The Manufacturers Association of Nigeria, MAN, has said that apart from Forex scarcity, high exchange rate and heightened inflation, the unfavourable macroeconomic environment was aggravated by the skyrocketed increase in the electricity tariff, the consistent increase in interest rates, the perennial fuel scarcity and the recent nationwide industrial which adversely affected the manufacturing sector in the second quarter.
While talking about the impediments, MAN explained that all of them listed above grossly escalated the cost of manufacturing operations, distorted the manufacturing value chain, discouraged investments, increased job losses and reduced sales volume.
This was contained in MAN Q2 CEO’s Confidence index report for 2024 released in Lagos recently.
The Manufacturers CEO Confidence Index (MCCI) as the report indicates is an index constructed by the Manufacturers Association of Nigeria (MAN) to measure changes in quarterly pulse of manufacturing activities in relation to movement in the macroeconomy and government policies.
It is a barometer used to aggregate the views of CEOs of manufacturing companies on changes in the economy.
The report indicates that the standard diffusion factors considered in the MCCI processes include the Current Business Condition, Business Condition for the Next Three Months, Current Employment Condition (Rate of Employment), Employment Condition for the Next Three Months and Production Level for the Next Three Months.
“The survey instrument used in the fieldwork for the MCCI is a structured questionnaire administered on 40 Chief Executive Officers (CEOs) of MAN member-companies across the six geo-political zones and Sectoral Groups of the Association through MAN’s branch networks,”it states.
“MCCI has a baseline index of 50 points, which suggests a stationary point in the economy. Therefore, any index point above 50 points indicates that manufacturers have confidence in the economy while any index point below 50 points indicate otherwise.”
MAN emphasises that the persistent increase of the interest rates in an attempt to curb the escalating inflationary pressure, which reached a 28-year high of 34.19 per cent in June, by the Central Bank of Nigeria has not succeeded in taming the interest rate.
The association explains that the Monetary Policy Committee’s decision to further hike the Monetary Policy Rate (MPR) by 50 basis points in its July meeting which brought the total increase to 1,525 basis points since May 2022, when the committee began its aggressive rate hikes, unfortunately, MAN says “inflation has continued to defy the antidote of increased interest rates, as the inflationary problem in the country is largely driven by supply-side deficiencies and other structural bottlenecks.”
MAN maintains in the Q2 report that the continuous hikes in MPR have tightened financial conditions for the productive sector, with the average maximum lending rate charged by commercial banks on manufacturers’ finances rising to 35% in Q2 2024 from 28.6% in Q1 2024.
“This has not only increased the cost of goods but has also further compounded the inflationary problem and threatened employment in the sector.”
MAN further states that the capacity of the manufacturing sector to play its strategic role of stimulating economic growth is further constrained by the increase in interest rate, arguing that the “new rate will further limit the growth of the manufacturing sector, as the purchasing power of consumers, production levels, competitiveness and sales will further decline beyond measure.”
The manufacturers states that specifically, the recent increase in cost of borrowing will among others escalate production costs, prices of finished goods, unemployment and social instability,reduce capacity utilization, consumer demand, and profitability.
MAN adds that it will also “stifle investment, innovation and curtail opportunities for growth, lead to closure of more manufacturing concerns and constrain the capacity of the sector to compete effectively in global and regional markets.
While MAN recognises the efforts made by the Monetary Policy Committee (MPC) to stabilise price and observed the rationale behind its decisions, it however says “it is expedient that the survival of manufacturing sector in Nigeria is prioritized when making monetary policy decisions.”
This, it adds will enable the sector to effectively play its role as the key driver of employment creation, productivity, stabilise foreign exchange earnings, and sustained economic growth.
In order to stimulate the manufacturing sector,and tackle the challenges facing the sector, MAN recommends among others to the government to: “Prioritise forex sale to productive sectors of the economy, particularly the manufacturing sector.
“Stabilise the value of the Naira by managing the floating exchange rate within a business-friendly threshold and introduce other measures that will promote healthy dollar transactions.
“Direct the CBN to clear all outstanding dollar obligations on the FX Forward contracts of manufacturing concerns to engender confidence in the market.
“Review the foreign exchange rate for import duty assessment for production inputs, including raw materials, machines and spare parts that are not locally available by pegging the rate at N800, pending the stabilisation of the exchange rate.
“Tame inflation by focusing less on interest rate hikes and more on exchange rate management which is highly linked to rising food prices and energy cost.
“Maintain the recent coordination with the monetary authority by sustaining the import duty waivers on essential foods and inputs to control inflation.
“Promote convergence with the monetary authority by providing financial incentives to only critical productive sectors like the manufacturing sector in order not to fuel inflation.
“Direct the NERC to review the high electricity tariff for Band A Customers as no manufacturer has access to the stated 20 hours minimum of electricity supply per day.
“Prioritise the domestic supply of gas to make it more accessible for local manufacturers and enforce the pricing of domestic gas supply in Naira as it is only a fraction of gas export.
“Refocus the Gas Master Plan to ensure sufficient supply of gas for power generation.
“Increase transparency in electricity tariff changes and improve electricity access by introducing outage compensation mechanism.”
MAN also suggests that the government should ensure affordable lending rate, and increased acces to credit by “Creating special windows for delivering single-digit interest rate to productive sectors of the economy, while ensuring the relaxation of stringent conditions that deny SMI’s access to such funding scheme.
“Recapitalise the Bank of Industry (BoI) to match the huge credit demand of industries and identify and address the intended and unintended consequences that may occur during the bank recapitalisation process in order to maintain financial stability.
It urges the government to implore the CBN to be domestic production -centric by taking a detour from continuous hike in MPR and allow time for the real sector to recover from the impact of previous hikes.
If further wants the government to direct the CBN to collaborate with the Coordinating Minister of the Economy to facilitate stronger handshake and coherence between monetary and fiscal policies.
It adds that the government should insulate the productive sector from the impact of continuous hike in MPR by ensuring the disbursement of the N75billion single digit loan approved by President Bola Tinubu, GCFR over a year ago for the manufacturing sector.
“The government should offer fiscal support system that will enable the manufacturing sector import raw materials, spares and machines that are not available locally at concessionary duty rate,”
“Minimise pressure on foreign exchange reserves by incentivising backward integration and local sourcing to decrease reliance on imported products and raw materials.
“Enforce Executive Order 003 to enhance support for local industries and ramp-up domestic production by restricting access to forex for the import of products manufactured locally.
“Address the issue of low manufacturing productivity and food production occasioned by the high-level insecurity across the country to effectively curb the persistent rise in inflation
“Utilise Forex revaluation gains to improve patronage of made in Nigeria products and upgrade electricity, road and rail networks within industrial hubs.
“Encourage nationwide investments in renewable energy sources to alleviate energy cost and enhance competitiveness.”
MAN in the report said the result of the second quarter (Q2) 2024 MCCI survey shows the perceptions of manufacturers on movements in the macroeconomic and operating environments between Q1 2024 and Q2 2024 as well as their sentiments and projections for the next quarter.
“The Aggregate Index Score (AIS) of MCCI is the weighted mean of the observed and expected changes in business condition, employment condition and production level in the economy based on the perceptions of manufacturers in the quarter under review.
“Additionally, the sentiment of manufacturers regarding these variables for the next quarter was also examined.
As displayed in Figure IV, the Aggregate Index Score (AIS) of MCCI dropped by 1.6 points to 51.9 points in Q2 2024 from 53.5 points recorded in Q1 2024. This is a relapse following the improvement recorded in the previous quarter.
“The decrease is majorly attributed to the current performance of diffusion factors. While the indicators for the Current Business and the Current Employment Conditions further declined below the 50-point benchmark, dropping from 46.8 points and 47.5 points in the first quarter of 2024 to 43.9 points and 47.2 points in Q2 2024, respectively.”
It observes further that the index of the Current Production Level fell from 52.8 points to 49.7 points which is also below 50-point threshold, underscores a significant decline in manufacturers’ confidence regarding production levels during the review period.
“The deterioration of the three indices was occasioned by the exorbitant increase in the electricity tariff, the aggressive hike of the interest rates, the high exchange rate, the persistent inflationary pressure, the reoccurrence of fuel scarcity as well as the disruptive effect of the Industrial Action observed by the National Labour Congress,” MAN stresses in the report.
Based on the prevailing harsh economic environment, the manufacturers also reduced their expectations for the employment condition and production level in the next quarter, they noted that “more manufacturers are projecting tighter employment conditions for the next quarter, which is responsible for the decline in the Employment Condition Index in the Next Quarter.
“The index dropped below the 50-point threshold, sliding from 51.2 points in Q1 2024 to 49.8 points in Q2 2024. Similarly, manufacturers’ expectations for production levels remained pessimistic, as reflected in the Production Level Index for the Next Quarter, which recorded a drop of 3.3 points, falling from 63.5 points in Q1 2024 to 60.2 points in Q2 2024. ”
However, the sentiments of the manufacturers on the Business Condition and Production Level in the Next Quarter remained above the threshold point primarily due to the expectations that inflationary pressure in the country may subside to slightly ease production costs and improve demand for manufactured products.
In spite of the general notion that the approved higher minimum wage would lead to tighter employment conditions, manufacturers expect its implementation to improve sales.
The expectations of a prolonged stability in the exchange rate and the adoption of the recommendations by the Presidential Fiscal Policy and Tax Reforms Committee (PFPTRC) also contributed to the optimism of the manufacturers during the reviewed period.
“The adoption and effective implementation of the recommendations of the PFPTRC can ease tax burdens faced by the manufacturers by streamlining the several taxes currently paid into just eight taxes.”
In the result of the analysis of index scores of the 10 Sectoral Groups, according to the report using the same diffusion factors such as Business Condition, Employment Condition and Production Level, a close observation reveals that eight (8) of the sectors recorded confidence levels above the 50-point threshold.
“However, among these eight sectors, only Chemical & Pharmaceuticals and Pulp, Paper, Printing & Publishing Sectoral Groups recorded confidence indices higher than the score attained in the previous quarter.
“The performance of Chemical & Pharmaceutical Sectoral Group moved up to 51.9 points in Q2 2024, a 2.9 points increase when compared with 49 points recorded in Q1 2024.
“In the same vein, the performance of Pulp, Paper, Printing & Publishing Sectoral Group rose marginally from 51.4 points recorded in Q1 2024 to 51.6 points in Q2 2024.
“The Chemical & Pharmaceutical Sectoral Group witnessed an improved confidence above the threshold due to the high positive expectations from the Presidential Order suspending import duty and VAT on medical supplies.
“Operators in the sector expect that the Executive Order will significantly reduce the cost of inputs, particularly Active Pharmaceutical Ingredients (API), which will help boost sales and reduce pressure on the forex.
“In spite of the disruption encountered due to the rise of digitalisation, the Pulp, Paper, Printing & Publishing Sectoral Group remained resilient recording a confidence index above 50 points. The marginal rise of 0.2 point recorded by the Sectoral Group was majorly attributed to the surge in demand occasioned by the patronage from stationery companies, schools and retailers in preparation for the 2024/2025 academic year.
“The surge in demand was experienced particularly between the months of April and June.”
However, further observation also shows that the Textile, Apparel & Footwear and the Motor Vehicle & Miscellanies Assembly Sectoral Groups recorded confidence indices below the threshold at 48.4 points and 43.9 points respectively.
” Despite the purported $3.5 billion investment to unlock the textile industry, the Textile, Apparel & Footwear Sectoral Group remains heavily challenged by the rampant smuggling of foreign materials, heavy influx of imported textile products, low patronage by Government MDAs and the suspension of the Export Expansion Grant claims. The operators within the sector also incur outrageous cost to source for local inputs due to the high rate of insecurity in farming areas.
In the area of industrial Zones’ Performance, the breakdown of the MCCI by industrial zone shows that Kano (40), Rivers/Bayelsa (44.7), Bauchi/Benue/Plateau (45), Anambra/Enugu (48.1) Oyo/Ondo/Ekiti/Osun (48.8) industrial zones have low confidence in the economy as the five zones recorded indices less than 50 points.
“Undoubtedly these sectoral groups were more affected the by the harsh economic conditions that prevailed in the second quarter of 2024.
“However, it is noteworthy that the figures recorded by the Rivers/Bayelsa, Bauchi/Benue/Plateau, and Oyo/Ondo/Ekiti/Osun industrial zones in Q2 2024, as presented above, show marginal improvements in performance compared to their index points of 44.3, 43.8, and 47.1, respectively, recorded in Q1 2024.”
In contrary, Kwara/Kogi (59.1), Edo/Delta (58.7), Ogun (58.2), Imo/Abia (56.4), Kaduna (56), Abuja (55.4), Apapa (52.9), Ikeja (52.2) and Cross River/Akwa Ibom (51.7) industrial zones recorded index scores above the 50-point standard in the quarter under review.
“However, only manufacturers operating in Abuja and Cross River/Akwa Ibom industrial zones recorded improved business confidence in the review period when compared with their performance in in Q1. By implication, manufacturers operating in Abuja and Cross River/Akwa Ibom industrial zones exhibited some high level of resilience despite the hostile business environment during the reviewed period, “the report indicates.
On the macroeconomic performance, this section of the report shows the perspectives of CEOs on the effect of macroeconomic trend of forex, lending rate, commercial bank loans and Federal Government capital expenditure on the manufacturing companies within Q2 2024.
It reveals that 19.7 percent of CEOs agreed that the rate at which manufacturers sourced for Forex has improved. This is a minimal improvement of 2.9 percentage points compared to the preceding quarter.
“The minimal improvement was due to the re-introduction of dollar sales to BDCs and over 35 percent increase in Forex inflow in late May. Notwithstanding, 66.3 percent of the respondents disagreed that Forex sourcing has improved.”
The perspectives of manufacturers on the implication of the operating environment on manufacturing activities in Q2 2024 were also measured focusing on multiple regulation, multiple taxes, access to the national ports, local sourcing of raw materials, inventory of unsold manufactured goods, and patronage of Nigerian manufactured goods by Government MDAs.
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