H1 ECONOMIC REVIEW
1.0 INTRODUCTION
This document presents the summary of finding of the survey of manufacturing sector by the Manufacturers Association of Nigeria (MAN) for the first half of 2023. The survey is designed to monitor changes in manufacturing sector performance indicators viz-a-viz the behaviors 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 sources, etc.
2.0 OVERVIEW OF GLOBAL ECONOMY
The global economy is currently facing significant challenges characterized by slow growth prospects, high inflation, and increased uncertainties. These difficulties result from a combination of factors, including the lingering effects of the COVID-19 pandemic, the ongoing Russian – Ukraine war, the worsening impacts of climate change, and rapidly changing macroeconomic conditions. One key consequence of these challenges is the aggressive increase in interest rates, the most significant in decades, aimed at combating persistent inflation. This tightening of financial conditions has also heightened concerns about mounting debt vulnerabilities in Sub-Saharan Africa.
In early 2023, there were notable financial market events, including the collapse of Silicon Valley Bank and Signature Bank in the United States, as well as the takeover of Credit Suisse by the Swiss government. While these events were contained by governments and regulators, they highlighted the potential for systemic financial stability risks. Despite these market disruptions, central banks in developed countries, such as the Federal Reserve, have continued to raise policy rates due to persistent high core inflation.
Notwithstanding these economic challenges, there has been some optimism about global growth in the first half of 2023. With the US, UK, EU and India’s economic growths surpassed projections, however, growth remained weak in China, the second largest economy in the world which accounts for 17 percent of the global output. Factors contributing to the improved economic performance globally are improved household spending in the United States and the European Union, China’s economic recovery, and no major setbacks in India’s economy. These economies account for more than 70 percent of the global output. However, structural issues such as the pandemic’s lingering effects, low investment levels, growing debt vulnerabilities, and funding shortages remain unaddressed, posing a risk of prolonged poor growth. This undermines progress towards poverty reduction and other Sustainable Development Goals.
Overall, Consumer and business confidence has improved slightly in recent months in major economies, partly due to lower international food and energy prices. Still, these confidence levels remain below their historical averages. Manufacturing activity seems to have stabilized, and global financial markets have shown resilience, even in the face of banking sector turmoil in the United States and Europe.
Sub-Saharan African countries are facing significant exchange rate pressures due to enduring external factors, such as tightened financing conditions and unfavorable terms of trade. This has led to currency depreciation, driving higher inflation, increased public debt burdens, and short-term trade imbalances. Given limited reserves, most countries in the region have little choice but to allow exchange rates to adjust. They are also tightening monetary policy to mitigate inflation’s impact. These challenges underscore the need for prudent economic management and diversification of revenue sources in Sub-Saharan Africa to wither the impact of external shocks effectively. Consequently, IMF predicts a decline in the economic growth of Sub-Saharan Africa to 3.1 percent in 2023 from 3.6 percent in 2022.
3.0 MANUFACTURING SECTOR PERFORMANCE
3.1 Global Manufacturing Overview
According to the United Nations Industrial Development Organization (UNIDO), the global manufacturing output experienced a significant slowdown in the first quarter of 2023, with growth dropping to just 0.7 percent. This is 0.8 percentage point lower than 1.5 percent recorded in the fourth quarter of 2022. This marks the first time in over two years that growth has fallen below one percent. Given the uncertain state of the global economy, it is evident that the manufacturing sector must explore alternative strategies to reverse this ongoing trend and prevent the risk of a recession. This uncertainty has been amplified by persistent disruptions in the supply chain, sluggish global demand, the consequences of the conflict in Ukraine, and the rising global interest rates, whose effects are only beginning to show in year-over-year growth figures. Although there were varying levels of resilience in the manufacturing sector at the regional level, a noticeable slowdown is now evident in all major regions.
Sub-Saharan Africa witnessed diminished manufacturing output; a 0.5 percent decline which is the worst performance across broad regions of the world. Larger manufacturers in the continent reported negative growth: -2.6 per cent in Egypt and -3.8 percent in South Africa. On the other hand, some other countries, such as Côte d’Ivoire (3.0 percent), Nigeria (2.0 percent) and Tunisia (4.4 percent), remained in positive territory.
3.2 Nigeria’s Manufacturing sector
Manufacturing Capacity Utilization: Capacity Utilization in the manufacturing sector in the first half of 2023, year-on-year, declined to 56.5 percent from 57.9 percent recorded in the corresponding half of 2022. This indicates a reduction of 1.4 percentage points in the last year. However, compared with the second half of 2022, manufacturing capacity utilization rose by 1.6 percentage points when compared with 54.9 percent recorded in the preceding half. The Nigerian economic environment was clouded by election activities in second half of 2022 resulting in uncertainties in the economy. This coupled with the immediate impact of the Naira redesign policy which was announced in October of 2022 and required that economic agents including manufacturers thread with caution. The dampening effects on the manufacturers’ confidence hence reflected in the manufacturing sector’s indicators including the capacity utilization in the period. However, re-infusion of the old currency to circulation temporarily restored confidence especially to the informal sector of the economy, where more than 98 percent of transactions is carried out in cash.
Manufacturing Production Value: Manufacturing sector factory output value increased to N4.10 trillion in the first half of 2023 from N3.99 trillion recorded in the corresponding half of 2022; thus, indicating N110.00 billion or 2.8 percent increase over the period. It also, increased by 1.42 trillion or 52.8 percent when compared with N2.68 trillion recorded in the preceding half.
The 2.8 percent increase in the monetary value (not real output) of manufacturing sector production over the period of one year when inflation is at 24.08 percent at the same period indicates a struggling sector. The manufacturing sector faced myriad of challenges in the first half of 2023. The residual effect of naira redesign and the removal of fuel subsidy towards the end of the period under review triggers inflationary pressure, cost of transportation, cost of production and other macroeconomics imbalances, thereby worsened the purchasing power of the households. Key sectors like manufacturing and agriculture, which play a vital role in Nigeria’s economy, suffer as higher fuel costs drive up expenses related to machinery, irrigation, and transportation. These led to increase in the prices of food and other products, impacting both productivity and social stability. The uncertainty stemming from this policy change has undermined investor confidence, hampering both domestic and foreign investments that are crucial for economic growth and job creation.
Local Raw-Materials Sourcing: Manufacturing sector local raw materials sourcing increased to 55.3 percent in the first half of 2023 from 48.0 percent recorded in the corresponding half of 2022; thus, indicating 7.3 percentage points increase over the period. It also increased by 1.8 percentage points when compared with 53.5 percent recorded in the second half of 2022. The observed increase in the utilization of local raw materials within the sector can be attributed to the growing challenges associated with sourcing foreign exchange. This situation has compelled manufacturers to shift their focus towards obtaining raw materials domestically, despite the substantial cost implications involved.
Unsold Inventory of Finished Products: The inventory of unsold finished products in the manufacturing sector saw a significant increase to N271.96 billion during the first half of 2023, as compared to N187.08 billion recorded in the corresponding period of 2022. This indicates a substantial rise of N84.88 billion or 45.4 percent over this timeframe. However, there was an N11.64 billion or 4.1 percent decline when compared with the inventory value of N283.6 billion recorded in the second half of 2022. This increase in inventory can be attributed to a weakened purchasing power of the consumers, brought about by diminishing real household income resulting from the ongoing escalation of inflationary pressures, compounded by the scarcity of naira in the first quarter of the year and the aftermath of the subsidy removal.
Manufacturing Investments: Manufacturing sector investment in naira value increased to N192.89 billion in the first half of 2023 from N178.39 billion recorded in the corresponding half of 2022; thus, indicating N14.50 billion or 8.1 percent increase over the period. It further increased by N47.3 billion or 32.50 percent when compared with N145.59 billion recorded in the second half of the year. The increase in investment in naira value was driven by the currency devaluation which saw naira depreciated to N901/$ or 65 percent depreciation at the Investor and Export Window from N462/$ before the devaluation policy of the CBN was announced. Hence, the increase recorded does not indicate physical investment by manufacturers but rather nominal which resulted from the devaluation of currency that has made the manufacturers to pay more for plants and machinery importations.
Manufacturing Employment: According to MAN survey, employment generation of the manufacturing sector declined to 6428 in the first half of 2023. This is an indication of 32.8 percent reduction in employment generation capacity when compared with 9559 jobs generated in the first half of 2022. Also, the data showed a shed of 313 jobs when compared with 6741 jobs created in the second half of 2022. The decline in the number of jobs created in the sector during the period further highlighted the unfriendly business environment resulting from the hasty policies and residual effect of the currency redesign policy that led to naira crunch. In the same vein, a total of 3567 jobs were lost in the first half of 2023, indicating 1855 more job lost when compared with the 1709 job lost in corresponding half of 2022 and 850 more jobs lost when compared with 2708 jobs lost in the last half of 2022.
Electricity Supply to Industries: Electricity supply to the industries from the national grid in the first half of 2023 increased marginally to 11.3 hours per day from 10.2 hours recorded in the same period of 2022. Additionally, it increased by 42 minutes when compared with 10.6 average hours per day of electricity supply in the last half of 2022. In the same vein, the average number of outages per day increased marginally to 4.7 times from 4. 4 times in the first half of 2022.
Consequently, expenditure on alternative energy sources declined to N60.47 billion in the first half of 2023 from N76.70 billion recorded in the second half of 2022, thus indicating N16.23 or 21.2 percent decrease in the period. It also declined by N7.33 billion or 10.8 percent from the N67.8 billion recorded in the same period of 2022.
Cost of Funds to Manufacturers: Undoubtedly, one of the major hurdles confronting the manufacturing sector in the country is the high cost of obtaining funds. This challenge is substantiated by data gathered during the fieldwork for the first half of 2023 report. According to this data, the average lending rate to the manufacturing sector from commercial banks remained high at 24 percent when compared with what was recorded in the corresponding half of 2022. However, the cost of funds for the manufacturers increased by 2.0 percentage points when compared with 22.0 percent recorded in the second half of 2022. The lending rates offered by commercial banks to industries are significantly influenced by the continuous upward adjustments in the Monetary Policy Rate. These adjustments aim to maintain a favorable real interest rate environment, with the goal of attracting foreign investment inflow, defending the domestic currency (Naira) and curbing the spiraling inflation.
4.0 CONCLUSION
2023 started with uncertainty in the economy as a result of Naira redesign policy of the Central Bank that led to naira crunch and the usual dormant economic activities prior to general election. The re-infusion of the old currency notes which was initially moved out of circulation brought a promising outlook to the economy. Consequently, a short-lived uptick in economic activities, especially in the informal sector, was experienced.
However, the effects of the naira redesign program and slow economic activities was reflected in the GDP data released by the National Bureau of Statistics (NBS), showing that the economy slowed to 2.31 percent and 2.51 percent in the first and second quarters respectively. Furthermore, the subsidy removal and exchange rate unification policy towards the end of the first half left the economy on the brink of uncertainty, causing a ripple effect that further eroded investors’ confidence. As a result, businesses and foreign investors are increasingly wary of committing capital, thereby hindering economic growth and prospects for recovery. The combined effect of these is the resultant higher inflationary pressure, which fuels cost of production, reducing consumers’ purchasing power and having a greater impact on the manufacturers.
Therefore, it is of utmost importance that the challenges identified by manufacturers in our survey are promptly and effectively addressed. The sector urgently requires measures to mitigate the adverse effects of these policies and restore its growth trajectory.
5.0 RECOMMENDATION
– Stakeholder Dialogue: The government should engage in constructive dialogue with the stakeholders in the private sector to share their concerns, provide feedback on the potential impacts of the policy changes, and collaborate on finding solutions to mitigate adverse effects on businesses.
– Policy Clarity and Predictability: The government should provide clear and consistent policies to provide certainty for businesses. Frequent policy changes and uncertainties could hinder long-term investments and growth.
– Economic Impact Assessment: The government should conduct a comprehensive economic impact assessment of the fuel subsidy removal, exchange rate changes, and other policy measures. This assessment should identify potential challenges and opportunities for the private sector and inform further adjustments to the policies if necessary.
– Access to Credit: To ensure effective implementation of the plans to support the manufacturing sector and MSMEs, the government should provide streamlined processes for accessing credit and preferential terms that are suitable for different types of businesses.
– Infrastructure Development: The government undivided attention and priority be paid to infrastructure development projects to enhance transportation, logistics, and energy supply. These improvements will positively impact on businesses’ efficiency and reduce operational costs.
– Support for Workers: While supporting the introduction of a new national minimum wage, we emphasize the need for a balanced approach to ensure businesses can manage labor costs without compromising employment stability.
– Transparent and Efficient Implementation: We recommend transparency and efficiency in the disbursement of funds and implementation of support programmes. This will ensure that the resources reach intended beneficiaries in a timely manner.
– Continuous Monitoring and Feedback Mechanism: Government should establish a monitoring and feedback mechanism to assess the effectiveness of the implemented policies and make necessary adjustments based on real-time feedback from businesses.
– Regulatory Reforms: We recommend regulatory reforms to improve the ease of doing business in Nigeria. Simplified and efficient regulations would attract more investments and foster a conducive business environment.
– Social Safety Nets: To mitigate the short-term impact of the policy changes on vulnerable groups, the private sector advocates for the government to implement social safety nets or targeted support programs to protect those most affected.
– Long-Term Economic Vision: The government should articulate a clear long-term economic vision that outlines the pathway to sustainable economic growth, job creation, and poverty reduction. By providing these recommendations, we aim to work collaboratively with the government to ensure that the economic reforms are balanced, sustainable, and beneficial for all stakeholders.
– Other Specific Recommendations
Prioritize forex intervention for raw materials and machinery for industries.
Improve forex allocation to the industrial sector.
– Develop a roadmap for improved power supply, including off-grid solutions and private sector-driven independent power projects.
– Promote renewable energy sources such as solar and wind.
– Resuscitate national refineries for local fuel production.
– Review domestic gas pricing.
– Encourage investment in gas aggregation to reduce gas flaring.
– Address the oil theft to optimize crude oil production based on OPEC quotas.
– Incentivize local raw material development, especially Active Pharmaceutical Ingredients (API) and basic chemicals.
. Focus on backward integration and resource-based industrialization.
– Publish a list of approved harmonized taxes and levies for the manufacturing sector.
– Implement and enforce the harmonized taxes and levies.
– Develop a framework for transition of informal sector operators to the formal sector.
– Expand the tax base without increasing the burden on existing taxpayers.
– Invest in transportation infrastructure (road, rail, waterways) to reduce transportation costs.
– Enhance ports infrastructure and streamline operations.
– Revive rail tracks connecting ports to industrial areas.
– Promote harmonious cooperation among government agencies at ports.
– Implement a single window platform to streamline customs procedures.
– Improve efficiency in clearing machines and raw materials at national ports.
– Establish a monitoring and evaluation platform with private sector representation for development fund disbursement oversight.
– Provide credit guarantees for industrial loans from commercial banks.
– Create development funding opportunities with liberal conditions for SMEs.
– Strengthen the Bank of Industry (BOI) and Bank of Agriculture (BOA) to provide finance for the manufacturing sector.
– Make the CBN non-oil export stimulation facility accessible to the productive sector with favorable terms and conditions.
– Allow industrial policies to mature with proper monitoring and evaluation.
– Strengthen the implementation of Executive Orders 003 and 005 and monitor compliance across MDAs.
– Facilitate collaboration of fiscal and monetary authorities to formulate policy measures that will address high inflation in the country.
