Rising input costs in Africa’s biggest economy have contracted the manufacturing sector in the third quarter (Q3) of 2022, the first time since Q4 2020, according to data from the Q3 GDP report.
Real growth in the sector stood at -1.91 percent (year-on-year), lower than the same quarter of 2021 and lower than the preceding quarter by 6.20 percentage points and 4.91 percentage points respectively.
“The growth rate of the sector on a quarter-on-quarter basis stood at 8.95 percent.”
Analysts at Afrinvest Limited said the manufacturing sector was deterred by rising operating costs stoked by foreign exchange illiquidity, high-interest rate, and weak infrastructural amenities.
Abdulazeez Kuranga, a macroeconomist with Cordros Securities, also said the country has started seeing the impact of production costs on manufacturing output – elevated energy costs, currency pressures, and higher interest rates.
“It’s not surprising that the manufacturing sector declined in Q3, although base effects also underpinned the contraction seen during the period,” he said.
BusinessDay analysis of the report also showed that the sector’s contraction contributed to the slow growth in the general GDP growth rate for the economy which slowed by 2.29 percent, the slowest pace in 15 months from 3.54 percent in the previous quarter.
“This development is a reflection of a major setback for the Nigerian manufacturing sector which calls for an emergency response by the government,” Muda Yusuf, founder of the Centre for the Promotion of Private Enterprise said.
He added the plunge in the manufacturing sector performance has profound implications for food inflation, food security and employment.
Energy, especially diesel, has a stronghold on the economy as it powers a large part of the industrial and commercial activities in the economy, from the trucks used for long-distance haulage of both industrial and finished goods, to small machines used by small-scale enterprises.
But since the beginning of this year, the Russia-Ukraine crisis has pushed up diesel prices by 178.1 percent to N801.1 per litre in October from N288.1 per litre in January, according to NBS.
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Earlier this month, Segun Ajayi-Kadir, director-general of the Manufacturers Association of Nigeria (MAN) revealed manufacturers spent N67.7 billion in the first half of this year, a 51 percent increase from N45.0 billion in the same period of last year.
“Manufacturing in Nigeria is heavily beset by these price developments and manufacturers are contending with these challenges while struggling to sustain production,” he said.
Apart from energy prices, foreign exchange liquidity challenges have also increased as a result of the crisis. At the official market, the naira-dollar exchange rate closed at N432/$1 last month from N414/$1 in December 2021.
At the parallel market, it rose to as high as N800/$1 last month from N580/$1 in December 2021.
With limited foreign exchange inflow from crude oil sales, foreign exchange demand pushed over the bounds of supply and contributed to the depreciation in Naira value, said Ajayi-Kadir.
“The crises are responsible for the unfavorable movements in manufacturing indicators such as capacity utilisation, contribution to real GDP, investment, employment, cost of production, competitiveness,” he added.
The surge in diesel prices and foreign exchange also contributed to the country’s inflation rate which increased by 21.09 percent in October, the highest in 17 years from 20.77 percent in the previous month.
