The outlook of Nigeria’s employment conditions for the third quarter of this year dropped to the lowest in nearly three years on the back of petrol subsidy removal and naira devaluation.
According to the latest aggregate Manufacturers CEO’s Confidence Index (MCCI) of the Manufacturers Association of Nigeria (MAN), employment conditions for July-September of 2023 deteriorated below the 50 benchmark points to 46.6 points from 47.8 points in the previous quarter.
A further analysis shows that the indicator, which declined for the fourth straight quarter, is the lowest compared to others such as current business condition (48.9), current employment condition (50.2), business condition for the next three months (58) and production level for the next three months (59.8).
“The decline underscores the persistent harsh operating business environment for manufacturers which was occasioned by escalating energy cost as well as necessary but poorly coordinated subsidy and exchange rate reforms,” MAN said.
Sola Obadimu, director-general of Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, said manufacturers are reducing their capacity, which means that their personnel will be affected. “When you are producing less, you end up producing less tax.”
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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.
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.
The harsh reality has pushed some manufacturers to shut down, which is increasing unemployment, said Olamide Adeyeye, a Lagos-based human development researcher.
“And it is quite unfortunate because manufacturing is one of the biggest employers of labour and the index of infrastructural development. And when things get tough, the employees are the ones that will be affected,” he added.
Africa’s most populous nation, with more than 200 million people, had an all-time high unemployment rate of 33.3 percent in Q4 2020 but it fell to 4.1 percent in Q1 2023 following the new methodology adopted by the National Bureau of Statistics (NBS).
In recent months, households and businesses have been affected by reforms of President Bola Tinubu, including the floating of the naira.
The foreign exchange reform, which allows the naira to trade more freely, has led to the currency depreciating by 66.5 percent to 780 per dollar on Wednesday from 463.33/$ as of May 25 at the official market.
At the parallel market, the naira depreciated by 21.4 percent to N925 per dollar from N762/$ on May 25.
The FX scarcity and the implementation of a 7.5 percent value added tax on diesel imports pushed its pump price by about 20 percent to as high as N870 per litre last month.
Apart from FX, the removal of the petrol subsidy, which tripled petrol price to N617 from N184 in May, has affected millions of small businesses in the country.
The rising cost of energy and FX pushed the country’s inflation rate to a near 18-year high of 24.08 percent in July from 22.79 percent in the previous month, according to the NBS.
The latest Purchasing Managers’ Index (PMI) by Stanbic IBTC Bank shows that the surging inflationary pressures squeezed business activity in the private sector, as it declined for the third straight month to 50.2, the lowest in five months, from 51.7 in July.
“Steep price rises presented a challenge for firms to secure new orders. August saw only a marginal increase in new business, with the rate of expansion the softest in the current five-month sequence of growth. Similarly, employment also rose only marginally,” the PMI report said.
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There are expectations that the index could shrink in September for the first time since the end of a cash crunch that plagued the economy in Q1.
“Manufacturers are struggling because they cannot transfer the cost from FX and energy to consumers. And it is even worse for those in the product segment,” Muda Yusuf, chief executive officer of the Centre for Promotion of Private Enterprises, said.
He said when manufacturers are faced with such market conditions, what will suffer are their profit margins, shareholders’ value, dividends and the returns of investments because they are the ones that will absorb the additional costs.
The challenging macroeconomic issues impacted the sector’s growth rate in Q2 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 Q2 growth rate is however higher than the 2.31 percent recorded in the previous quarter, when the country experienced an unprecedented cash crunch that dampened business activity.
“Though the sector’s growth rate improved slightly to 2.2 percent compared with 1.61 percent in Q1, we believe conditions will worsen in the second half of the year,” analysts at CSL Research said in a recent note.
In July, the Nigerian Association of Small and Medium Enterprises told BusinessDay that about 10 percent of the 40 million Micro, Small, and Medium Enterprises in the country had shut down since the subsidy removal. The Association of Small Business Owners of Nigeria projected that more than 20 percent of their 27,000 members had been affected.
