Manufacturers say positive GDP growth masks sector’s true health

Manufacturers are saying the growth recorded by the sector in the first quarter of 2021 is not reflective of the obstacles in their path.

After three consecutive quarters of contraction in 2020, the sector expanded by 3.4 percent in the first quarter, according to data by the National Bureau of Statistics (NBS).

Analysts say after the disruption occasioned by the COVIDe -19 pandemic, activities in the sector have dragged significantly due to challenges around rising production cost, supply cuts and foreign exchange shortages.

Segun Ajayi-Kadir, DG, Manufacturers Association of Nigeria (MAN) noted that even though the sector’s positive GDP performance was indicative of a rebound from the lows of the pandemic, it still did not fully capture current realities in the sector.

“In Q1 2021, manufacturing activities, rebounded to the level of pre-COVID-19 period, so it is expected that the sector will present better performance, however, we are mindful of the negative impact of the depreciation in Naira value and acute shortage of FOREX as they remained huge challenges in the quarter,” he explained.

Similarly, Muda Yusuf, director-general, Lagos Chamber of Commerce & Industry (LCCI) said the sector is still struggling to fully recover from the shocks of the pandemic. Yusuf said most foreign exchange dependent manufacturers have been hammered by FX shortages and exchange rate depreciation in the economy.

The FX volatility in Nigeria has been a nightmare for manufacturers. The naira was devalued twice in 2020 alone due to the dip in oil income which made foreign exchange scarce.

Foreign exchange shortages have been an ongoing challenge in Nigeria and led to the death of 54 manufacturing firms in 2016 alone. Many more have followed since then with manufacturers saying they get two to 10 percent of their dollar needs from the market even after waiting for 30-90 days.

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This was affirmed by 82 percent of business managers in the Manufacturers CEOs Confidence Index (MCCI) for Q4’20 who complained that the rate at which FX is sourced and accessed has not improved adding that the unavailability of FX has negatively impacted the sector’s performance.

Experts are of the opinion that if issues around FX availability and accessibility are not addressed promptly, many of these companies will fold up which will consequently collapse the sector and affect job creation.

Furthermore, the COVID-19 pandemic emanated from China, the world’s manufacturing powerhouse and Nigeria’s largest trading partner especially for manufacturing inputs, this caused an abrupt stop in the supply of raw materials, goods, tools, and machinery for manufacturing companies which forced many of them to suspend business operations.

The cut in global supply forced manufacturers to source for inputs locally however this also posed a struggle on the back of rising insecurity which caused scarcity of raw materials.

This also contributed to increasing the cost of production thus discouraging production activities. Furthermore as cost pressure is intensified, manufacturers are unable to pass the entire cost increase to already battered consumers.

In 2020, the sector slid into recession in the third quarter of the year following two consecutive contractions and a sub-optimal record of 0.43 percent in the first quarter.

During the heat of the pandemic in Q2’20, manufacturing sector performance contracted to -8.78 percent, the following quarter saw a mild improvement of -1.51 percent which it retained in the fourth quarter of the year, hence an overall full-year performance of -2.75 percent

The NBS report however revealed that the sector’s performance was driven majorly by four sub-sectors out of the 13 subsectors, three of which emerged winners amid the pandemic, they are the cement subsector with 11.20 percent growth, food, beverage, and tobacco with 7.11 percent, chemical, and pharmaceuticals with 3.91 percent and other manufacturing with 3.75 percent.

The motor vehicles & assembly subsector achieved 3.29 percent while the non-metallic products plastic and the rubber products subsectors recorded 2.88 percent and 1.68 percent respectively.

The other six subsectors noted in the report contracted with oil refining plunging by -57.05 percent, the textile, apparel, and footwear sub-sector hit -4.53 percent, electrical and electronics was -4.46 percent.

The wood and wood product subsector was -2.36 percent, basic metal, iron, and steel subsector recorded -1.63 percent while the pulp, paper, and paper products hit -0.26 percent.

Vincent Nwani, Managing Consultant, RTC Advisory Ltd, told BusinessDay that although the sector is showing signs of recovery, the government still needs to take prompt action in order to prevent the sector from relapsing.

“The sector is in dire need of policy and project reforms across its sub-sectors, vulnerable sub-sectors in the manufacturing space should be provided funds at a low cost to sustain operations and encourage CAPEX spending. In addition, solving the FX challenges faced by these manufacturers would be an important factor to kick-start growth,” Nwani said.