Worsening business environment dampens economic outlook

BY EMEKA EJERE

Rising operating cost and low purchasing power compounded by the removal of petrol subsidy and floating of the naira are taking a heavy toll on the profitability of businesses across the critical sectors of the Nigerian economy with no end in sight, available statistics have shown.

Although the government and some deposit money banks have recorded unsustainable gains from the forex unification policy in form of exchange difference revenue, a number of manufacturers are reporting significant FX losses as a result of the policy.

Already, the number of factories shutting down yearly due to power shortages and harsh economic conditions are raising concerns that without urgent actions, job losses and revenue declines from the sector could severely impact the nation’s economic growth and its expected contributions to Gross Domestic Product (GDP).

The crisis was further exacerbated by the impacts of the Central Bank of Nigeria (CBN) Naira redesign policy. In the second quarter of this year, manufacturers witnessed a 17.3 percent increase in the cost of production and distribution. Volume of production contracted by 6.1 percent; manufacturing investment decreased by 5.6 percent; employment dropped by 5.7 percent sales volume plunged by 6.3 percent, and the cost of shipment went up by 14.3 percent.

The President of the Governing Council of the Nigerian Association of Small and Medium Enterprises (NASME), Abdulrasid Yarima, recently lamented that over 10 percent of the 40 million micro, small and medium enterprises (MSMEs) in the country have shut down since May.

He regretted that subsidy removal, rising energy costs, naira depreciation, rising inflation, operating costs and reduced purchasing power are forcing even more companies and businesses to go under, insisting that Nigeria would be more de-industrialised if urgent steps are not taken to address the issues.

A recent Small and Medium Enterprises Agency of Nigeria (SMEDAN) survey revealed that the biggest challenges of small businesses are high energy cost, high electricity tariffs, multiple taxation, poor access to finance and high cost of funds. Others are the depreciation of naira, high logistics cost and worsening insecurity.

Also, in its executive summary highlighting issues that stalled economic growth in the first half of 2023, the Manufacturers Association of Nigeria (MAN) revealed that diesel, which has risen to N1,000 a litre, poses a serious threat to the sector. The association said its members spent about N60. 47 billion on alternative energy sources to support production from January to June 2023. It added that the average number of outages per day increased to 4.7 from 4. 4 in the first half of last year.

Speaking at the sixth Annual General Meeting of the Manufacturers Association of Nigeria Export Promotion Group (MANEG), on Wednesday, chairman of the association, Odiri Erewa-Meggison, noted that the manufacturing sector was experiencing the toughest period in the history of its existence as a result of the prevailing economic situation.

According to her, although manufacturers are still trying to recover from the effect of low sales of goods especially in the southeast region where the sit-at home order holds sway every week, the problem of insecurity also ravages the northern part of the country.

“Apart from the above enumerated factors, policies of government on non-oil export incentive, exchange rate policy, which led to further depreciation of the naira and scarcity of foreign exchange, hike in the price of diesel and other energy sources further culminated in low performance of the manufacturing export sector,” she added.

Director General of MAN, Segun Ajayi-Kadir, said this was not a good time for manufacturers in the country. “A lot of people have said we should move away from our comparative advantage and focus on exports driven development. This is why MAN for more than five decades concentrated on making Nigerian manufacturing competitive,” he said.

He added that the theme of the event was so special to the association as it focused at manufacturers’ competitiveness even in the midst of rising production costs.

“You all agree with me as businessmen that one of the most difficult things to do in Nigeria is to drive down your cost because inflation continues to head north and profitability is heading south. This is the reality we are facing daily,” Ajayi-Kadir said.

Inflation rose to an 18-year high of 25.80 percent in August from 24.08 percent in July. Rising inflation increased manufacturers’ inventory of unsold finished goods by 45.4 percent to N272 billion in the first half of 2023 from N187.1 billion in the same period of last year, according to the National Bureau of Statistics (NBS).

The latest aggregate Manufacturers CEO’s Confidence Index of MAN also shows that manufacturers’ confidence in the economy dropped to the lowest in nearly two years. The index declined for the third straight quarter to 52.7 points in Q2 from 54.1 points in the previous quarter.

The Chief Executive Officer, Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, said there was an urgent need to stem the rising tide of de-industrialisation in the economy. Yusuf regretted that following the collapse of many manufacturing firms, most of which are SMEs, many factory premises have been converted to event centres, supermarkets, worship centres, warehouses for imported finished goods, restaurants and sports viewing centres.

“Many of our industrial estates have become a shadow of what they used to be. Evidence of all of these can be found in industrial estates located in Ilupeju, Ogba, Ikeja, Sango-Ota, Agbara and many other parts of the country. It is imperative to take urgent steps to stem the tide of de-industrialisation if we must curb the growing unemployment and increasing import dependence of our economy,” he said.

“The systemic issues of infrastructure should be addressed as a matter of utmost priority. The immediate focus should be on electricity supply and logistics. Unless we have these two critical infrastructures in place, it will be very difficult to ensure a competitive industrial sector and to make possible the transformation of the sector.

“We must fix the foreign exchange liquidity and currency depreciation issues and structural issues on infrastructure must be addressed to improve productivity and competitiveness of manufacturing firms,” Yusuf said.’’
World Bank’s concerns

The World Bank last week advised the Nigeria, Ethiopia, and Uganda to avoid unorthodox interventions that might render their monetary policies ineffective. Such unorthodox interventions include monetising the fiscal deficit, direct lending interventions, untargeted subsidy programmes, or foreign exchange controls.

According to the World Bank, inflation remains a challenge for monetary authorities in the region, particularly for countries with underdeveloped financial systems, a large informal sector, and lack of monetary-fiscal policy coordination.

“If monetary and fiscal actions are not adequately coordinated to bring down inflation, the risk of de-anchoring inflation expectations would fuel further inflation, accelerate interest rate increases, and exacerbate the deceleration of economic activity,” the global lender cautioned.

The World Bank described the Nigerian naira as one of the worst-performing currencies in Africa, noting that the currency weakened by nearly 40 percent against the US dollar since a mid-June devaluation.

In a report by the global bank titled, ‘Africa’s Pulse: An analysis of issues shaping Africa’s economic future (October 2023 | Volume 28),’ it stated that so far this year, the Nigerian naira and the Angolan kwanza are among the worst performing currencies in the region, saying that the currencies have posted a year-to-date depreciation of nearly 40 per cent.

According to the report, “the weakening of the naira was triggered by the central bank’s decision to remove trading restrictions on the official market.”

According to Fitch Ratings Inc, a widening gap between the official and parallel market exchange rates of the naira is an indication of government’s lack of capacity to stabilize the currency and the likelihood it may depreciate further.

The naira was quoted at 1002 per dollar at the parallel market on Wednesday, according to foreign exchange operators. But it was 26% stronger at N745.19 /dollar in the official window, according to FMDQ, a platform where the currency is traded.

The naira has weakened sharply at the black market in the last two weeks as the CBN abstained from increasing supply of the greenback at the official window, where the currency rate has been very volatile. The new CBN governor Olayemi Cardoso, is yet to signal his policy preference.

The gap between the official and parallel market rates “highlights the challenges in sustaining exchange-rate liberalisation and raises the possibility of a further devaluation,” Fitch Ratings said in a statement.