• Tuesday, December 05, 2023
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Manufacturers in N166bn loss as borrowing costs surge seven-fold

How manufacturing can drive Nigeria’s economic diversification and trade growth

Six out of 10 fast-moving consumer goods (FMCG) firms in Nigeria posted losses in the first nine months of this year as their borrowing costs swelled on the back of rising interest rates and naira devaluation, a BusinessDay analysis of data from their financial statements shows.

Nestle Nigeria, Cadbury Nigeria, Dangote Sugar Refinery, Nigerian Breweries, International Breweries and Champion Breweries suffered a combined loss of N166.3 billion in the nine months of this year.

In the same period of last year, five of them reported a total profit of N83.9 billion, while International Breweries posted a loss of N2.81 billion.

The other four fared better. Guinness Nigeria’s profit declined to N2.59 billion from N2.75 billion. BUA Foods and NASCON Allied Industries saw their profits rise by 53.5 percent and 281.9 percent respectively. Unilever reported a profit of N1.67 billion, compared with a loss of N348 million a year earlier.

“We are seeing the result of the naira devaluation which is affecting the financial performance of companies with foreign currency-denominated loans in their books,” Omobola Adu, an economist at BancTrust & Co, said.

He said coupled with high-cost pressures which are reducing peoples’ spend on discretionary items, FMCG firms’ challenges have worsened. “The impact of the FX devaluation made it worse.”

Uaboi Agbebaku, secretary at Nigerian Breweries, said in a note last month that a combination of foreign exchange losses due to the devaluation of the naira and higher interest costs resulted in the company’s net loss during the period.

Read also: Brewers incur N89bn loss as borrowing costs surge

Finance costs, also known as the cost of finances, are costs, interests, and other charges involved in the borrowing of money to build or purchase assets.

Further analysis of the companies’ financial statements show that the six firms that reported losses saw their combined finance cost jump to N325.8 billion, an increase of 681.3 percent from N41.7 billion.

“A lot of manufacturers are getting more money from banks at a higher interest because of the rising inflation. Manufacturers need more working capital because of the high cost of production in order to meet the same production capacity,” said Gabriel Idahosa, deputy president of the Lagos Chamber of Commerce and Industry.

The Central Bank of Nigeria (CBN) increased the monetary policy rate, also known as its benchmark interest rate, for the eighth consecutive time in July by 25 basis points to 18.75 percent.

This puts more pressure on the margins of FMCG companies, already dealing with double-digit inflation rate and weak purchasing power of cash-strapped consumers.

Abiodun Keripe, managing director at Afrinvest Consulting Limited, said manufacturers’ contribution to Nigeria’s GDP might be further weakened.

Read also: Downstream firms’ short-term borrowings surge 42% in H1

“The fact that most of them are having losses means that tax revenue to the government will be affected,” he said.

According to George Onafowokan, managing director/chief executive officer at Coleman Technical Industries Limited, most manufacturing businesses have shrunk as the working capital or funds available to manufacturers have reduced by 40-60 percent.

“If the money for buying raw materials has shrunk by that percent and you don’t have enough dollars to back that up, it means a lower capacity utilisation for manufacturers,” he added.

The CBN in June merged all segments of the FX market into the Investors and Exporters window, and reintroduced the willing buyer, willing seller model.

The naira has continued to depreciate against the dollar and other major foreign currencies since then.

The official exchange rate increased from N463.38/$ to N789.94/$ as at October 27. At the parallel market, the naira depreciated to N1,200/$.

The high cost of dollars and the implementation of a 7.5 percent value added tax on diesel imports, which was suspended in September, pushed its pump price to as high as N1,200 per litre.

The rising cost of energy and FX pushed the country’s inflation rate to an 18-year high of 26.72 percent in September from 25.80 percent in the previous month, according to the latest inflation report by the National Bureau of Statistics.

The latest monthly Purchasing Managers’ Index by Stanbic IBTC Bank showed that business activity contracted in October for the first time in seven months.

The headline index dropped to 49.1 in October from 51.1 in the previous month. Readings above 50.0 signal an improvement in business conditions, while those below show deterioration.

“I would be surprised if the economy grows more than one percent especially with the softness in the currency market. Manufacturers and big agricultural producers are struggling with securing foreign exchange to get inputs for their businesses,” Ikemesit Effiong, head of research and partner at SBM Intelligence, said.

BusinessDay reported last month that manufacturers’ woes had worsened on the rejection of letters of credit from foreign suppliers.

“In the past six months, I have downsized about 40 percent of my staff because of the dollar problem,” Melvin Anu, managing director/chief executive officer at Kerlin Products Nigeria Limited, said.

“As of now, we are not making any profit, we are just doing all we can to remain in business because it is more expensive to go out of business,” he added.

In August, the Manufacturers Association of Nigeria (MAN) said manufacturing activities continued to suffer due to persisting scarcity of forex and further depreciation of the naira.

Read also: Single exchange rate, lower borrowing cost top Tinubu’s priorities

“Only 14.7 percent of manufacturers enumerated claimed that the rate at which forex was sourced improved in Q2; 66 percent disagreed while 19.3 percent were not sure if forex sourcing had improved in the quarter under review,” it said.

The association added that the lingering FX scarcity and continuous depreciation of the naira have left manufacturers bleeding and limited their capacity utilisation since the importation of non-locally produced critical input has become a nightmare.

“Government has to address the root cause of this problem by giving priority to manufacturers. Manufacturing is the bedrock of any economy. And if you are failing in that space, you will trigger inflation and unemployment which could result in a decline in revenues,” Segun Ajayi-Kadir, director-general of MAN, said.