May 19, 2024

EXECUTIVE SUMMARY OF H2 2022 ECONOMIC REVIEW

0

1.0 INTRODUCTION
This document presents the summary of findings of the survey of manufacturing sector by the Manufacturers Association of Nigeria (MAN) for the second half of 2022. The survey is designed to monitor changes in manufacturing sector performance indicators viz-a-viz the behaviours of macroeconomic and policy environments during the period of the survey. The focus manufacturing indicators include capacity utilization, production value, inventory, level of utilization of local raw materials, investment, expenditure on alternative energy source, etc.


2.0 GLOBAL AND NIGERIAN MACROECONOMIC HIGHLIGHTS
In the October 2022 World Economic Outlook, the International Monetary Fund (IMF) observed that global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. The cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on global output. World output growth is forecast to decline from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023, the weakest growth profile since 2001 except for the global financial crisis and the height of the COVID-19 pandemic.

According to IMF forecast, global inflation is to rise from 4.7 percent in 2021 to 8.8 percent in 2022, but to decline to 6.5 percent in 2023 and 4.1 percent by 2024. However, IMF noted that monetary policy should be directed at restoring price stability, while fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy.

Output growth of Sub-Sahara Africa was projected by the IMF to slow to 3.6 percent in 2022 from 4.7 percent of 2021 and further decline to 3.0 percent in 2023. Nigeria’s output growth was projected to slow to 3.2 percent in 2022 and 3.0 percent in 2023 respectively.

3.0 MANUFACTURING SECTOR PERFORMANCE
Global Manufacturing
According to the United National Industrial Development Organization (UNIDO), since the last quarter of 2021, global manufacturing output had maintained a stable year-over-year growth rate between 3 and 4 percent. However, this changed in the fourth quarter of 2022, when growth decelerated considerably to 1.5 per cent. On a quarter-on-quarter comparison, global manufacturing suffered a loss of 0.3 per cent due to ongoing challenges such as high energy prices, rising global interest rates and persistent disruptions in the supply chain of raw materials and intermediate goods. Africa’s manufacturing grew by 2.2. percent in the fourth quarter of 2022 in the midst of the various challenges.

Nigeria’s Manufacturing SectorManufacturing Capacity Utilization: In the second half of 2022, year-on-year, Capacity utilization in the manufacturing sector declined to 54.9 percent from 59 percent recorded in the corresponding half of 2021; thus, indicated 4.1 percentage points decline over the period. Quarter-on-quarter, it declined by 3 percentage points when compared with 57.9 percent recorded in the first half of the year. Manufacturing capacity utilization averaged 56.4 percent in 2022 as against 55.9 percent average of 2021. The decline in manufacturing capacity utilization in the period is due to the adverse effect of high cost of energy and the Russian Ukrainian war, the grave effects of the Naira Redesigning policy and other perennial challenges such as acute shortage of Forex for importation of raw materials and machines, high cost of borrowing and many more.


Manufacturing Production Value: Manufacturing sector factory output value declined to N2.68 trillion in the second half of 2022 from N3.73 trillion recorded in the corresponding half of 2021; thus, indicating N1.05 trillion or 28 percent declined over the period. It also declined N1.31 trillion or 32 percent when compared with N3.99 trillion recorded in the preceding half. The value of manufacturing production totaled N6.67 trillion in 2022 as against N7.39 trillion recorded in 2021. Manufacturing production was severely affected in the second half of 2022 by absence of implementation of new capital project by the government as they focused on the election. Production in the sector was also negatively affected by limited purchases by households due to the Naira redesign policy, the high inflationary pressure in the country, high cost of energy, particularly diesel and gas, acute shortage of forex for importation of raw materials and machinery needs of the sector that are not locally manufactured in the time being and many more. Unfortunately, the issues of the basic metal group whereby duty of Annealed Cold roll was reduced to 5 percent from the previous 45 percent; the suspension of motorcycles in some areas across States, the increase in the duty of paper from 5 percent to 20 percent and so on are still effective. These challenges, in addition to the perennial issues, contribute enormously to the dip in the production of the sector in the period under review.

Local Raw-Materials Sourcing: Manufacturing sector local raw materials sourcing increased to 53.5 percent in the second half of 2022 from 50 per cent recorded in the corresponding half of 2022; thus, indicating 3.5 percentage points increase over the period. It also increased by 1.5 percentage points when compared with 52 percent recorded in the preceding half. Local raw materials utilization in the sector averaged 52.8 percent in 2022 as against 51.5 percent recorded in 2021. The increase in the local raw materials utilization in the sector during the period is due to increased difficulty in sourcing forex which compelled manufacturers to look more inward for raw materials notwithstanding the associated huge cost. It is therefore important for the Government to re-evaluate tis role in local development and production of raw materials in terms of funding. For instance, the development and production of Active Pharmaceutical Ingredients (APIs) has continuously eluded due to limited funding of the Raw Materials Research and Development Council (RMRDC) by the Government. The absence of local production of APIs has been having dire consequences on the pharmaceutical production, particularly in the current situation of acute shortage of forex.

Unsold Inventory of Finished Products: Inventory of unsold finished products in the manufacturing sector increased to N282.56 billion in the second half of 2022 up from N169.75 billion recorded in the corresponding half of 2021; thus, indicating N112.81 billion or 66 percent increase over the period. It also increased by N85.46 billion or 51 percent when compared with N187.1 billion recorded in the first half of the year. Inventory of unsold goods in the sector totaled N469.66 billion in 2022 as against N384.58 billion recorded in 2021. The high inventory recorded in the period is attributed to low purchasing power in the economy due to declining real income of household following the continuous increase in inflationary pressures in the country. This is worsened by the Naira Redesign policy which began in the last quarter of 2022. The withdrawal of large amount of the ‘old Naira’ without commensurate replacement with the ‘new notes’ resulted to cash crunch in the economy with very limited means of purchasing items by households across the country.

Manufacturing Investments: Manufacturing sector investment dipped to N145.59 billion in the second half of 2022 down from N160.88 billion recorded in the corresponding half of 2021; thus, indicating N15.29 billion or 10 percent decline over the period. It further declined by N32.8 billion or 18 percent when compared with N178.39 billion recorded in the first half of the year. Manufacturing investment totaled N323.98 billion in 2022 as against N305.02 billion recorded in 2021. Investment in the period was affected by the high debt profile of the Government which particularly deters foreign investment, high cost of borrowing, high cost of energy, low consumption during the period and many more.

Manufacturing Employment: Based on MAN survey since 2013, cumulative manufacturing employment was estimated at 1,686,725 at the end of 2022. However, in the second half of 2022, manufacturing employment dipped to 6741 down from 8508 and 9559 recorded in the corresponding half of 2021 and the first half of 2022 respectively. The decline in the number of jobs created in the sector during the period corroborates the poor operating business environment that was perverse with high energy cost, exorbitant cost of borrowing, high inflation, low sales due to limited cash and many more.

Electricity Supply to Industries: Electricity supply to the industries from the national grid declined marginally to 11 hours per day from 12 hours recorded in the preceding half. However, average number of outages per day stabilized at 4 times in the second half of 2022 as it was recorded for the first half of the year. Irrefutably, the trends shows that power supply to the industry is still a huge challenge which accounts for huge investment of manufacturers in self-energy generation. Consequently, expenditure of alternative energy source increased to N76.7 billion in the second half of 2022 from N45.04 billion recorded in the corresponding half of 2021; thus, indicating N31.66 billion or 70 percent increase over the period. It also increased by N8.9 billion or 13 percent when compared with N67.8 billion recorded in the preceding half. The expenditure was incurred on procurement of diesel, gas, generators and spare parts, inverters and UPS, etc.

Cost of Funds to Manufacturers
In the second half of 2022, average lending rate to the sector from the commercial banks slowed to 22 percent from 24 percent recorded in the corresponding half of 2021 and the first half of 2022 respectively. The trend shows a 2 percentage points declined over the periods. Commercial bank lending rate to the industries is grossly influenced by the incessant increase in Monetary Policy rate in quest to maintain an appreciable real interest in order to attract foreign investment inflow. In the last quarter of 2022, Monetary Policy Rate was retained at 16.5 percent; CRR was 32.5 percent; and Liquidity Ratio, 30 percent.

4.0 SUMMARY AND RECOMMENDATIONS
The beginning of 2022 was marked with the invasion of Ukraine which later graduated to a full scale war between the two countries. Russia are Ukraine are central to effective functioning of the global supply chains as they are significant suppliers of agriculture produces and inputs, energy and many more across the world. As the war increasingly debilitates production in Ukraine and Russia, it furthers incapacitated the performance of the various nations of the Western World, this led to increase in the prices of global commodity (food, agricultural inputs, energy, etc.) and resulting to global inflation.

The effect on Nigerian economy was quick in the second half of 2022 as the cost of wheat and other food inputs increased; prices of fuels, particularly diesel rose by over 50 percent; cost of transportation logistics including shipping escalated even as the effect of cOVID-19 pandemic is yet to fully die down. In addition to these challenges was the CBN policy on Redesigning the Naira, which aimed at bring a N3 trillion in the economy to the control of the banking system. from the economy. The policy created a cash crunch that debilitated economic activities in the last quarter of 2022. This particularly affected the manufacturing sector adversely as it was extremely difficult to sell most of the Fast-Moving consumer Goods and other commodities by the sector in the period.

The performance of the manufacturing sector based on the outcome of the survey is corroborated by the GDP reports of National Bureau of Statistics which shows that output growth of the sector declined to-1.91 percent in the third quarter of 2022 from 3.0 percent recorded in the second quarter before moving up to 2.83 percent in the fourth quarter of the year. Consequently, it is critically important that the challenges identified by manufacturers in the course of the survey are adequately addressed as follows:

1. Improving Forex Availability
– Prioritize forex intervention through the official market, particularly to support the raw materials and machine needs of the industries;
– Improve forex allocation to industrial sector and enhance the capacity of designated banks to efficiently process application of forex by manufacturers;
– Grant concessional forex allocation at the official forex market to industries for importation of productive inputs that are not locally available;
– Unify the various forex windows in the country;

2. Energy/Power Supply
– Develop and implement a roadmap for improved power supply focusing on off-grid solutions and independent power projects by the private sector to ensure adequate supply of energy for production and also attract and expand investment
– Carry out further investment in the electricity value chain and commit to adding 10000MW to the current electricity distributed in the country.
– Embrace and support significant development of energy mix and renewable: the country has huge potentials for Solar and Wind
– Commission the resuscitation of the existing national refineries to produce fuels locally;
– Review the gas price for domestic consumption to be in tandem with the export price which is about $3.25 per cubic meter
– Promote energy efficiency and renewable energy deployment in industries and homes;
– Quickly incentivize more investment in gas aggregation to end gas flaring;
– Optimize crude oil production based on OPEC quota and gas production to ramp up revenue now that hydrocarbon is still saleable;

3. Resuscitation of Domestic Refining
– Review the current status of the four national refineries to determine their current state;
– Commission the CHIYODA Group, the Japanese company that built the national refineries to rehabilitate them to resume domestic refining;
– Review the Nigerian energy policy and ensure that available energy sources, particularly natural gas is optimally explored and exploited.
– Create functional incentive to attract private sector investment in gas aggregation to end the current gas flaring;
– Create incentive to resuscitate private sector investment in the petrochemical industry;
– Improve the capital expenditure on the energy sector for greater public investment in energy development
– Carry out and utilize the outcome, the Egypt’s energy development strategy

4. Raw Materials Production, Supply and Utilization
– Incentivize investment in local development of raw materials; Give attention to domestic production of Active – – Pharmaceutical Ingredients (API) and Basic chemicals
– Refocus on Backward Integration and Resource-Based Industrialization;
– Reverse the duty for Annealed Coldroll back to 45 percent from the new 5 percent.
– Re-invigorate the backward integration policy through the use of local resources to provide raw materials to the industries;

5. Taxes and Government Regulation
– Publish the list of approved harmonized taxes and levies for the manufacturing sector by the Joint Tax Board (JTB) to address the issues of multiples taxes and levies;
– Commence implementation of the harmonized taxes and levies project which should be monitored and enforced strictly by the Joint Tax Board (JTB);
– Jettison the proposed increase in Excise Duties.
– Develop a comprehensive and integrated framework that will facilitate the intentional movement of operators in the informal sector to the formal sector.

– Widen the tax net rather than increasing the tax base or the tax burden of existing tax payers.
– Fully implement the Steve Oronsanye Report on the reduction and re-alignment of Government Agencies and Parastatals in order to streamline the number of taxes, levies, fees and administrative charges;

6. Infrastructure
– Investment in transportation sector (road, rail, waterways etc.) to mitigate the high cost of transportation logistics in the country;
– Invest significantly in ports infrastructure including scanners, etc.;
– Resuscitate the moribund rail tracks leading from the ports to industrials areas;
– Government Agencies operating at the ports should work harmoniously, particularly in the implementation of the recent migration of National list to ECOWAS CET Chapter 99;
– Implement the single window platform to eliminate significant human inference in the ports clearing system;
– Improve the time taken to clear machines and raw-materials at the national ports while making the link road accessible.

7. Funding
– Set up a monitoring and evaluation platform with private sector representatives to oversee the disbursement of the various development funds meant for the industries;
-Provide Credit guarantee for industrial loans from commercial banks;

– Create development funding windows for SMEs with liberal conditionality
– Strengthen the Bank of Industry (BOI) and Bank of Agriculture (BOA) to adequately provide liberal finance for the manufacturing sector; Avail to the productive sector the CBN non-oil export stimulation facility with liberal term and condition

8. Economic/Industrial Policies
– Allow industrial policies in the country to gestate with proper monitoring and evaluation rather than jettisoning or altering them unduly frequently.
– Strengthen the implementation of the Executive Order 003 and 005;
– Monitor the implementation of Executive Order 003 and 005 to ensure compliance by MDAs so as to boost activities in the manufacturing sector.
– Through fiscal and monetary policy authorities’ joint effort, formulate and implement a national policy that would address the current high inflation in the country

Leave a Reply