In its executive summary highlighting issues that has stagnated economic growth in the first half of 2023, the Manufacturers Association of Nigeria, MAN, considered a number of options that can help in reviving the ailing economy, YEMISI IZUORA, writes.
The executive summary of the country’s economic performance has remained a routine exercise conducted by the Manufacturers Association of Nigeria, MAN.
The document presents the summary of finding of the survey of manufacturing sector by the Association for the first half of 2023 and is specifically 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 utilization, production value, inventory, level of utilization of local raw materials, investment, expenditure on alternative energy sources, etc.
The Association in the document observed that apart from various inhibiting factors challenging growth of the sector, the global economy is equally facing significant challenges characterized by slow growth prospects, high inflation, and increased uncertainties.
These difficulties result from a combination of factors, including the lingering effects of the COVID-19 pandemic, the ongoing Russian – Ukraine war, the worsening impacts of climate change, and rapidly changing macroeconomic conditions.
One key consequence of these challenges is the aggressive increase in interest rates, the most significant in decades, aimed at combating persistent inflation.
This tightening of financial conditions has also heightened concerns about mounting debt vulnerabilities in Sub-Saharan Africa.
In early 2023, there were notable financial market events, including the collapse of Silicon Valley Bank and Signature Bank in the United States, as well as the takeover of Credit Suisse by the Swiss government. While these events were contained by governments and regulators, they highlighted the potential for systemic financial stability risks. Despite these market disruptions, central banks in developed countries, such as the Federal Reserve, have continued to raise policy rates due to persistent high core inflation.
On Monday President of the European Central Bank, Christine Lagarde, said that interest rates will stay high enough to restrict business activity for “as long as necessary” to beat back inflation.
She however, sympathized with homeowners who have seen their mortgage payments jump.
Lagarde said rates would stay high because upward pressure on prices “remains strong” in the 20 countries that use the euro currency.
Notwithstanding these economic challenges, there has been some optimism about global growth in the first half of 2023.
With the US, UK, EU and India’s economic growths surpassed projections, however, growth remained weak in China, the second largest economy in the world which accounts for 17 per cent of the global output.
Factors contributing to the improved economic performance globally are improved household spending in the United States and the European Union, China’s economic recovery, and no major setbacks in India’s economy. These economies account for more than 70 per cent of the global output. However, structural issues such as the pandemic’s lingering effects, low investment levels, growing debt vulnerabilities, and funding shortages remain unaddressed, posing a risk of prolonged poor growth. This undermines progress towards poverty reduction and other Sustainable Development Goals.
The MAN however observed that overall, Consumer and business confidence has improved slightly in recent months in major economies, partly due to lower international food and energy prices.
Still, these confidence levels remain below their historical averages as manufacturing activity seems to have stabilized, and global financial markets have shown resilience, even in the face of banking sector turmoil in the United States and Europe.
But it said that the Sub-Saharan African countries are facing significant exchange rate pressures due to enduring external factors, such as tightened financing conditions and unfavorable terms of trade.
This according to the Association has led to currency depreciation, driving higher inflation, increased public debt burdens, and short-term trade imbalances.
Given limited reserves, most countries in the region have little choice but to allow exchange rates to adjust.
They are also tightening monetary policy to mitigate inflation’s impact. These challenges underscore the need for prudent economic management and diversification of revenue sources in Sub-Saharan Africa to wither the impact of external shocks effectively.
Consequently, IMF predicts a decline in the economic growth of Sub-Saharan Africa to 3.1 per cent in 2023 from 3.6 per cent.
In Nigeria, one recurring challenge is cost of energy.
Oriental News Nigeria, understands that cost of diesel has risen above N1,000 a liter which poses serious threat to the sector.
The MAN, said its members spent about N60. 47 billion in alternative energy sources to support production from January to June 2023.
Though the Association admitted that power supply to industries rose marginally but manufacturers required more than the supply which necessitated the whopping expenditure.
According to its findings, electricity supply to the industries from the national grid in the first half of 2023 increased marginally to 11.3 hours per day from 10.2 hours recorded in the same period of 2022.
Additionally, it increased by 42 minutes when compared with 10.6 average hours per day of electricity supply in the last half of 2022.
In the same vein, the average number of outages per day increased marginally to 4.7 times from 4. 4 times in the first half of 2022.
Consequently, expenditure on alternative energy sources declined to N60.47 billion in the first half of 2023 from N76.70 billion recorded in the second half of 2022, thus indicating N16.23 or 21.2 per cent decrease in the period.
It also declined by N7.33 billion or 10.8 per cent from the N67.8 billion recorded in the same period of 2022.
The MAN said that one of the major hurdles confronting the manufacturing sector in the country is the high cost of obtaining funds.
This challenge is substantiated by data gathered during the fieldwork for the first half of 2023 report.
According to this data, the average lending rate to the manufacturing sector from commercial banks remained high at 24 per cent when compared with what was recorded in the corresponding half of 2022.
However, the cost of funds for the manufacturers increased by 2.0 percentage points when compared with 22.0 per cent recorded in the second half of 2022.
The lending rates offered by commercial banks to industries are significantly influenced by the continuous upward adjustments in the Monetary Policy Rate. These adjustments aim to maintain a favorable real interest rate environment, with the goal of attracting foreign investment inflow, defending the domestic currency (Naira) and curbing the spiraling inflation.
To reverse the ugly trend the MAN, provided some solutions and advised that Federal Government should as a matter of urgency develop a roadmap for improved power supply, including off-grid solutions and private sector-driven independent power projects.
In addition to that it proposed the promotion of renewable energy sources such as solar and wind.
It said that resuscitation of local refineries has become imperative to ensure uninterrupted supply and better pricing of refined petroleum products.
The MAN is also of the opinion that review of domestic gas pricing and encouragement of investment in gas aggregation to reduce gas flaring will help in gas commercialization and help to improve manufacturing in the country.
It also urged Government to address the oil theft to optimize crude oil production based on OPEC quotas and incentivize local raw material development, especially Active Pharmaceutical Ingredients (API) and basic chemicals as well as focus on backward integration and resource-based industrialization.
Also, in the survey MAN noted that Nigeria’s manufacturing sector suffered some setbacks in the first half of the year, forcing capacity utilization in the sector to crash to 56.5 per cent from 57.9 per cent recorded in the corresponding half year of 2022.
This indicates a reduction of 1.4 percentage points in the last year.
However, compared with the second half of 2022, manufacturing capacity utilization rose by 1.6 percentage points when compared with 54.9 per cent recorded in the preceding half.
One of the factors leading to this in the view of the Association is that the economic environment was clouded by election activities in second half of 2022 resulting in uncertainties in the economy.
This coupled with the immediate impact of the Naira redesign policy which was announced in October of 2022 and required that economic agents including manufacturers thread with caution.
The dampening effects on the manufacturers’ confidence hence reflected in the manufacturing sector’s indicators including the capacity utilization in the period. However, re-infusion of the old currency to circulation temporarily restored confidence especially to the informal sector of the economy, where more than 98 percent of transactions is carried out in cash.
However, the Association noted that the manufacturing sector factory output value increased to N4.10 trillion in the first half of 2023 from N3.99 trillion recorded in the corresponding half of 2022; thus, indicating N110.00 billion or 2.8 per cent increase over the period. It also, increased by 1.42 trillion or 52.8 per cent when compared with N2.68 trillion recorded in the preceding half.
The 2.8 per cent increase in the monetary value (not real output) of manufacturing sector production over the period of one year when inflation is at 24.08 per cent at the same period indicates a struggling sector.
The Association noted that the sector faced myriad of challenges in the first half of 2023 as the residual effect of naira redesign and the removal of fuel subsidy towards the end of the period under review triggered inflationary pressure, cost of transportation, cost of production and other macroeconomics imbalances, thereby worsening the purchasing power of the households.
Key sectors like manufacturing and agriculture, which play a vital role in Nigeria’s economy, thus suffered as higher fuel costs drive up expenses related to machinery, irrigation, and transportation and these led to increase in the prices of food and other products, impacting both productivity and social stability.
The uncertainty stemming from this policy change has undermined investor confidence, hampering both domestic and foreign investments that are crucial for economic growth and job creation.
Equally, the manufacturing sector local raw materials sourcing increased to 55.3 per cent in the first half of 2023 from 48.0 per cent recorded in the corresponding half of 2022; thus, indicating 7.3 percentage points increase over the period.
It also increased by 1.8 percentage points when compared with 53.5 per cent recorded in the second half of 2022.
The observed increase in the utilization of local raw materials within the sector can be attributed to the growing challenges associated with sourcing foreign exchange. This situation has compelled manufacturers to shift their focus towards obtaining raw materials domestically, despite the substantial cost implications involved.
One good news however is that the survey found that despite economic headwinds, investment in the country’s manufacturing sector increased to N192.89 billion in the first half of 2023 from N178.39 billion recorded in the corresponding half of 2022.
This indicated a N14.50 billion or 8.1 per cent increase over the period and further increased by N47.3 billion or 32.50 per cent when compared with N145.59 billion recorded in the second half of the year.
The Association, attributed the increase in investment in naira value to the currency devaluation which saw naira depreciated to N901/$ or 65 percent depreciation at the Investor and Export Window from N462/$ before the devaluation policy of the CBN was announced.
Hence, the increase recorded does not indicate physical investment by manufacturers but rather nominal which resulted from the devaluation of currency that has made the manufacturers to pay more for plants and machinery importations.
Unfortunately, the Association disclosed that inventory of unsold finished products in the manufacturing sector saw a significant increase to N271.96 billion during the first half of 2023, as compared to N187.08 billion recorded in the corresponding period of 2022.
This indicates a substantial rise of N84.88 billion or 45.4 percent over this timeframe. However, there was an N11.64 billion or 4.1 percent decline when compared with the inventory value of N283.6 billion recorded in the second half of 2022.
The Association attributed the increase in inventory to a weakened purchasing power of the consumers, brought about by diminishing real household income resulting from the ongoing escalation of inflationary pressures, compounded by the scarcity of naira in the first quarter of the year and the aftermath of the subsidy removal.
According to MAN survey, employment generation of the manufacturing sector declined to 6428 in the first half of 2023.
This is an indication of 32.8 per cent reduction in employment generation capacity when compared with 9559 jobs generated in the first half of 2022.
Also, the data showed a shed of 313 jobs when compared with 6741 jobs created in the second half of 2022.
The decline in the number of jobs created in the sector during the period further highlighted the unfriendly business environment resulting from the hasty policies and residual effect of the currency redesign policy that led to naira crunch. In the same vein, a total of 3567 jobs were lost in the first half of 2023, indicating 1855 more job lost when compared with the 1709 job lost in corresponding half of 2022 and 850 more jobs lost when compared with 2708 jobs lost in the last half of 2022.