MANUFACTURERS CEOS CONFIDENCE INDEX Q2 2023

MAN IN FOCUS: How Naira Scarcity Took a Toll on Manufacturing Businesses
Sequel to the naira redesign and the new cash withdrawal limits by the Central Bank of Nigeria, the scarcity of both old and new naira notes across all banking halls and electronic payment channels in the country meted severe hardship on manufacturers. The prolonged crisis nearly crippled manufacturing companies with about 20% and 30% decrease in sales for consumer goods and cement respectively.

The crisis impacted negatively on the manufacturers by directly limiting their working capital, thus halting their daily business operations. In addition, the naira scarcity crushed the consumer patronage of manufacturing firms and resultantly escalated their volume of inventories, especially for retail goods. By exposing the highly cash-based distributive trade sector to great risk, the economic crisis had severe consequences on the manufacturing value chain and cost of logistics.

The substantial reduction in money velocity left opportunity for speculation and ignited the creation of a naira black market that compounded the woes of manufacturers already plagued by insufficient forex. The naira scarcity clearly wiped out numerous small and medium manufacturing businesses whose transactions were cash-based, especially those within the agro-allied industries who regularly deal with local farmers in remote towns where no formal banking is in sight. More unfortunately, the exorbitant POS charges on such cash constrained the operations of resilient manufacturing SMEs and worsened their cost of doing business.

The country’s transition to a cashless economy requires no urgency or policy aggressiveness considering that a lot of progress has already been made. A comparative analysis of the country’s cashless status has shown that while the ratio of cash to GDP in Europe, U.S. and South Africa are respectively about 10%, 6% and 3.5%, Nigeria’s ratio is impressively below 1.5%. Therefore, achieving a full cashless economy should not be the pressing issue when there are tougher challenges of insecurity, exchange rate volatility, skyrocketing inflation, energy disruption, over bloated fiscal debt, dwindling foreign reserves, business collapses and daily divestments.

5.0 SUMMARY OF FINDINGS

Manufacturing activities in the second quarter of 2023 was adversely affected by escalation in the Consumer Price Index (CPI), continuous erosion in Naira value and difficulty in accessing forex, high cost of energy, naira crunch, exorbitant taxes, high lending rates, persistent, insecurity, domino effects of the lingering Russian-Ukrainian war, slow recovery from the cash crisis. Manufacturers are extremely groaning in pain due to these issues that are frustrating their contribution to the economy

The Aggregate Index Score (AIS) of MCCI declined to 52.7 points in the second quarter of 2023 from 54.1 points obtained in the first quarter of 2023. The index score of the current quarter, though below that of the previous quarter, indicates that manufacturers generally show resilience and retain confidence in the economy.

However, across sectoral groups, operators in Motor Vehicle & Miscellaneous Assembly with an index score of 46.7 exhibited further loss of confidence as they fell below the 50-point benchmark. These operators were adversely affected by the exorbitant new premium rate for motor insurance and the abrupt subsidy removal which significantly worsened sales performance and increased the consumer’s preference for fairly used vehicles as a result of low purchasing power.

Similarly, among industrial zones, activities in Abuja (40), Rivers/Bayelsa (40.5), Cross-Rivers/Akwa-Ibom (45), Kano (46.2), Kaduna (47.8) and Oyo/Ondo/Ekiti/Osun (48.6) were depressed by the high-cost operating environment in the second quarter of 2023 as underlined by their index scores which fell below the benchmark points.

Sequel to the above trends, it is highly expedient that the Government strives to ensure the harmonization of fiscal and monetary policies that will pave the way for a stable macroeconomic environment needed to promote productivity in the manufacturing sector and improve the ease of doing business.

6.0 CONCLUSION AND RECOMMENDATIONS
The idea of throwing policies of subsidy removal and a free float exchange rate all at Nigerians within the short space of time could result in another policy somersault that sets to drag back the economy without any hope of recovery and could result in the failure of Mr. President’s promise of a renewed hope. The abrupt removal of fuel subsidy without appropriate palliatives is already beginning to wane on the confidence of Nigerians in this new administration.

No CBN forex intervention will be effective without boosting the level of liquidity and transparency in the official forex window. The introduction of the Forex Price Verification System Portal is laudable as it will improve transparency but more needs to be done to increase the forex liquidity especially by intensifying efforts to encourage the inflow of foreign investments, promoting export in productive industries as well as encouraging local sourcing and local patronage.

In the medium term, it is essential to tackle problems relating to low productivity and limited export diversification, excessive import-dependent production structure and dilapidated capital goods industry. This will require:

– Bridging the huge infrastructure gap, especially as it relates to customs, transport and power which are of utmost concern to the manufacturers.

– The complete reformation of the power sector through the Electricity Act 2023 in order to end erratic supply of electricity.

– Boosting public-private investment in renewable energy, backward integration and local sourcing of raw materials in order to create a highly competitive and self-sufficient manufacturing industry.

In the existence of a strong political will, the short-term remedy will require:

– Manage the floating exchange rate system within an acceptable lower and upper bound, pending the actualization of a net-exporting economy.

– The prioritization of the manufacturing sector for forex allocation.

– Expend cost savings from fuel subsidy removal on the major drivers of food inflation such as road transport cost and infrastructure.

– Create farm settlements with thousands of farmhands on different plantations in order to boost food security and combat food inflation.

– Reducing volatility in the oil sector which is the country’s main source of forex by upgrading security of oil infrastructure, rehabilitating the old refineries and establishing modular refineries,

– Ensuring efficiency of the recently privatized NNPC

– Promoting investment by the full implementation of the Petroleum Industry Act (PIA)

– Provide appropriate palliatives to mitigate the adverse impact of fuel subsidy removal on the welfare of households and businesses.