EDIDIONG IKPOTO examines how the naira redesign, forex unification and subsidy removal impacted the manufacturing sector
Like other sectors in the Nigerian economy, the manufacturing sector in 2023 had its fair share of challenges, which left profound implications not only for players within the industry but also for Nigerian consumers.
For most of last year, manufacturers complained bitterly about the inimical effects of government policies on the real sector.
The Director-General of the Manufacturers Association of Nigeria, Segun Ajayi-Kadir, listed unfavourable policies in terms of power, transport and ports as some of the factors that stalled economic growth in 2023.
According to Ajayi-Kadir, several initiatives aimed at developing the economy had various degrees of success and failures, noting that the performance of the manufacturing sector had been largely unimpressive as the country remained a largely import-dependent country.
He noted that the manufacturing sector contributed less than 10 per cent to the country’s Gross Domestic Product due to inflation, which had risen to over 28 per cent in November.
That, he said, was as the interest rate at double digits continued to limit the potential of the sector for expansion.
He claimed that the high rate of foreign exchange and the non-prioritisation of allocation to the sector further stifled the sector’s growth.
Many of the points echoed by the MAN DG in this interview were issues manufacturers had raised on several occasions.
During an interview with The PRIMANEWS in May, Ajayi-Kadir said that manufacturers were constantly beset by an acute shortage of forex for the importation of raw materials and machines that are not produced in the country.
Other issues raised by the MAN DG included high cost of funds; high inflation; multiple taxes and regulation; inadequate power supply and bad roads; effects of limited and inadequate port facilities and high charges; unfavourable monetary and tariff policies, smuggling, counterfeiting and cloning activities.
Those challenges, he said, were mostly borne out of government policies and had continued to cause hardship to manufacturers in the country.
Naira scarcity
The first major government policy which hit manufacturers hard in 2023 was the acute scarcity of naira notes in the early part of the year. This followed the decision of the Central Bank of Nigeria to design the local currency.
During an interaction with journalists, the President of MAN, Francis Meshioye, lamented the toll the naira notes scarcity was taking on the productive sector of the economy.
He said the scarcity of naira notes had negatively impacted business activities by disrupting the proper flow of goods.
According to Meshioye, the naira scarcity and the challenge with e-payment platforms negatively affected the free flow of goods and caused a 25 per cent drop in sales.
He said, “I want to assume that this is a very short-term problem. It is general. Even if you want to do e-banking, there are some things you cannot do at the moment. We have problems. POS is not working.
“There is no way any scarcity of something essential to the consumer will not affect the producer. We feel it because it hinders the proper flow of our goods to the end user. What effect is that going to have?
“It means we will pile stock, and when we pile stock, it means cash is trapped. We pay high interest rates and they won’t yield good returns and investments go to where returns come regularly.”
In its Purchasing Managers Index for April, Stanbic IBTC noted that manufacturing activities had contracted and that the drop in production consequently led to reduced sales as manufacturers navigated through headwinds occasioned by a shortage of cash.
According to the PMI, which measures manufacturing activity in the country, Nigeria’s purchasing manager index for March reduced from 44.7 in February to 42.3 in March.
The drop signalled the second-deepest plunge since the survey started 10 years ago. Any reading above 50 indicates a healthy industry. The 42.3 points recorded in March pointed towards contraction.
Meanwhile, the country’s business environment recorded an improvement in December as the PMI rose to 52.7 from 48.0 in November, according to Stanbic IBTC.
Over-taxation
Over-taxation, occasioned by payment of multiple taxes, also constituted a major bone of contention for manufacturers in 2023.
In May, MAN said that the increase in excise duty for beverage and tobacco goods would force businesses to scale down operations, which will result in factory closures, job losses, and a decline in exports, among others.
Meshioye stated this during a press conference in Lagos to raise objections on the 2023 fiscal policy measures.
He noted that the excise duty hike was a flagrant reneging of a promise made to the association by the Federal Government, through the Ministry of Finance, Budget and National Planning.
He said the exponential increase in excise duty in the 2023 Fiscal Policy Measures came as a shock to the industry and was, in effect, ‘an increase on an increase’, since there was already an approved increase in place for 2023.
Meshioye claimed that the increase was coming at a time when the manufacturing sector was immersed in an unprecedented crisis and an acute recession, due to extraordinary challenges.
The MAN president argued, “The manufacturing sector has been struggling with crashing sales, mainly attributable to the sustained naira scarcity. A continuing decline in sale volumes will necessitate production cuts and a reevaluation of investments in the sector.”
On his part, the DG of MAN lamented that manufacturers were being saddled with over 30 different types of taxes, levies, and fees being charged by diverse public agencies across federal, state, and local government levels.
Some of these taxes are: company income tax, stamp duties, petroleum profit tax, capital gains tax, value added tax, tertiary education tax, and police special trust fund tax.
Others are consumption tax, land use charge, radio and television license, cabotage levy and one per cent of payroll contributions to the National Social Insurance Trust Fund.
Energy costs
High cost of energy was another major challenge manufacturers grappled with last year. In an exclusive interview with The PRIMANEWS, Meshioye said manufacturers were spending between 35 per cent and 40 per cent of total costs on energy needs.
He said, “We rejected the hike in electricity tariff because, in the first instance, energy cost is very high for manufacturers, particularly those who consume much like steel manufacturers.
“It takes an average of 35 to 40 per cent of their total costs. Any increase in electricity tariff makes it harder on us. The harder it is, the harder it will be for consumers. When this is so, it means that the demand for products will drop. Like I said in my previous interview, the profit margin will be low.”
By August, when manufacturers had rejected the proposal by the Federal Government to increase electricity tariff, diesel prices jumped to N1,000 per litre, a development which put a strain on the activities of manufacturers, who are naturally heavy users of energy.
A report by MAN said manufacturers spent at least N60.4bn on alternative energy sources in the first half of 2023.
Forex scarcity
For local manufacturers, forex scarcity is not particularly a novel experience. Due to the country’s heavy reliance on imported inputs for manufacturing purposes, manufacturers have perennially battled to secure forex for their importation needs.
After the Central Bank of Nigeria (CBN) decided to stop fixing the value of the naira and allow it to fluctuate based on market forces, the local currency’s value plummeted from 471 naira per dollar to 897 naira per dollar by the end of December at the Investors’ and Exporters’ Forex window. This sudden drop in value significantly increased the operating costs of manufacturers.
In September, following the appointment of Yemi Cardoso as the Governor of the CBN, MAN DG told The PRIMANEWS that the new apex bank boss needed to speedily address the issue of forex illiquidity, which had negatively affected the manufacturing sector.
He said the association was expectant that the change would create an atmosphere that would be conducive to the promised reform in the financial sector of the economy.
He said, “Better attempts should be made to ensure a strategic balance between tackling inflation and engendering economic growth through effective funding. So, promoting long-term macroeconomic management under this scenario is a task that has the CBN governor located right in the middle.”
Fuel subsidy removal
On May 29, 2023, President Bola Tinubu in his inauguration speech announced that the fuel subsidy regime was gone. It was an announcement which came with swift consequences for the economy, including the manufacturing sector.
Since the manufacturing sector relies on fuel for various processes, such as powering machinery and transportation, the removal of fuel subsidies consequently increased manufacturing costs. This led to higher prices for locally produced goods.
Foreign firms’ exit
Consequently, in December, American consumer goods company, Procter & Gamble, announced plans to terminate its on-ground operations in Nigeria, transforming the country into an import-focused market.
The manufacturing giant joined a growing list of multinationals to dump Nigeria in 2023, owing to the tough operating environment.
Other multinational manufacturers that have also left Nigeria in 2023 include Unilever Nig (home care and skin cleansing division), GlaxoSmithKline, and Sanofi-Aventis.
The companies, in separate statements, said the painful decision to leave Nigeria to pursue an import-based model that would ensure business sustainability.
2024 outlook
In its “Manufacturing Sector Outlook for 2024”, which was made available to The PRIMANEWS, MAN noted that 2024 may not be a good year for manufacturers and that it foresaw a challenging first six months of the year for players in the industry.
According to MAN, in 2024, sectoral real growth is expected to hit about 3.2 per cent; contribution to the economy will most likely exceed 10 per cent and the Manufacturers’ CEOs Confidence Index is predicted to rise above 55 points thresholds by the end of Q4 2023.
Average capacity utilisation is expected to hover around the 50 per cent threshold as the forex-related challenges and high inflation rate limiting manufacturing performance may linger until mid-year.
The report read in part, “Judging from the observed trend, it is obvious that the outlook for the manufacturing sector in 2024 may not be a positive one, at least in the first half of the year. The period will be challenging, with a subtle possibility of recovery from the third quarter.
“The envisaged recovery is highly dependent on the deployment of policy stimulus supported by a synthesis of domestic growth-driven, export-focused and offensive trade strategies. This will promote resilience and steady growth and ensure that the sector gains meaningful traction in the later part of the year.”
On its part, the Lagos Chamber of Commerce and Industry, in a New Year statement, made available to The PRIMANEWS, urged the government to accelerate the implementation of the plans it intends to adopt as measures to cushion the hardship that has trailed the removal of fuel subsidy.
The chamber urged the government to provide more detailed plans and strategies to tackle these challenges, such as inflation, under-employment, security, and social inequality.
The statement read in part, “A transparent and inclusive approach to governance will contribute to building public confidence and achieving sustainable economic growth.”
Also, the Chief Executive Officer of Coleman Wires and Cables, George Onafowokan, urged the Federal government to prioritise the manufacturing sector this year.
He appealed to the Minister of Industry, Trade and Investment to take the plight of manufacturers to the Presidency.
According to Coleman MD, having a minister who does not advocate for the industry within the government indicates a problem.
