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 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.
According to the Manufacturer CEO’S Confidence Index (MCCI) for the second quarter released by Manufacturers Association of Nigeria (MAN) in its said 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 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, 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%. Therefore, 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.
3.0 PRESENTATION OF SURVEY OUTCOME
The result of the MCCI second quarter 2023 survey shows the perceptions of manufacturers on movements in the macroeconomic environment, compared with the operating environment in the first quarter of 2023
3.1 AGGREGATE MCCI
The Aggregate Index Score (AIS) of MCCI is the weighted mean of the observed and expected changes in business conditions, employment and production level in the economy based on the perceptions of manufacturers in the quarter under review. As displayed in Figure I, Aggregate Index Score (AIS) of MCCI declined to 52.7 points in the second quarter of 2023 from 54.1 points recorded in the first quarter of 2023. Among the standard Diffusion Factors, Current Business Condition and Business Condition for the next three months stood at 48.9 and 58 points respectively. Current Employment Condition (Rate of Employment) declined to 50.2 points from 50.7 points recorded in the first quarter of 2023 but remained marginally above the 50-point benchmark. Employment Conditions for the next three months further plunged below the benchmark points to 46.6 points against the 47.8 points obtained in the preceding quarter. On the other hand, Production Level for the next three months remains strongly above the 50-point benchmark but reduced to 59.8 points from 61.8 points recorded in the first quarter of 2023.
While other diffusing factors exceeded the 50-point benchmark index, Current Business Condition and Employment Condition for the Next Three Months deteriorated to 48.9 and 46.6 respectively. 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.
3.2 SECTORAL GROUP MCCI
The result of the analysis of index scores of the 10 Sectoral Groups using the same diffusion factors such as Business Condition, Employment Condition and Production Level. A close observation reveals that the operating environment impacted most negatively on the activities of the Motor Vehicles & Miscellaneous Assembly which deteriorated further below the benchmark from 48.6 to 46.7 points due to unpalliated subsidy removal and reduction in sales and low demand for new vehicles because of eroded disposable income of the consumers.
Only the Electrical & Electronics sector witnessed an improved performance from 49.7 to 51.4 points due to increased supply of electricity which encouraged production and patronage in the sector during the reviewed period.
Other sectoral groups including Food, Beverage & Tobacco (57.6); Textile Apparel & Footwear (50.5); Wood & Wood Products (50.2); Pulp, Paper, printing & Publishing (51.9); Chemical & Pharmaceutical (56.6); Non-Metallic Products (50.2); Domestic/Industrial Plastic & Rubber (57.6) and Basic Metal, Iron & Steel (54.6) reflected reduced performances in the second quarter of 2023. However, their indices stood above the 50-point benchmark. This suggests that manufacturers operating in the groups remain confident in the macroeconomy perhaps due to the expectation of more favourable business reforms by the new administration.
3.3 ZONAL MCCI
The zonal breakdown of the MCCI. An observation of analysis of the 14 industrial zones shows that Abuja (40), Rivers/Bayelsa (40.5), Cross-Rivers/Akwa-Ibom (45), Kano (46.2), Kaduna (47.8) and Oyo/Ondo/Ekiti/Osun (48.6) industrial Zones have low confidence in the economy as the four zones recorded index scores less than 50 points.
However, Apapa (63.9), Ikeja (63.7), Ogun (61.1), Kwara/Kogi (60.4), Edo/Delta (60.1), Imo/Abia (57.4) and Bauchi/Benue/Plateau (53.1) recorded index scores above the 50-point standard in the quarter under review. With the exception of Ikeja, they reflect incremental changes from the figures recorded in the previous quarter, hence, indicating continuous improvement of the confidence of manufacturers operating in the six zones.
3.4 Macro Economic Performance
This section of the report portrays the effect of macroeconomic trend of forex, lending rate, commercial bank loans and Federal Government Capital Expenditure on the perceptions of CEOs of manufacturing companies within the second quarter of 2023. Figure IV shows that manufacturing activities continue to suffer due to persisting scarcity of forex and further depreciation of the naira. Only 14.7% of manufacturers enumerated claimed that the rate at which forex was sourced improved in the second quarter of 2023; 66% disagreed while 19.3% were not sure if forex sourcing had improved in the quarter under review.
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, the exorbitant premium that persists between the official and parallel exchange rates have further stalled manufacturing operations.
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.
Only 10.1% of manufacturers interviewed agreed that the bank lending rate had improved in the second quarter of 2023 as against 20.3% that agreed in the first quarter of 2023. About 84% disagreed that the rate at which banks lend to manufacturers encouraged productivity in the second quarter of 2023, which is greater than the percentage recorded in the previous quarter. Highly exorbitant double-digit lending rate of about 30 percent has rendered a number of manufacturers uncompetitive and contributed to declining investment in the sector.
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.
Over 67% of manufacturers enumerated disagreed that commercial bank loans to the manufacturing sector encourage productivity. Unfortunately, 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, 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. The implication is low investment, limited capacity utilization and production level in the sector.
Implementation of Government capital expenditure.
About 63.1% of manufacturers enumerated disagreed that Government capital expenditure encourages productivity in the manufacturing sector. 23.9% of those enumerated agreed, while about 13.1% were not sure. Government capital expenditure should address the issues of economic infrastructure such as roads, electricity, water, etc. that supports industrial sector businesses. The absence of economic infrastructure contributes significantly to the high cost of operating environment which obstructs the development of manufacturing in Nigeria.
3.4 OPERATING ENVIRONMENT PERFORMANCE
The perspectives of manufacturers on the implication of the operating environment on manufacturing activities in the second quarter of 2023 was also measured focusing on multiple regulation, multiple taxes, access to the national ports, local sourcing of raw materials, inventory of unsold manufactured, and patronage of Nigerian manufactured goods by Government MDAs. Figures VIII to XIII present the outcome of analysis.
Effect of Macroeconomic On Environment On Manufacturing Indicators
Survey data on the effects of macroeconomic environment on manufacturing activities were also generated and analyzed taking into consideration Production and distribution costs; Capacity utilization; Volume of production; Investment; Employment; Sales volume; and Cost of shipment.
3.7 Estimated Impact of Macroeconomic Environment on the Manufacturing Sector
The estimate of impact of macroeconomic environment on key manufacturing indicators taking into account production & distribution cost, capacity utilization, volume of production, investment, employment, sales volume and cost of shipment.
The figure reveals 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.
A critical evaluation of the analysis above provides an inference that major performance indicators of the manufacturing sector all recorded unfavorable changes. 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 disrupted the manufacturing value chain, escalated cost of manufacturing operations and resulted in reduction in manufacturing patronage.
4.0 CHALLENGES OF MANUFACTURERS
In the course of the survey, manufacturers had the opportunity to identify and rank the current challenges of the manufacturing sector in order of severity of impact. Based on the ranking as presented in Table 2, high cost of energy was top on the list of major manufacturing challenges. This was accordingly followed by high cost of credit/inadequacy of loanable funds, multiple taxes/charges/levies/same tax policy for local producers and importers, unavailability of raw materials/delay in receiving imported raw materials/high cost of raw materials and scarcity of forex/high exchange rate/poor allocation of forex.
- 0 SUMMARY OF FINDINGS
Manufacturing activities 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.
The Aggregate Index Score (AIS) of MCCI declined to 52.7 points in the second quarter of 2023 from 54.1 points obtained in the first quarter of 2023. The index score of the current quarter, though below that of the previous quarter, indicates that manufacturers generally show resilience and retain confidence in the economy.
However, across sectoral groups, operators in Motor Vehicle & Miscellaneous Assembly with an index score of 46.7 exhibited further loss of confidence as they fell below the 50-point benchmark. These operators were adversely affected by the exorbitant new premium rate for motor insurance and the abrupt subsidy removal which significantly worsened sales performance and increased the consumer’s preference for fairly used vehicles as a result of low purchasing power.
Similarly, among industrial zones, activities in Abuja (40), Rivers/Bayelsa (40.5), Cross-Rivers/Akwa-Ibom (45), Kano (46.2), Kaduna (47.8) and Oyo/Ondo/Ekiti/Osun (48.6) were depressed by the high-cost operating environment in the second quarter of 2023 as underlined by their index scores which fell below the benchmark points.
Sequel to the above trends, 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.
6.0 CONCLUSION AND RECOMMENDATIONS
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.
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. 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.
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.