Manufacturers’ confidence in Nigerian economy nears 2-year low

Manufacturers’ confidence in the nation’s economy dropped to the lowest in nearly two years in the second quarter of this year, new data have shown.

The aggregate Manufacturers CEO’s Confidence Index (MCCI) of the Manufacturers Association of Nigeria (MAN) declined for the third straight quarter to 52.7 points in Q2 from 54.1 points in the previous quarter.

According to the latest report by MAN released on Wednesday, major performance indicators of the manufacturing sector all recorded unfavourable 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 Q2,” it said.

It said the economic turmoil disrupted the manufacturing value chain, escalated cost of manufacturing operations and resulted in reduction in manufacturing patronage. “Manufacturers are extremely groaning in pain due to these issues that are frustrating their contribution to the economy.”

The MCCI is a quarterly research and advocacy publication that measures changes in the pulse of operators and trends in the manufacturing sector, in response to movements in the macro-economy and government policies, using primary data mined through direct survey over 400 CEOs of MAN member-companies.

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It is computed using data generated on standard diffusion factors of current business condition, business condition for the next three months, current employment condition, employment condition for the next three months and production level for the next three months.

It has a baseline score of 50 points and scores above the baseline indicate improvement in manufacturers’ confidence in the economy, while an index score of less than the baseline suggests deterioration in the operating environment.

MAN said: “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 Q1 but remained marginally above the 50-point benchmark.”

It added that employment conditions for the next three months further plunged below the benchmark points to 46.6 points as against the 47.8 points obtained in the preceding quarter.

The 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 Q1, according to the association.

It revealed that across sectorial groups, operators in motor vehicle and miscellaneous assembly with an index score of 46.7 exhibited further loss of confidence as they fell below the 50-point benchmark.

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“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,” it said.

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 Q2 as their index scores fell below the benchmark points.

On May 29, President Bola Tinubu announced the removal of the petrol subsidy, and pump prices have surged to as high as N617 per litre from N184, while the value of the naira has plunged following the floating of the currency.

The floating of the currency has increased the official rate from N463.38/$ to N775.34/$ as at Tuesday. The gap between the official and black market expanded to N150.

The high cost of dollars and the implementation of a 7.5 percent value added tax on diesel imports have pushed its pump price by about 20 percent to as high as N870 per litre.

According to the National Bureau of Statistics (NBS), the inflation rate quickened for the seventh consecutive month to 24.08 percent in July 2023, the highest in nearly 18 years from 22.79 percent in the previous month.

The latest Purchasing Managers’ Index by Stanbic IBTC Bank also shows that business activities in the country dropped to 51.7 in July, the lowest in four months, from 53.2 in the previous month.

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The challenging macroeconomic issues impacted on the manufacturing sector as its growth rate slowed to the lowest in three years.

Data from the NBS shows that the real GDP growth of the sector stood at 2.2 percent in Q2, the lowest since Q2 2020.

The lingering foreign exchange scarcity and continuous depreciation of the naira have left manufacturers bleeding and limited their capacity utilisation since the importation of non-locally produced critical input has become a nightmare, according to authors of the report.

“Despite the recent reform to unify all forex windows, the exorbitant premium that persists between the official and parallel exchange rates has further stalled manufacturing operations,” they said.

High cost of energy was listed as the top major manufacturing challenges 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.

MAN said the abrupt removal of fuel subsidy without appropriate palliatives is already beginning to wane on the confidence of Nigerians in this new administration.

“No Central Bank of Nigeria forex intervention will be effective without boosting the level of liquidity and transparency in the official forex window.”

It recommended that more needs to be done apart from the introduction of the Forex Price Verification System Portal which is laudable as it would improve transparency.

“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,” the association said.

It added that 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.”