Manufacturing Sector’s Performance Still on Downward Curve

A report by the Manufacturers Association of Nigeria has reveals that the productivity and fortunes of the country’s industrial sector is still downward slopping curve, writes Dike Onwuamaeze

The performance of the Nigerian manufacturing sector in the first half of 2024 was particularly weak. This is the verdict contained in the “Executive Summary of MAN Economic Review for H1 2024,” which was released last week.

The review presented the summary of finding of the survey of manufacturing sector by the MAN for the first half of 2023. The survey is designed to monitor changes in manufacturing sector performance indicators viz-a-viz the behaviors of macroeconomic and policy environments during the period of the survey. The focus manufacturing indicators include capacity utilisation, production value, inventory, level of utilisation of local raw materials, investment, expenditure on alternative energy sources, etc.

According to the findings of the survey that provided materials for the economic review, the capacity utilisation in the Nigerian manufacturing sector showed a slight year-on-year decline to 56.4 per cent in H1 2024, from 56.5 per cent in H1 2023.

Also, the real manufacturing output in Nigeria declined by 1.66 per cent year-on-year in H1 2024, falling to N1.34 trillion from N1.36 trillion in H1 2023. However, the magnitude of the decline would be appreciated more if its value is expressed in dollars, bearing in mind that that value of the Naira to the dollar by H1’23 was about N666/$ against the current value of more than N1700/$.

In addition, the inventory of unsold finished products in the manufacturing sector also surged by 357.57 per cent year-on-year; reaching N1.24 trillion in H1 2024. Also, the employment generation capacity of the manufacturing sector continued its decline, with only 2,606 jobs created in H1 2024, which represented a 29.99 per cent reduction from H2 2023.

According to MAN, the first half of 2024 was marked by significant challenges for Nigeria’s manufacturing sector, including high operational costs, declining consumer demand, and rising inflation.

While some sectors showed resilience and growth, others struggled with declining production values, rising inventories, and reduced employment.

The report underscored the urgent need for Nigeria to implement decisive and coherent economic reforms to address these challenges.

Key areas of focus include enhancing policy consistency, improving the business environment, and fostering economic diversification.

“The success of these reforms will be crucial in reversing the current economic downturn, creating jobs, reducing inflation, and improving the overall welfare of Nigerian citizens.

“As the country navigates through these turbulent times, the resilience of its policy framework and the effectiveness of its economic management will determine the path forward,” MAN said.

Capacity Utilisation

The half year review stated that capacity utilisation in the manufacturing sector showed a slight year-on-year decline to 56.4 per cent in H1 2024, from 56.5 per cent in H1 2023. However, there was a 2.8 percentage point increase compared to H2 2023, reflecting some recovery.

According to the review, “the sector faced significant challenges, including high energy costs due to a 200 percent increase in electricity tariffs, forex scarcity, and declining consumer demand. These factors collectively resulted in elevated operational costs and a difficult business environment for manufacturers.”

Real Manufacturing Production Value

The real manufacturing output in Nigeria declined by 1.66 per cent year-on-year in H1 2024, falling to N1.34 trillion from N1.36 trillion in H1 2023. Despite the decline, the sector witnesses 9.97 per cent increase during the period under review compared to H2 2023, driven by a baseline effect.

Some of the factors responsible for the declining manufacturing output included rising electricity tariffs, exchange rate volatility, and higher energy costs, which heightened production costs amidst declining consumer demand.

The review said that “persistent increase in interest rates by the Central Bank of Nigeria further strained the sector.”

Nominal Manufacturing Production Value

In nominal terms, the report showed that the manufacturing sector’s output increased by 30.38 per cent year-on-year, reaching N5.34 trillion in H1 2024. This growth was primarily driven by the sharp rise in domestic prices, as reflected in the Consumer Price Index (CPI), which surged to 34.19 per cent in June 2024.

But “the increase in nominal output masked the underlying difficulties faced by manufacturers in maintaining real output levels, highlighting the impact of inflationary pressures on the sector,” the review said.

Raw Material Sourcing

The manufacturing sector’s local raw material sourcing, it said, improved slightly to 56.03 per cent in H1 2024, up from 55.4 percent in H1 2023. “This modest increase indicated a gradual shift towards local sourcing, driven by difficulties in obtaining foreign exchange. However, some sectors, like Non-Metallic Mineral Products and Textile, Apparel & Footwear, faced declines in local sourcing, reflecting the challenges of shifting away from imported raw materials,” it said.

Unsold Inventory of Finished Products

The inventory of unsold finished products in the manufacturing sector surged by 357.57 per cent year-on-year, reaching N1.24 trillion in H1 2024. This alarming increase is attributed to declining consumer purchasing power due to escalating inflation, subsidy removal, and the devaluation of the Naira.

According to the review, “the high levels of unsold inventories reflect the challenges faced by consumers and the need for interventions to stimulate demand and improve the sector’s performance.”

Manufacturing Investments

It added, “Investment in the manufacturing sector continued to rise, reaching N250.13 billion in H1 2024, which represented a 29.63 per cent year-on-year increase. However, this increase could be described as money illusion due to the depreciation of the Naira, which inflated the cost of importing machinery and other essential assets.

“In real terms, investment spending did not increase, as manufacturers focused on maintaining current production levels rather than expansion due to the challenging economic environment,” the review stated. The employment generation capacity of the manufacturing sector continued to decline, with only 2,606 jobs created in H1 2024, a 29.99 per cent reduction from H2 2023. Year-on-year, job creation fell by 37.83 per cent, reflecting the ongoing challenges within the sector, including economic uncertainties, inflationary pressures, and an unfavourable business environment.”

According to the review, the chemical and pharmaceuticals industrial sub-sector remained the highest job creator, while the motor vehicle and miscellaneous assembly industry created the fewest jobs.

Electricity Supply and Alternative Power Costs

The electricity supply to industries, it disclosed, showed some improvement in H1 2024, with average daily supply hours increasing to 11.28 hours per day. “However, the increase in electricity tariffs by over 200 percent imposed by DisCos significantly raised the cost of electricity for manufacturers. This, coupled with ongoing power outages, placed additional financial strain on the sector.

“The cost of providing alternative power continued to rise, with manufacturers spending N238.31 billion on alternative energy sources in H1 2024, a 7.69 per cent increase from H2 2023. The surge in costs was driven by higher prices for diesel, gas, and other energy sources, as well as the need for manufacturers to invest in self-energy generation due to unreliable power supply from the national grid.

“The struggles facing the Nigerian manufacturing sector showed that Nigeria is not divorced from the global economy that remained resilient in the first half of the year 2024, with major economies avoiding a severe downturn, bringing down inflation without increasing unemployment.

“However, the lingering impact of high interest rates, debt sustainability challenges, continuing geopolitical tensions and ever-worsening climate risks continue to pose challenges to growth, threatening decades of development gains, especially for developing and Small Island developing states,” the report added.

The increasing climate shocks, according to the review, have continued to pose additional challenges to the global economy, threatening decades of economic growth, especially for the least developed countries and small islands developing states.

“Yet, improved performance is notable in the United States of America and several large developing economies, particularly India and Brazil. However, the economic outlook for many African countries has deteriorated because of high inflation, elevated borrowing costs, persistent exchange rate pressures and lingering political instability.

In addition, geopolitical tensions have particularly affected the economic outlook of a few Landlocked Developing Countries (LLDCs) due to their dependence on neighboring transit countries to access international trade routes.

“Nigeria’s economy continued to grapple with formidable challenges that have stymied its growth potential and eroded economic stability. The real GDP growth rate was sluggish, reflecting the country’s struggle to regain momentum amidst persistent economic and policy headwinds.

“Inflationary pressures intensified, significantly diminishing the purchasing power of Nigerians, with millions more being pushed into poverty due to the combined effects of soaring prices and stagnant wages,” the review said.

It added that the policy environment in Nigeria during this period was marked by uncertainty and turbulence, so much that, “despite efforts to stabilise the economy, including aggressive monetary tightening by the Central Bank of Nigeria (CBN), which raised the Monetary Policy Rate (MPR) to an unprecedented 26.25 per cent, the desired outcomes in terms of curbing inflation and stimulating growth remained elusive.

“The higher interest rates exacerbated borrowing costs, placing further strain on businesses across various sectors, particularly manufacturing, which already faced significant challenges such as forex scarcity, high operational costs, and unreliable electricity supply.”