Manufacturers Groan as Economic Indicators Falter with Naira Crunch Nearly Crippling Companies
The Manufacturers Association of Nigeria (MAN) has expressed the concern of their members who have been groaning in pain as all the major performance indicators in the sector declined in the second quarter of 2023 (Q2’23).
The association highlighted this view in its MAN CEO’s Confidence Index (MCCI) report on the second Quarter (Q2) 2023, noting that sequel to the naira redesign and the new cash withdrawal limits by the Central Bank of Nigeria, the scarcity of both old and new naira notes across all banking halls and electronic payment channels in the country meted severe hardship on manufacturers.
The prolonged crisis, it said nearly crippled manufacturing companies with about 20% and 30% decrease in sales for consumer goods and cement respectively.
“The crisis impacted negatively on the manufacturers by directly limiting their working capital, thus halting their daily business operations. In addition, the naira scarcity crushed the consumer patronage of manufacturing firms and resultantly escalated their volume of inventories, especially for retail goods. By exposing the highly cash-based distributive trade sector to great risk, the economic crisis had severe consequences on the manufacturing value chain and cost of logistics,” the association said.
The Association pointed out that the substantial reduction in money velocity left opportunity for speculation and ignited the creation of a naira black market that compounded the woes of manufacturers already plagued by insufficient forex.
The naira scarcity, it stated further clearly wiped out numerous small and medium manufacturing businesses whose transactions were cash-based, especially those within the agro-allied industries who regularly deal with local farmers in remote towns where no formal banking is in sight.
More unfortunately, it noted that the exorbitant POS charges on such cash constrained the operations of resilient manufacturing SMEs and worsened their cost of doing business.
“The country’s transition to a cashless economy requires no urgency or policy aggressiveness considering that a lot of progress has already been made. A comparative analysis of the country’s cashless status has shown that while the ratio of cash to GDP in Europe, U.S. and South Africa are respectively about 10%, 6% and 3.5%, Nigeria’s ratio is impressively below 1.5%,” it emphasized.
The report stated that, “manufacturers are extremely groaning in pain due to these issues that are frustrating their contribution to the economy,” and this caused a decline in the Aggregate Index Score (AIS) of the MCCI to 52.7 points in the second quarter of 2023 from 54.1 points it recorded in the first quarter of 2023.
The report hinted that the current Business Condition and Employment Condition for the Next Three Months deteriorated to 48.9 and 46.6 respectively, adding that the decline in the Aggregate MCCI underscores the persistent harsh operating business environment for manufacturers which was occasioned by escalating energy cost as well as necessary but poorly coordinated subsidy and exchange rate reforms.
It pointed out that the lingering forex scarcity and continuous depreciation of the naira have left manufacturers bleeding and limited their capacity utilization since the importation of non-locally produced critical input has become a nightmare. Despite the recent reform to unify all forex windows, it noted that the exorbitant premium that persists between the official and parallel exchange rates have further stalled manufacturing operations.
According to the report, the interest rate charged to manufacturers by the commercial banks appears to have deteriorated the productivity of the manufacturing sector in the quarter under review, while the size of loans given to the manufacturing sector by commercial banks is grossly inadequate and as such does not encourage productivity in the sector.
Unfortunately, it stressed that while credit to the public sector has soared over the years, credit support for the private sector in general and manufacturers in particular has been abysmally low.
Incidentally, it noted that when credit is available, it is usually on short-term tenure which does not adequately support the medium to long-term gestation required in the manufacturing sector and the implication is low investment, limited capacity utilization and production level in the sector.
The association also lamented that the absence of economic infrastructure contributes significantly to the high cost of operating environment which obstructs the development of manufacturing in Nigeria.
The figures from the MAN report summation revealed that:
⮚ Production and Distribution costs escalated by 17.3% in the quarter under review though witnessed a slowdown from the 24% increase witnessed in the preceding quarter;
⮚ Capacity utilization nosedived further by 5.6% in the quarter under review from a contraction of 5% witnessed in the preceding quarter;
⮚ Volume of production contracted by 6.1% in the quarter under review from a contraction of 13% recorded in the previous quarter;
⮚ Manufacturing investment dipped further by 5.6% in the second quarter of 2023 from 3% contraction recorded in preceding quarter;
⮚ Manufacturing employment reduced further by 5.7% in the second quarter of 2023 from 3% contraction recorded in preceding quarter;
⮚ Sales volume plummeted by 6.3% in the second quarter of 2023 against the 13% contraction witnessed in the preceding quarter;
⮚ Cost of shipment rose by 14.3% in the second quarter of 2023 though witnessed a slowdown from the 20% increase recorded in the first quarter of 2023.
It was gathered from the report that amidst the harsh business-operating environment evidenced by poor macroeconomic indices, the underperformance was largely driven by the slow recovery from the cash crunch, high cost of energy, high transportation cost and partially by the abrupt removal of subsidy that took effect towards the end of the second quarter of 2023.
The economic turmoil, it noted disrupted the manufacturing value chain, escalated cost of manufacturing operations and resulted in reduction in manufacturing patronage.
Manufacturing activities, according to the Association in the second quarter of 2023 was adversely affected by escalation in the Consumer Price Index (CPI), continuous erosion in Naira value and difficulty in accessing forex, high cost of energy, naira crunch, exorbitant taxes, high lending rates, persistent, insecurity, domino effects of the lingering Russian-Ukrainian war, slow recovery from the cash crisis. Manufacturers are extremely groaning in pain due to these issues that are frustrating their contribution to the economy.
Sequel to the above trends, the Association stressed that it is highly expedient that the Government strives to ensure the harmonization of fiscal and monetary policies that will pave the way for a stable macroeconomic environment needed to promote productivity in the manufacturing sector and improve the ease of doing business.
MAN in its report highlighted that “The idea of throwing policies of subsidy removal and a free float exchange rate all at Nigerians within the short space of time could result in another policy somersault that sets to drag back the economy without any hope of recovery and could result in the failure of Mr. President’s promise of a renewed hope. The abrupt removal of fuel subsidy without appropriate palliatives is already beginning to wane on the confidence of Nigerians in this new administration.
“No CBN forex intervention will be effective without boosting the level of liquidity and transparency in the official forex window. The introduction of the Forex Price Verification System Portal is laudable as it will improve transparency but more needs to be done to increase the forex liquidity especially by intensifying efforts to encourage the inflow of foreign investments, promoting export in productive industries as well as encouraging local sourcing and local patronage.”
The Association stated that in the medium term, it is essential to tackle problems relating to low productivity and limited export diversification, excessive import-dependent production structure and dilapidated capital goods industry, adding that this will require:
⮚ Bridging the huge infrastructure gap, especially as it relates to customs, transport and power which are of utmost concern to the manufacturers.
⮚ The complete reformation of the power sector through the Electricity Act 2023 in order to end erratic supply of electricity.
⮚ Boosting public-private investment in renewable energy, backward integration and local sourcing of raw materials in order to create a highly competitive and self-sufficient manufacturing industry.
The report also revealed that in the existence of a strong political will, the short-term remedy will require:
⮚ Manage the floating exchange rate system within an acceptable lower and upper bound, pending the actualization of a net-exporting economy.
⮚ The prioritization of the manufacturing sector for forex allocation.
⮚ Expend cost savings from fuel subsidy removal on the major drivers of food inflation such as road transport cost and infrastructure.
⮚ Create farm settlements with thousands of farmhands on different plantations in order to boost food security and combat food inflation.
⮚ Reducing volatility in the oil sector which is the country’s main source of forex by upgrading security of oil infrastructure, rehabilitating the old refineries and establishing modular refineries,
⮚ Ensuring efficiency of the recently privatized NNPC
⮚ Promoting investment by the full implementation of the Petroleum Industry Act (PIA)
⮚ Provide appropriate palliatives to mitigate the adverse impact of fuel subsidy removal on the welfare of households and businesses.
MAN therefore averred that achieving a full cashless economy should not be the pressing issue when there are tougher challenges of insecurity, exchange rate volatility, skyrocketing inflation, energy disruption, over bloated fiscal debt, dwindling foreign reserves, business collapses and daily divestments.
