Manufacturing businesses on recovery path as PMI improves
…credit access, stable power remain challenges
Businesses in Nigeria’s manufacturing sector have positioned for recovery after the disruption experienced in the local and global economy, as the manufacturing Purchasing Managers’ Index (PMI), a gauge for manufacturing sentiments improved in April.
The PMI moved from 51.4 points in March to 53 points in April with improvement recorded for four out of the five sub-indices examined, according to data by FBN Quest and NOI.
The growth recorded was driven by the slightly improved access to raw materials, the gradual easing of the COVID-19 restrictions and an uptick in demand driven by the Easter celebration.
Despite the increase in demand, the report notes that Nigeria’s current inflationary conditions adversely affected the profitability of the manufacturing sector as consumer’s purchasing power was further weakened. Beyond the constrained profitability, a number of challenges also affect the productivity of the manufacturing sector.
According to the report, affordable credit is still, a major challenge for manufacturers although the sector was the second largest recipient of loans in the fourth quarter of 2020, accounting for 16 percent of the N20.37 trillion loan disbursed by Deposit Money Banks (DMB).
Over the years, credit accessibility and affordability have troubled Nigerian manufacturers, with data showing that the interest rate in the sector hovers between 14.8 percent and 22 percent.
Presently Nigeria has one of the highest lending rates in Sub Saharan Africa with 11.50 percent leaving deposit money banks to lend as high as 25 to 35 percent interest loans while other countries like Rwanda has 4.5 percent, South Africa and Cameroon has 3.5 percent and Namibia has 3.75 percent.
The report also reveals that the impact of the N1 trillion COVID-19 intervention fund rolled out by the Central Bank of Nigeria (CBN) is yet to fully impact businesses after one year.
Despite the existence of over 250 businesses in Nigeria’s manufacturing sector, a total of N803 billion was disbursed to 228 projects across various segments in agro-allied, mining, steel production, and packaging industries among others, as such not all the businesses are beneficiaries.
According to the Manufacturers Association of Nigeria (MAN), access the N1 trillion COVID-19 stimulus for manufacturing requires a working capital of N2 billion per obligator, with a refinancing facility N15 billion per obligator.
In addition to this, the loans have an interest rate of five percent which will revert to nine percent by February 2021, and cannot exceed N10 billion.
MAN said most of the association members who applied for the loan could not get adding that only 30 percent of the loan was disbursed in one year according to the financial regulator.
Furthermore, epileptic power supply remains a major challenge hindering productivity and development in the sector.
“The manufacturing sector as a whole operates on more than 60 percent of energy from generators, and operating these generators greatly increases the cost of manufacturing goods. The shortages increase business uncertainty and lower returns on investment,” the report adds.
In 2020, manufacturers spent N81.91 billion on providing alternative energy, spending N24.16 billion in the first quarter and N57.75 billion in the second quarter of the year, furthermore Nigeria ranks 169 in the getting electricity metric, scoring 47.4 points on the World Bank’s ease of doing business 2020 report and a zero in the reliability of power supply.
This is however expected to improve as the NNPC recently announced plans to boost power generation with an additional 5,000 megawatts of electricity to the national power grid once the ongoing gas projects across the country are completed.
Noting the federal government’s ambitious proposed plan to improve manufacturing share of GDP to 20 percent by 2023, which as of 2020 stood at 12.8 percent, they believe this is part of why the ministry of industry plans to finalize development strategies for the oil palm, clothing and textile sectors later this year.
Analysts at FBN Quest also assume that this decision was influenced by the success stories of East Asian countries where commercial agriculture provides raw materials for many manufacturing goods.