In spite of the excruciating business environment the Nigerian manufacturing sector struggled to scrape through the second quarter of 2022 on a positive note, writes Dike Onwuamaeze
The Nigerian manufacturing sector sustained its positive performance in the second quarter of 2022. During the period, the aggregate Manufacturers CEO’s Confidence Index (MCCI) score rose to 54.6 points against 53.9 points it recorded in the first quarter of 2022.
This is contained in the MCCI’s report for the second quarter of 2022, which was released last week by the Manufacturers Association of Nigeria (MAN).
Nevertheless, the MCCI report noted that the increase recorded during the period under review was achieved in spite of the harsh business condition experienced by most manufacturers which was more challenging than what was obtained in the first quarter of the year.
Aggregate MCCI
The MCCI report attributed the growth recorded in the second quarterto two factors. One of them was “the survival strategies adopted by Nigerian manufacturers that improved production.” The second factor was “the increase in the aggregate index score to the feedback on the anticipated improvement in business condition, employment condition and production level in the third quarter of the year.”
It also added that the “compelling adjustments made by government, manufacturers and households in response to general increase in price, foreign exchange shortage, increasing cost of energy, scarcity of raw materials and many more, thrown up by the war in Europe,” helped to make the increase in the aggregate MCCI index possible.
The MCCI is a research advocacy publication of the MAN, which measures quarterly changes in the pulse of operators and trends in the manufacturing sector in response to movements in the macro-economy and government policies by using primary data mined through direct survey on over 400 chief executive officers of MAN member-companies.
The index has a baseline score of 50 points and scores above the baseline indicate improvement in manufacturers’ confidence in the economy, while index score less than the baseline suggests deterioration in the operating environment.
The MCCI report said: “In the second quarter of 2022, the index of MCCI marginally increased to 54.6 points up from 53.9 points recorded in the first quarter of the year, despite the plethora of challenges including poor access to foreign exchange for importation of raw materials not available locally, effect of rising global inflation, aggressive drive for revenue by government, frequent collapse of the grid, increase in price of diesel, scarcity of wheat and other manufacturing inputs due to the ongoing war in Europe between Russia and Ukraine and the wide spread insecurity that limit productive activities in the economy during the quarter.”
The afore-mentioned meager improvement in the index scored in the second quarter of 2022 implied that manufacturers responded to the economic challenges that prevailed in the quarter with appropriate survival strategies and adjustments, including the remodeling of production operations after the marginal slowdown experienced in the first quarter.
Sectoral Group MCCI
The sectorial analysis of the report for the period under review showed that the Wood and Wood Products group recorded a marginal increase in the index score of sector that grew up to 49 points in the second quarter of the year, which was a slight uptick from 48.9 point it recorded in the first half of this year, even though it is below the 50 baseline points.
Similarly, the index score of Electrical and Electronics group also recorded marginal improvement to 50 points from 49.9 points obtained in the preceding quarter. But the index of the Motor Vehicle and Miscellaneous Assembly moved above the baseline to 50.1 points from 49.2 points of the preceding quarter.
The report summed that “based on the above backdrop, activities in the Wood and Wood Products and Electrical and Electronics sectoral group signaled an improvement over the results of the first quarter despite the fact that the operations of the groups were most impeded by unfriendly operating environment.
“However, the Motor Vehicle and Miscellaneous Assembly group appeared to be gradually finding its footing back after operational difficulty in the first quarter of the year.”
Industrial Zone MCCI
The report showed that operating environment in the zones within the middle belt and Rivers/Bayelsa zone was the toughest during the quarter under review. For instance, the index score of Bauchi/Benue/Plateau fell below the 50 points baseline at 46.3 points from 48.3 points recorded in the first quarter of the year.
Likewise, Index score of Abuja zone also declined to 43.5 points from the 44.8 points in the first half of the year. River/Bayelsa scored 45.0 points, which fell short of the 46.0 points recorded in the first quarter.
The MCCI report said that “the middle belt that houses Bauchi/Benue/Plateau industrial zones is the most unsettled region due to insecurity challenge in the country. As a result of the situation, a number of companies in the zone operated at sub-optimal level, while others have either shut down their operations or relocated to a safer environment.
“The companies also experienced severe stock out of primary raw materials, particularly agro-allied as most of the farmers had taken to their heels due to insurgency.
“Manufacturing and other business activities in the Rivers/Bayelsa zone also appeared to be struggling with the impact of aggressive drive for internally generated revenue by government to bridge revenue gaps occasioned by the divesting activities of International Oil Companies from hydrocarbon to renewable energy sources.”
The report also acknowledged the impact of the ongoing Russian/Ukraine war on businesses in the country. It noted that the war has clearly underscored the popular maxim that the world has become a global village; and that occurrence of an incidence in one part of the world, notwithstanding how specific it might be, could actually become a global issue.
It said: “Apart from the need for ardent management of global peace, the series of global occurrences and the lessons learnt demand that national governments should begin to take drastic measures to manage these phenomena proactively going forward.
“Undoubtedly, phenomena such as the China-America trade war, the Asian and Global Financial crises, and the challenges thrown up by COVID-19 pandemic and now, the Russian-Ukraine war called for the development of a sustainable national anticipatory policy measures.
It said: “The business ambiance in the second quarter was no doubt beset by numerous macroeconomic, regulatory and externally induced challenges, compounded by the lingering backlashes of COVID-19 pandemic and the ongoing Russian-Ukrainian war. Clearly, the resultant effects of these challenges continue to manifest in the escalation of global inflation, shortfall in the global supply chain followed by the rise in energy cost, fertilizer and fertilizer inputs, wheat grain, etc.
“Cumulatively, these challenges interplayed to shape the direction of performance of the manufacturing sector in the second quarter of 2022.
“It is therefore important for the government to intentionally create an anticipatory policy framework that will facilitate automatic stabilisation of the economy in the event of domestic or global shocks, while addressing the afore-mentioned familiar operating challenges limiting the performance of the sector.”
The Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, in his half year review of the economy noted that the war between Russia and Ukraine, insecurity and scarcity of foreign exchange posed serious challenges to manufacturers during the second quarter of 2022.
Yusuf stated that output declined significantly in many industries because of the challenges of accessing raw materials due to the scarcity of foreign exchange that is constraining many play to resort to the parallel market at very prohibitive cost, as very little access existed on the official window.
He said: “The sharp depreciation of the exchange rate and the parallel market which is over 300 per cent has worsened the profitability of investments. The capacity to retain employment and the capacity to create new jobs have been greatly endangered because of the foreign exchange crisis,” adding that “capacity utilisation is impacted when access to forex is constrained.”
He said that the FX crisis has imposed high cost of production on industrialists because of the high import dependence of the Nigerian manufacturing sector for imported raw materials.
He also noted that manufacturers were faced with the burden of low sales and turnover because of the increase in price and effect on demand and erosion of profit margins because not all the additional cost can be passed on consumers.
Yusuf said that the worsening insecurity in Nigeria has forced “many industrialists especially those who are in the agro-allied sector to grapple with challenges of getting raw materials from the crop producing areas of our country. This has continued to negatively impact capacity utilization, turnover, cost of production and the value delivery to shareholders. Some now source raw materials from neighbouring West African countries.”
Key Challenges of Nigerian Industrialists
Yusuf said that sugar and resins are currently scares. He pointed out that “sugar is used in many of the beverage industries, bread and the likes. Raisins are used for purposes of packaging materials. These are also critical inputs for practically all manufacturing sectors. Access to these products is becoming extremely difficult and we appeal to the fiscal authorities to intervene very quickly to remove whatever bottlenecks that exist in ensuring the availability of these critical inputs for the manufacturer.”
He noted that “manufacturers also continue to grapple with the problems of high cost of logistics, access to foreign exchange, access to raw materials and the impact of excise duty on alcoholic or non-alcoholic beverages which is impacting demand for their products.
“The high inflationary pressure is also constraining the capital expenditure of many of the manufacturing firms. Capacity to expand is being constrained because of the high inflationary situation. These are some of the challenges that are faced by the manufacturers.
“Most of the exports to ECOWAS countries are by road and most of these export or import goes through Benin Republic, but Benin Republic has for a few years now been imposing prohibitive transit taxes and levies on transit goods passing through Benin Republic, it is making many of these cross-border businesses very unproductive and very unprofitable. It is a major cause of frustration to many cross-border investors.
“We appeal therefore to the authorities in Nigeria and Benin Republic to resolve whatever issues there is on this matter. This prohibitive fees and levies on transit goods are a clear violation of ECOWAS protocols. This does not portend a good omen for our economy integration and the larger issue of the African Continental Free Trade Area because over 80 per cent of trade is by road and if a fellow African country continues to pose this kind of challenge and this kind of impunity to our transit cargo then it gives a great cause for concern.”
