will not be able to collect any taxes from them until they recover all those losses, till next 10 years, five years. Even when they make a profit next year, they will tell you they have losses they are carrying forward.”   

Now, the latest report of the National Bureau of Statistics (NBS) has revealed that Nigeria’s manufacturing sector’s contribution to the Gross Domestic Product (GDP) declined in the first two quarters of 2024 by 20.95 per cent when compared with the same period in 2023.

The report showed that the sector’s contribution to GDP dropped from 16.04 per cent in Q4 2023 to 12.68 per cent in Q2 2024.    

The manufacturing sector’s nominal GDP growth in the second quarter of 2024 was recorded at 1.91 per cent year-on-year. This represented a significant decline of 27.99 per cent points compared to the 29.90 per cent growth recorded in the corresponding period of 2023.       

The real GDP growth in the manufacturing sector also reflects the sector’s ongoing struggles. In Q1 2024, real GDP growth for the manufacturing sector was 1.49 per cent year-on-year, a slight improvement over the previous quarter, with a contribution to overall GDP of 9.98 per cent.

However, by Q2 2024, real GDP growth had further declined to 1.28 per cent, which is lower than both the growth recorded in Q2 2023 and the preceding quarter.  

NACCIMA Reacts

The National President of National Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Mr. Dele Kelvin Oye, told THISDAY that he came to the conclusion that the significant contraction of the sector’s contribution to GDP is a cause for concern because the manufacturing industry is a crucial driver of economic growth, job creation, and industrial development.

Oye believed that several factors contributed to the shrinking of the manufacturing sector’s GDP contribution. These factors include persistent challenges with the availability and cost of key inputs such as raw materials, energy (electricity and fuel), and foreign exchange. Others are weak domestic demand due to the economic impact of the COVID-19 pandemic, high inflation, and declining consumer purchasing power.

He further noted that insufficient and aging industrial infrastructure; including poor transportation networks and unreliable power supply are among the factors responsible for the sector’s declining performance.

Oye also identified, “unfavorable macroeconomic policies, including restrictive trade measures and inconsistent fiscal and monetary policies” as well as “increasing production costs and diminished competitiveness of Nigerian manufacturers vis-à-vis imports and regional competitors” among the factors.

Oye expressed concern that contraction in the manufacturing sector’s GDP contribution would have significant implications for both investment and employment in the Nigerian economy.

According to him, it would reduce investor confidence in the manufacturing industry and hamper the much-needed expansion and modernisation.

He said: “Layoffs, reduced working hours, and higher unemployment as companies struggle to maintain operations and profitability.

“Potential decline in foreign direct investment (FDI) inflows, as investors seek more favourable manufacturing destinations.”

A former Professor of Economics and Public Policy, University of Uyo, Professor Akpan Hogan Ekpo, contended that the manufacturing sector has never contributed more than 15 per cent to GDP since 1963.

Ekpo believed that until the sector would begin to contribute at least 40 per cent to GDP, the economy would remain at the primary stage of development.

He blamed lack of political will to implement sound policies on the sector as well as the misuse of the oil sector with emphasis on exporting crude rather than linking the sector to petrochemical, pharmaceutical and agricultural subsectors for Nigeria’s poor economic development.   

“In addition the cost of manufacturing is rather too high given the cost of running generators, neglect of the small and medium-sized enterprises and failure to exploit the global value chain, inadequate incentives to attract FDI, macroeconomic instability, lack of access to forex and security challenges. What we call manufacturing is packaging, assembling and bottling.   Because of lack of adequate investment, you have sluggish and/low growth resulting in high rates of unemployment. Hence the economy is producing below potential,” he noted.

He said that government should implement “the policies and recommendations put forward by MAN as well as those of small and medium-sized business association.

“For example relax the conditions for assessing forex and fix the power sector as well as reducing the tax burden.”

NECA Addresses Challenges

The Director General of the Nigeria Employers’ Consultative Association (NECA), Mr. Adewle-Smatt Oyerinde, traced the root cause of the sector’s declining performance to high-cost operating environment that is driven by unfavourable macroeconomic conditions.

Oyerinde attributed the distortion and declining performance in the manufacturing sector to government policies, particularly the FX liberalisation policy.

He argued that this policy is ill-suited for an economy and business environment heavily dependent on imports, as it has led to increased borrowing costs and escalating import prices for raw materials and machinery.

Oyerinde highlighted that the unfavourable exchange rate of approximately N1600/US$, coupled with a staggering inflation rate of 33.60 per cent, has led to a significant increase in interest rates, reaching 26.75 per cent.

“These factors have significantly increased the cost of raw materials, productive machinery, and overall production, ultimately resulting in low sales and profitability for manufacturers,” he explained.

He expressed grave concerns about the implications of this trend, warning that Nigeria’s collective industrialisation aspirations are at risk if the manufacturing sector continues to underperform.

He cautioned that the declining sector performance would not only impact employment and government tax revenue negatively but also derail activities in other sectors through economic linkages, potentially leading to a broader economic contraction.

Most vulnerable sectors

For the Chief Executive Officer of Centre for Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, the manufacturing sector is one of the most vulnerable sectors amidst current economic reforms and the inherent shocks. Even though the reforms were necessary to pull the economy from the brink, the impact on the sector has been profound.

Yusuf noted that the sector was severely impacted by two major factors. The first was the sharp depreciation in the exchange rate, which aggravated production and operating costs. The second is the increase in energy cost, which resulted in escalation of logistics and production costs.

Other factors, he added, include weak purchasing power of consumers and high cost of funds.

“These factors were regrettably outcomes of the current reforms,” he said, adding that many large manufacturing firms posted losses in their most recent financial results while some opted to shut down and leave the country. The second quarter GDP report showed that the petroleum refining and textile sectors were still in recession while the motor vehicle assembly sector contracted.” 

He added, “Reversing the declines in manufacturing would require the fixing of the macroeconomic headwinds especially stabilising the naira exchange rate, addressing the structural impediments, moderation of energy cost, reduction or possible elimination of import duties on critical industrial raw materials.  

“Other desirable measures include the deepening of development finance intervention to ensure the provision of single digit and long-term credit facilities to manufacturers. There should also be better commitment to the implementation executive orders for patronage of made in Nigeria products.”

Oye postulated that a comprehensive and coordinated approach is necessary to revive the manufacturing sector and enhance its contribution to Nigeria’s GDP by implementing targeted industrial policies that provide incentives, subsidies, and access to affordable financing for manufacturers.

He called for the promotion of skill development and vocational training to address the skills gap in the manufacturing workforce. 

In the same manner, Oyerinde emphasised the need to review the FX liberalization policy and revert to a guided float regime, which has proven supportive for businesses in the past.

Additionally, he called for the creation of specific development funds for the manufacturing sector, providing medium to long-term financing at single-digit lending rates.

He also highlighted the importance of building economic infrastructure, such as electricity, to support production in the manufacturing sector.

This, he said, would help alleviate the high-cost operating environment and enable manufacturers to operate more efficiently.

QUOTES

“Reversing the declines in manufacturing would require the fixing of the macroeconomic headwinds especially stabilising the naira exchange rate, addressing the structural impediments, moderation of energy cost, reduction or possible elimination of import duties on critical industrial raw materials.” 

“Other desirable measures include the deepening of development finance intervention to ensure the provision of single digit and long-term credit facilities to manufacturers. There should also be better commitment to the implementation executive orders for patronage of made in Nigeria products.”