Manufacturers in Nigeria’s textile industry are under strain as the cost of energy has almost doubled over the last month as a result of the naira devaluation.
Some of the manufacturers spent about N21 million in one month, up 90.1 percent from N11 million, on gas, a vital source of power for their operations.
This presents dire consequences for the struggling industry, which remains in the doldrums as textile imports have doubled in two years amid a lack of implementation of the interventions from the previous administration.
“Our members are complaining seriously that they may have to downsize or close down because of the cost of gas, which is priced according to dollars,” said Hamma Kwajaffa, director-general of Nigerian Textile Manufacturers Association (NTMA).
He said the cost of a standard cubic meter (scm) of gas has risen to N133 per scm from N73 per scm.
“When the dollar was officially around N400-450, the price of gas was cheaper. But now that it is close to N800, it is a big challenge for us, especially when we just converted to gas as a result of the high cost of diesel,” he added.
According to Kwajaffa, the manufacturers cannot convert back to diesel because the cost of conversion is very high. “Most of them would have to wait for the market to stabilise.”
Energy is a key element of the production process. Nigeria’s inability to supply and distribute sufficient electricity has left businesses at the mercy of generators that consume diesel and petrol.
Manufacturers spend 40 percent of their total production cost on generating energy for their businesses, according to the Manufacturers Association of Nigeria (MAN).
Data from the association also show that on average, manufacturers spent at least N144.5 billion on sourcing alternative energy (gas and diesel) in 2022, up from N77.22 billion in 2021.
In June 2023, the Central Bank of Nigeria (CBN) collapsed all segments of the foreign exchange market into the Investors & Exporters (I&E) window. Based on this adjustment, the naira fell from N463.38/$ to N775.76/$ last Friday.
A letter seen by BusinessDay dated June 30, 2023 from Gaslink Nigeria Limited shows the company informing its customers of the changes in the exchange rate and gas prices.
“Pursuant to our gas sales and purchase agreement, the naira equivalent of the gas price is calculated based on the prevailing $/N exchange rate of the CBN at the time of invoicing. Consequently, the June invoice will be calculated using the CBN $/N exchange rate as at June,” it said.
The company said in order to minimise the impact of the volatility of the floating exchange rate on monthly invoices, it was reviewing an approach where the naira equivalent of the gas price would be calculated using the simple average of the daily CBN $/N exchange rate for the applicable month of invoice.
“Banks are not supplying dollars to us because there is no official rate again. And at the I&E window, the dollars to naira is about N870-N895. There is no option. We are just working without profit,” Pal Woollen, general manager at Woollen & Synthetic Textile Manufacturing Limited, said.
Ramalingam Arumugam, chief operating officer at Alkem Nigeria Limited, said the industry, which is capital intensive, may not be able to generate revenue for the government, thereby affecting the country’s Gross Domestic Product (GDP).
Analysts at Economist Intelligence Unit projects that the pressure on the naira is expected to continue in the near term, falling to as low as N1,018 per dollar in 2027, as high and rising inflation persists.
“Foreign-exchange scarcity will persist in the near term despite partial unification of the official and the black-market exchange rates. We expect the Central Bank of Nigeria to revert to heavier management of the exchange rate in late 2023 to tame rapid price rises,” they said in a recent report.
They added that the average rate is forecast at N815 to $1 in 2024, sliding to N1, 018 to $1 by the end of 2027, with a spread of 10-15 percent against the black-market over the period.
Business activities in Africa’s biggest economy dropped to 51.7 in July, the lowest in four months, from 53.2 in the previous month, the latest Purchasing Managers’ Index (PMI) by Stanbic IBTC Bank shows.
According to the National Bureau of Statistics (NBS), Nigeria’s inflation rate rose to a fresh 17-year high of 22.79 percent in June 2023 from 22.41 percent in the previous month.
The textile industry, one of the top contributors to the manufacturing sector, plays an important role in an economy. It is believed to create huge employment for both skilled and unskilled labour, generate export earnings, attract foreign direct investment and reduce poverty.
In the 1970s and early 1980s, Africa’s most populous nation had over 167 textile mills that employed more than 250,000 Nigerians. Some of the mills were United Nigerian Textile Limited, Aswani Textile, Afprint, Asaba Textile Mills, and Edo Textile Mills.
But the number of mills has reduced to 24 with over 20,000 workers as they were unable to compete in an atmosphere of smuggling, unbridled importation, inadequate power supply, inconsistent government policies and insecurity.
“The country has at least 24 textile industries but only three are functioning properly because some ministries are patronising them, otherwise they would have closed down long ago,” Kwajaffa of NTMA said.
In a bid to revive the industry, former President Muhammadu Buhari, through the CBN, rolled out several intervention programmes, including provision of financial support, training and foreign exchange restrictions for all forms of textile materials at the official exchange market, importation of textiles products.
Despite the interventions, the NBS data show that the importation of textile and textile articles rose by 100.3 percent to N365.5 billion last year, the highest in at least 15 years, from N182.5 billion in the previous year.
Economic activities in the textile, apparels and footwear sub-sector under the manufacturing sector have been in recession since 2019.
Apart from the devaluation of the naira, BusinessDay reported last week that small businesses were shutting down as a result of the surge in petrol prices occasioned by the removal of petrol subsidy.
The Nigerian Association of Small and Medium Enterprises said about 10 percent of the 40 million Micro, Small and Medium Enterprises in the country have closed shops since the subsidy removal.
The Association of Small Business Owners of Nigeria, which could not give the number or percentage of businesses that have stopped operating, projected that more than 20 percent of their 27,000 members have been affected by the mounting economic woes.
According to Kwajaffa, the government should subsidise the cost of energy or supply for industries so that they can retain their workforce.
“They should have considered businesses and the industry before removing the subsidy and doing naira devaluation. Some countries defer prices so that businesses can continue running the factories thereby retaining jobs,” he said.