Businesses in Nigeria’s manufacturing sector are adopting coping measures including renegotiation of contracts in a bid to survive the economic shocks caused by the removal of the petrol subsidy and naira devaluation.
The two policies, which have pushed up inflationary pressures in recent months, have further weakened the purchasing power of cash-strapped consumers, reduced the demand for goods and services, thereby increasing inventory of unsold finished goods.
This has forced most manufacturers to adopt cost-cutting measures such as reducing production capacity and staff strength, lowering costs of power, reducing the number of working hours for non-productive staff and combining procurements.
Others are increasing production of smaller quantities of products, divesting to food-related items and agriculture, re-evaluating suppliers and renegotiating contracts with international suppliers to get upfront supplies.
“Manufacturers are reducing their capacity because they are selling less, causing them to reduce their personnel,” Sola Obadimu, director-general of Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, said.
He said low production means less tax revenue for the government, which is trying to raise taxes. “So the coping measures are not really good.”
Gabriel Idahosa, deputy president of Lagos Chamber of Commerce and Industry, added that a lot of creativity was happening in the real sector as there have been a lot of efforts to cut down on the cost of power and march production to their working capital levels.
“More manufacturers are now reducing the size of their products so that the lower-income people who can’t afford to buy large quantities can buy little,” he said.
According to Idahosa, some manufacturers who would place their orders from foreign importers are now consolidating their imports to fill a vessel or containers and get a lower price.
“All these are well known mechanisms in the situation we find ourselves in.”
Since May 29, when President Bola Tinubu announced the removal of the petrol subsidy, petrol prices have tripled to N617, 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 N740.60/$ as at Friday. The gap between the official and black market expanded to N200.
Manufacturers spend 40 percent of their total production cost on generating energy for their businesses, according to the Manufacturers Association of Nigeria (MAN).
“Last year, the total amount spent by our members on alternative energy surged from N77.2 billion in 2021 to N144.5billion. And the average local raw materials utilisation in the manufacturing sector for 2021 and 2022 was 52.1 percent, which means that the imported component is 47.9 percent,” it said.
The association said a huge volume of foreign exchange is needed to finance the 47.9 percent of imported raw materials and much more for importation of machines and spares.
The latest Purchasing Managers’ Index by Stanbic IBTC Bank 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.
“Rising price pressures impacted demand, with growth of both new orders and business activity softening as the second half of the year got underway,” analysts at Stanbic IBTC Bank said.
Africa’s biggest economy has been grappling with double-digit annual inflation since 2016. According to the National Bureau of Statistics, the inflation rate rose to a fresh 17-year high of 22.79 percent in June 2023 from 22.41 percent in the previous month.
An official at MAN, who spoke on condition of anonymity, said manufacturers are battling with a lot of inventory of unsold finished products as it has risen between 42-45 percent since May.
“People are not buying because of the high inflation rate. And for the fact that manufacturers produce with high cost of input, the prices go up making it unaffordable for the people,” he said.
The purchasing power of consumers has reduced production and the coping measures may not be positive for businesses but it is what they can do under the normal circumstances, according to Femi Egbesola, national president of the Association of Small Business Owners of Nigeria (ASBON).
“The unstable inflation rate, FX and high energy cost makes it difficult for businesses to make any revenue or profit projection. This is already scaring away investors,” he said.
BusinessDay reported last month that small businesses were shutting down in the country since the subsidy removal. According to the Nigerian Association of Small and Medium Enterprises, about 10 percent of the 40 million Micro, Small and Medium Enterprises have closed shop.
ASBON projects that more than 20 percent of their 27,000 members have stopped operations.
Uchenna Uzo, professor of marketing and faculty director at Lagos Business School, recommended businesses to have a longer-term view towards pricing and cost management.
He said revising business models, changing the kind of partnerships you have and coming up with new products and services that are not import dependent.
Recently, President Bola Tinubu pledged to provide N75 billion to 75 manufacturing enterprises between July 2023 and March 2024 at nine percent interest rate.
“Our objective is to fund 75 enterprises with great potential to kick-start a sustainable economic growth, accelerate structural transformation and improve productivity,” he said during a national broadcast.