Nigeria’s business activity risks shrinking as manufacturers bleed

Rising inflationary pressures in Nigeria as a result of the removal of petrol subsidy and naira devaluation could shrink the activities of the country’s manufacturers in the third quarter of this year.

According to the latest Purchasing Managers’ Index (PMI), by Stanbic IBTC Bank, August’s headline index dropped for the third straight month to 50.2, the lowest in five months from 51.7 in July. Readings above 50.0 signal an improvement in business conditions, while those below show deterioration.

The latest aggregate Manufacturers CEO’s Confidence Index (MCCI) of the Manufacturers Association of Nigeria (MAN) also shows that manufacturers’ confidence in the economy dropped to the lowest in nearly two years in the second quarter.

The index declined for the third straight quarter to 52.7 points in Q2 from 54.1 points in the previous quarter.

A breakdown of the index revealed that current business condition and business condition for the next three months stood at 48.9 and 58 points respectively.

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Current employment condition (rate of employment) declined to 50.2 points from 50.7 points recorded in Q1, employment conditions for the next three months further plunged below the benchmark points to 46.6 points as against the 47.8 points obtained in the preceding quarter.

The production level for the next three months reduced to 59.8 points from 61.8 points recorded in Q1.

“I would not be surprised if the economy slows further in Q3 as a result of the high energy cost, no foreign exchange and low sales which has affected capacity utilization and dropped confidence level in the economy,” Muda Yusuf, chief executive officer of the Centre for Promotion of Private Enterprises, said.

He said the experience between July and now, has been extremely bad. “Uncertainty in the economy is almost at its peak, making people unable to carry out business plans.”

Johnson Chukwu, group chief executive officer at Cowry Asset Management Limited, projects the PMI for September to drop drastically to about 47 points because the confidence of purchasing managers has been very low.

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“Demand has collapsed because people are not buying. Remember that the PMI is an index of raw materials demand. So, I expect it to materially worsen,” he said.

Since May 29, when President Bola Tinubu announced the removal of the petrol subsidy, petrol price has tripled to N617 from N184, while the value of the naira has plunged following the floating of the currency.

The floating of the currency has increased the official rate from N463.38/$ to N740.38/$ as at Friday. While at the parallel market, it is N920/$.

The high cost of dollars and the implementation of a 7.5 percent value added tax on diesel imports have pushed its pump price by about 20 percent to as high as N870 per litre.

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 2023 from 22.41 percent in the previous month, according to the National Bureau of Statistics.

“Marked inflationary pressures remained a major hindrance to businesses in August. Both overall input costs and staff costs increased at the largest pace since the survey began,” Muyiwa Oni, head of equity research, West Africa at Stanbic IBTC Bank, said.

He added that inflation again reflected higher transportation costs as a result of the removal of the fuel subsidy, and exchange rate devaluation. “Rising transportation costs also caused supplier delivery delays.”

Toye Folosho, an official at MAN, said the last three months has seen a lot of fluctuations in the price of FX and petrol which has led to a drastic and unpredictable fall in purchasing power of an average Nigeria.

“Our members in the fast moving consumer goods industry are complaining that their warehouses are full of unsold finished goods because people are not buying. And they believe that it could worsen further because there are no clear cuts or policy on palliatives,” he said.

According to the Nigerian Exchange Limited, foreign investment in Nigerian stocks fell in July to its lowest level since Tinubu’s reforms that sparked a massive rally in the equities market.

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The total amount of stocks bought by foreign investors plunged to N9.45 billion from N22.72 billion in June.

The challenging macroeconomic issues impacted the country’s growth rate as it slowed to 2.51 percent in Q2 compared to 3.64 percent in the same period of last year.

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.

“Although Q2’s acceleration in growth is welcome news it is likely to prove short-lived. The decisions to devalue the naira and remove fuel subsidies are already heavily impacting economic activity and are likely to build as inflation continues to rise,” said David Omojomolo, Africa economist at Capital Economics.

He said his firm expects the central bank to hike interest rates again at their next meeting in September, further dampening activity.

Analysts at CSL Research said in a note on Friday, that there is an urgent need to address the numerous issues plaguing the manufacturing sector.

“We recognize the importance of prioritizing forex intervention for manufacturers through the official market. Also, swift resolution of the problems bedevilling the power sector will also be critical to boosting the sector’s prospects,” they said.

They added that it is critical to end the multiple taxes levied on manufacturers in order to help them protect profit margins.

Recently, 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 have shut down since the subsidy removal.

The Association of Small Business Owners of Nigeria (ASBON) projected that more than 20 percent of their 27,000 members have been affected by the mounting economic woes.

“The business environment is not conducive for any business projection to be made. The unstable inflation rate, high cost of FX and fuel which makes it difficult to plan or project is already scaring away investors,” Femi Egbesola, national president of ASBON, said.

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During a national broadcast on July 31, President Bola Tinubu said his government would energise the MSME sector with N125 billion and the manufacturing sector with N75 billion as part of measures to cushion the impacts of the subsidy removal.

But so far, businesses in Africa’s most populous have said they are yet to see any evidence of the funds such as the criteria for disbursement, the requirements, terms and conditions, prospects and the agencies that will disburse the funds.

Segun Kuti-George, national vice president of the Nigerian Association of Small Scale Industrialists, said the government could be working on the modalities for the implementation but at least business organisations should know where the money is, who is going to be in charge of it and who will distribute it.

“A lot can happen in one month. If nothing is done, many businesses could shut down. But if there is a lifeline the story will be different,” he said.