The Purchasing Managers Index (PMI) report released for the second quarter of 2019 recorded its highest points in five years and as a leading indicator for economic movement, it reveals a possible growth for the second-quarter GDP of the country’s economy.
The manufacturing and non-manufacturing PMI, released by the Central Bank of Nigeria (CBN), is an indicator of how each sector fares in a month and is also a leading indicator of how the economy fares within that period. It is computed based on survey responses from sector leaders, indicating changes in the level of business activities in a month.
The manufacturing and non-manufacturing PMI average for the second quarter of 2019 stood at 58.15 points, which is the highest in five years, according to BusinessDay findings. Furthermore, a trend was discovered which showed that the PMI mirrors the growth or drop in the country’s GDP.
Following the trend from 2015 before the Nigerian economy experienced a recession, it showed that growth or a drop in the quarterly PMI reflected on the country’s quarterly GDP.
In 2015, the Q2 average PMI was 51.15 points while the GDP growth was 2.35 percent. In 2016 when the economy experienced a recession, the PMI dropped below the benchmark of 50 points to 43.7 points and the GDP contracted to -1.49 percent.
In 2017, the PMI gained momentum and stood at 52.05 points and it was followed by rise in GDP to 0.72 percent. In 2018, the PMI average was up 9.7 percent to 57.1 while GDP grew to 1.50 percent mirroring the behaviour of PMI.
In reaction to this trend, the PMI, which recorded a marginal increase of two percent to 58.15 points, will most likely reflect a marginal growth on the country’s GDP for the second quarter of 2019.
“We might see some improvement in GDP growth to mirror PMI marginal increase,” said Gbolahan Ologunro, Research analyst at CSL stockbrokers, told BusinessDay.
He said the growth would be marginal as ministries that should execute the capital expenditure of the 2019 budget have not been appointed ministers. “Most importantly, the ministry of power, works, and housing, the absence of the minister means that the permanent secretary does not have the authority to implement the CAPEX of these ministries,” Ologunro explained further.
While the completion of the general election translated into an improved PMI index point against declining trend witnessed in the first quarter of the year 2019, this increase is marginal.
“Manufacturers are still trying to get a clear sense of direction in terms of what government policy will be in terms of supporting the private sector to stimulate growth. This could be why we have the slight increase,” Ologunro added.
While the economy has managed to pick up its activities following the general elections and its sentimental effects on investors’ decisions being measured by the PMI, the delay in the passage and signing of the ministerial list, which is withholding the implementation of the 2019 budget, dampens the prospects for economic growth.
Doyin Salami, chief executive officer of Kainos Edge Consulting, posited at a breakfast meeting in Lagos recently that 2019 would be tighter than 2018, considering its economic situation and happenings in the global environment.
“Having cleared the air of uncertainties in the country’s political space, there will be need to negotiate the transitions that will occur despite the results of the elections, as there will be new personnel who may or may not introduce new policies,” he said.
“Furthermore, the economy is in a fragile condition and will grow at a slow rate. It might possibly record a 2.5 percent growth this year,” Salami added.
A breakdown of the PMI into the two comprising sectors revealed that the manufacturing PMI experienced a contraction in June which marked the end of the Q2. It can be recalled that in April and May, the PMI stood at 57.7 and 57.8 respectively, while it contracted in June 2019 by 0.69 percent to 57.4 percent. While the non-manufacturing PMI had 58.7 and 58.9 in April and May respectively, it also contracted in June by 0.51 percent to 58.6 points.
Amid sluggish economic recovery and political uncertainties which characterised the first half of 2019, Nigeria’s manufacturing sector has been able to sustain growth which is reflective on its PMI in the second quarter of the year, but momentum is waning.
While the manufacturing PMI for the second quarter has recorded steady growth in the last five years, its growth rate has reduced significantly. In 2016, the PMI growth rate was -13.27 percent, in 2017 and 2018 growth rates were 19 percent and 9.02 percent respectively. In 2019, its growth rate was 1.41 percent.
The growth is, therefore, regressive which significantly implies that all that glitters is not gold, as the sector is battling with various challenges stemming its growth.
A report on Micro Small & Medium Enterprises (MSMEs) released recently by the National Bureau of Statistics (NBS) showed that the number of medium scale enterprises dropped by 61 percent from 4,670 in 2013 to 1,793 in 2017 while the total MSMEs grew marginally by 12.1 percent.
Further examination of the report shows that the small-scale enterprises consisted of majorly education and manufacturing medium enterprises and were majorly made up of manufacturers who covered 43 percent of medium enterprises. This means that manufacturers were the worst hit by economic viccititudes.
The growth recorded rises majorly from the abundance of the medium-scale enterprises while they bear the brunt of the challenges in the business environment.
The World Bank‘s Doing Business Index ranked Nigeria the 146th due to the constraining business environment.
Seleem Adegunwa, chairman, MAN, Ogun State, said manufacturers in Nigeria face various challenges which make doing business difficult. He added that the success of any manufacturing outfit depends upon various factors which include good infrastructure, improved power supply, and an enabling regulatory environment.
“If these issues are not checked by relevant government agencies, it could result in the collapse of more factories and businesses, as some firms have already shut down their operations and relocated to neighbouring countries,” he said.
According to the Manufacturers CEOs Confidence Index (MCCI) conducted by the Manufacturers Association of Nigeria (MAN) in the first quarter of 2019, issues around foreign exchange, double-digit interest rate, government capital implementation, multiple taxes, overregulation and raw materials were identified by chief executives of Nigerian firms as some of the challenges dragging the growth of the sector backwards.
Nigeria has retained its double-digit monetary policy rate at 13.5 percent from a previous 14 percent, while commercial lenders give out loans at 20 to 35 percent interest rates with a 12 months tenor. Development banks like the Bank of Industry which give out loans at single-digit rates of about nine percent lack the required capital to keep up with its activities. Data from MAN shows that the lending rate to the manufacturing sector averaged 22.21 percent in 2018 and 22.84 percent in 2017.
Manufacturers rely on gas, diesel and other alternative sources as power distribution companies’ failures pile up. According to a survey conducted by MAN, expenditure on alternative energy sources totalled N93.1 billion in 2018, eating deep into the finances of the producers.
Manufacturers also battle with the high cost of production, which majorly stems from the weak naira against the dollar. Presently, $1 equals N360 in the parallel market, which is expensive especially for those who have to import their raw materials for production. This, in turn, affects the volume, and quality of the products produced.
They complain that the gridlock in Apapa increases production cost, as they are often required to pay unnecessary demurrages due to delays of getting containers in and out of Apapa.
The country’s porous borders are also contributory factors to the manufacturers’ headache as smuggling has become the order in the market. Nigerian consumers patronise mostly foreign products as they are perceived to have more quality and, in some cases, less expensive.
In Nigeria, there are over 25 regulatory agencies that supervise business activities, some of which have similar duties under different bodies. While each agency tries to carry out its responsibilities, activities usually clash with others’, thereby creating confusion and problems for manufacturers.
According to the World Bank’s report on global economic overview, “It is of paramount importance for emerging market and developing economies to rebuild policy buffers while laying a stronger foundation for future growth by boosting human capital, promoting trade integration, and addressing the challenges associated with informality”.
Gbemi Faminu
