Manufacturing activities have been dampened over recurrent challenges such as rising production cost, supply cuts and foreign exchange shortages, which have significantly affected the sector’s productivity.
The impact of this was evident in the Purchasing Managers’ Index (PMI) for June which returned to a negative terrain as it declined to 48.8 points from 51.1 points in May according to data by FBN Quest and NOI.
The PMI, which is a gauge for manufacturing sentiments, was measured using five variables which are output, workforce, new orders, delivery times from suppliers and stocks of purchases, three of which declined while one remained flat.
It would be recalled that after three consecutive quarters of contraction in 2020, the sector expanded by 3.4 percent in the first quarter, according to data by the National Bureau of Statistics (NBS). Manufacturers however said the expansion did not reflect their realities as the sector’s challenges lingered.
The FX volatility in Nigeria has been a nightmare for manufacturers. The naira was devalued twice in 2020 alone due to the dip in oil income which made foreign exchange scarce.
Foreign exchange shortages have been an ongoing challenge in Nigeria and led to the death of 54 manufacturing firms in 2016 alone. Many more have followed since then with manufacturers saying they get two to 10 percent of their dollar needs from the market even after waiting for 30-90 days.
This was affirmed by 82 percent of business managers in the Manufacturers CEOs Confidence Index (MCCI) for Q4 ’20 who complained that the rate at which FX is sourced and accessed has not improved adding that the unavailability of FX has negatively impacted the sector’s performance.
Experts are of the opinion that if issues around FX availability and accessibility are not addressed promptly, many of these companies will fold up which will consequently collapse the sector and affect job creation.
Furthermore, the COVID-19 pandemic emanated from China, the world’s manufacturing powerhouse and Nigeria’s largest trading partner especially for manufacturing inputs, this caused an abrupt stop in the supply of raw materials, goods, tools, and machinery for manufacturing companies which forced many of them to suspend business operations.
The cut in global supply forced manufacturers to source for inputs locally however this also posed a struggle on the back of rising insecurity, which caused scarcity of raw materials.
This also contributed to increasing the cost of production thus discouraging production activities. Furthermore, as cost pressure is intensified, manufacturers are unable to pass the entire cost increase to already battered consumers.
Despite this performance, the report explains that the manufacturing sector has displaced retail trade and became the second-largest sector in the economy in the first quarter of the year. It however notes that the displacement has not impacted wealth and employment in the economy.
Analyst at FBN Quest believe that PMI performances such as this may dampen the federal government’s ambitious target to improve manufacturing share of GDP to 20 percent by 2023, with the latest figure being 12.8 percent as at 2020 current prices.
Vincent Nwani, managing consultant, RTC Advisory Ltd, told BusinessDay that the government still needs to take prompt action in order to prevent the sector from relapsing.
“The sector is in dire need of policy and project reforms across its sub-sectors, vulnerable sub-sectors in the manufacturing space should be provided funds at a low cost to sustain operations and encourage CAPEX spending. In addition, solving the FX challenges faced by these manufacturers would be an important factor to kick-start growth,” Nwani said.
