A report on economic activities in the industrial and other sectors of the economy showed that the cash crunch and petrol scarcity in February propelled a downward movement in economic activities, writes Dike Onwuamaeze
It happened just as it had been predicted by many economists and opinion leaders in the Nigerian organised private sector, such as; the Manufacturers Association of Nigeria (MAN), the Nigerian Economic Summit Group (NESG) and the Centre for the Promotion of Private Enterprise (CPPE). These organisations, in different forums, made it plain that the prevailing acute cash crunch, which was triggered by the chaotic implementation of the Central Bank of Nigeria’s (CBN) Naira redesigning of N200, N500 and N1,000 Naira notes would hurt business activities in the country.
Now, their concerns have been confirmed by the Stanbic IBTC’s Purchasing Managers Index (PMI) report for the month of February 2023 that was released on March 1. For instance, all the major indicators contained in the PMI’s report during the period under review tended southward. No thanks to the prevailing currency crunch that took the current out of the financial and trading activities in Nigeria economy which also forced a decline in new export orders of Nigerian goods and services during the month under review.
The PMI said that each of the four broad sectors covered by the survey saw overall input costs increase that imposed sharpest inflation on manufacturers.
For the first time, according to the report, the PMI fell below its positive point of 50.0 in many months by plunging down to 44.7 points from 53.5 points it recorded in January.
The Head of Equity Research West Africa at Stanbic IBTC Bank, Mr. Muyiwa Oni, who commented on the report, said: “February PMI data indicated that cash shortages across the Nigerian economy had a severe impact on the private sector midway through the first quarter of the year. Substantial declines were seen in both output and new orders, while firms scaled back their purchasing activity and employment.
“Companies were also impacted by shortages of fuel, which added to price pressures and led to supplier delivery delays.”
According to him, “the headline figure derived from the survey is the Purchasing Managers’ Index (PMI). Readings above 50.0 signal an improvement in business conditions on the previous month, while readings below 50.0 show deterioration.
“The headline PMI dropped below the 50.0 no-change mark in February, posting 44.7 from 53.5 in January. Business conditions deteriorated markedly, ending a 31-month sequence of expansion. The decline in operating conditions was the sharpest since the survey began in January 2014, excluding the opening wave of the COVID-19 pandemic in the second quarter of 2020.
“The most severe impacts of cash shortages were seen with regards to output and new orders, which both fell substantially as customers were often unable to secure the funds to commit to spending. The decline in new orders was the first since June 2020, while the fall in output ended a seven-month sequence of growth. In both cases, the reductions were the most pronounced in the survey’s history, apart from during the opening wave of the COVID-19 pandemic.
“With new orders and output falling, companies reduced their input buying and staffing levels accordingly. The declines were the first in 32 and 25 months respectively. The decrease in purchasing reflected not only a drop in customer demand but also difficulties for companies to find the funds to pay for items.”
Oni added that apart from the cash shortages, the private sector was also impacted by a scarcity of fuel in February. He stated that this had a notable impact on suppliers’ delivery times, which lengthened for the first time in close to six-and-a-half years and to the greatest extent since April 2016.
“In turn, shortages led to a rise in fuel costs which were widely mentioned as having been behind a further marked increase in purchase prices. Higher raw material costs and currency weakness were also factors pushing up purchase prices. The rate of inflation was the softest since June 2020, but marked nonetheless and stronger than the series average. Staff costs also rose again in February, but at a modest pace.
“The passing on of higher input costs to customers resulted in a further sharp rise in output prices, albeit one that was the weakest in four months,” he said.
New export orders
Nigerian companies also reported a decline in new export orders midway through the opening quarter of the year, thereby ending a seven-month sequence of growth. The rate of contraction was sharp and the fastest since April last year. This was attributed to funding difficulties and a lack of demand in international markets.
Backlogs of work
Backlogs of work increased for the second month running during February, with the rate of accumulation quickening to the fastest in five months. Respondents indicated that power supply issues and fuel shortages contributed to the accumulation of outstanding business.
Quantity of purchases
The PMI said: “In line with the picture outlined by a number of the indices from the latest survey, purchasing activity declined sharply midway through the first quarter of the year. The fall ended a 31-month sequence of growth and was one of the strongest on record. Lower input buying generally reflected a drop off in demand, but in some cases firms were unable to secure sufficient funds to purchase items.”
Stocks of purchases
Lower customer demand, price increases, money shortages and delivery delays all combined to result in a decrease in stocks of purchases during February. The modest fall in inventories was the first since the opening wave of the COVID-19 pandemic in the first half of 2020.
Input prices
Moreover, overall input prices continued to rise rapidly in February, with the rate of inflation ticking up from that seen in the previous survey period and remaining stronger than the series average. “Each of the four broad sectors covered by the survey saw overall input costs increase, with the sharpest inflation at manufacturers,” the report said.
Purchase prices
The rate of purchase cost inflation eased for the second month running to a 32-month low in February, but remained sharp and faster than the series average. There were widespread reports that fuel prices had increased amid shortages, while higher raw material costs were also mentioned. Currency weakness also contributed to inflationary pressures.
Output prices
The pass-through of higher input costs to customers resulted in a further monthly increase in output prices in the Nigerian private sector.
Charges were up sharply again in February, albeit to the least extent in four months. As was the case with input costs, manufacturing posted the fastest increase in charges of the four sectors covered by the survey.
But earlier in February, the manufacturers association had warned that the manner the new Naira policy is being implemented would not augur well with manufacturers.
The Director General of MAN, Mr. Segun Ajayi-Kadri, had said that the continued scarcity of the redesigned new Naira notes is quite worrisome. With our growth prospects heading further south, we can ill afford a downturn in our GDP. The negative impact it portends for local producers, the agricultural and distributive segments of our economy is huge and may worsen the bashing our economy has received from both external and internal shocks in recent times.”
Ajayi-Kadri further stated: “I would put a rough estimate of 25 per cent drop on monthly sales of domestic goods if the situation should persist for the next three weeks.
“As the purchases from the retail end that is mostly transacted in cash dries up, you will immediately notice a sharp drop in wholesale purchases and instant buildup of unsold inventory in your industries.
“This situation is not good for anyone, the industry, the government and the ordinary citizen. You will have a compounded crippling lack of patronage for the domestic manufacturer; the denial of government revenue that would have accrued from consumption taxes and the disruption of the daily life and need of the average Nigerian.”
Similarly, the Chief Executive of Officer of the Centre for the Promotion of Public Enterprises (CPPE), Mr. Muda Yusuf, made it clear that failure to extend the deadline of the currency swap for at least six months would put N100 trillion component of the national GDP at risk.
He said: “The crippling of business transactions at the distributive trade end amid the currency swap crisis would not only undermine the trade and agricultural sectors but would have a knock-on effect on manufacturing value chain and the services sectors. This is because whatever that is produced has to be sold. The trading end of the chain has been greatly disrupted by this currency swap crisis.”
He added that the trade sector contributes about 14 per cent of the GDP valued at an estimated N35 trillion; agricultural sector contributes 25 per cent, valued at an estimated N62 trillion.
“Most of the activities in these sectors are either in the rural areas or in the informal sector of the economy. These are the sectors that have been driving the resilience of the Nigerian economy amid numerous domestic and global headwinds. Any policy measure that would negatively disrupt these sectors should be avoided.
“Given the size of the Nigerian economy, our large population of over 200 million people, the dominance of the rural economy, the huge informal sector, the literacy level, and the over 30 million Nigerians that are unbanked, a minimum of six months window ought to have been given for the currency swap exercise,” Yusuf said.
The Chief Executive Officer of the Financial Derivatives Company Limited, Mr. Bismarck Rewane, has projected that Nigeria would suffer “total man hour loss in a month will be 120 hours and total GDP loss in a month will be $18 million.
“Trade is settled mainly in cash and POS, 70 per cent of trading transactions are settled by cash. A decline in the velocity of circulation could reduce output in the trading sector. Hence its contribution to GDP will fall,” he said.
gradual phasing out of the old naira currencies by prolonging their legal tender usage side-by-side with the new notes.
Similarly, the NESG in a report titled, “Naira Redesign Policy: Caught in the Web,” warned that prolonging the cash scarcity associated with the currency redesign policy would likely motivate a slowdown in Nigeria’s economic growth as many productive activities might have been halted due to the inability to access cash, especially the informal sector that runs primarily on cash and controlled about 65 percent of Nigeria’s GDP.
The report stated: “As laudable as the aims of the CBN were in its decision to redesign the currency, the evidence is that there has been a myriad of unintended challenges, which have been significantly disruptive to economic activity and negatively affected the welfare of citizens. Urgent redress is, therefore, required to stave off further adverse socio-economic effects and to restore confidence in the financial system.”
