Businesses battle rising costs amid shrinking consumer spending

Businesses in Africa’s most populous country have been battling rising operation costs amid high borrowing costs and low consumer spending.

Inventory of unsold products in the manufacturing sector rose to N272 billion in the first half of 2023 from N187.1 billion in the same period of 2022, the Manufacturer Association of Nigeria’s half-yearly review report shows.

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Globally, businesses are faced with rising energy costs, largely driven by the Russia-Ukraine war. In addition, FX volatility, accelerating inflation and worsening insecurity have compounded problems for Nigerian businesses.

“Decelerating and low growth in manufacturing and trade largely reflect the deregulation of the downstream oil sector and the high energy cost, exchange rate volatility, continuous rise in interest rate, high inflation and weak consumer demand,” Gabriel Idahosa, president, Lagos Chamber of Commerce and Industry said in his address on the state of the economy in Q1, 2024.

According to him, these macroeconomic challenges are expected to further weigh on the growth prospect of the manufacturing sector in the first quarter of 2024.

“In the short term, growth in manufacturing is expected to remain weak due to the squeezed consumer spending,” he noted.

Fuel prices have soared by over 200 percent from January to date, raising costs for firms in Nigeria, where businesses rely on diesel-fired generators amid unstable grid electricity.

Transportation costs have also doubled since removal of petrol subsidy and further impact costs for businesses.

BusinessDay analysis of FMCGs in Nigeria showed that production cost or cost of sale increased by 25 percent in the first nine months of 2023 to N1.35 trillion from N1.08 trillion in the same period of 2022. Their operational cost showed that it increased by 17 percent to N306 billion in 2023 from N260 billion in the same period in 2022.

Also, FX availability and accessibility have remained challenging for manufacturers. Currently, it costs N1,080 to get one dollar from the Central Bank of Nigeria (CBN), while it costs around N1,300 in the black market.

The unfavorable exchange rate has increased production costs significantly because not less than 40 percent of raw materials, machines and other inputs required for production are sourced using FX.

A BusinessDay analysis of the financial statements of five FMCGs shows that their cost of raw materials rose by 30 percent in the first nine months of 2023 to N718.7 billion from N551.8 billion in the corresponding period of 2022.

Local sourcing of input, which should serve as an alternative, is also struggling due to rising insecurity in crucial regions.

Edobong Akpabio, former head of agribusiness at Lagos Chamber of Commerce and Industry (LCCI), said the country has lost 60 percent of its food production in key-producing states owing to rising insecurity.

“A lot of farmers do not cultivate in places where they usually grow crops because of the high rate of insecurity,” Akpabio said.

“Insecurity must become a thing of the past before Nigeria can curtail the recent surge in food prices,” she added.

Africa’s most populous country has been grappling with double-digit annual inflation since 2016, with the consumer price index hitting 28.9 percent in December, according to the National Bureau of Statistics (NBS).

Growth in the manufacturing sector slowed to 0.48 percent in Q3, 2023 from 2.2 percent in the preceding quarter of 2023.