Uncertain future for Nigerian manufacturers as FX volatility, production costs take toll

Nigerian manufacturers are facing an uncertain future due to persistent foreign exchange volatility and higher production costs, which have been crippling business activities in recent years.

The situation has left many manufacturers unsure whether to cut down on production or stay in business as they continue to battle rising energy costs, FX volatility, and accelerating inflation that has made it increasingly hard for them to predict their production costs, experts say.

According to Sola Obadimu, the Director-General of the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture, the 2024 manufacturing outlook remains dim as long as the government fails to stabilise the naira and deal with security issues.

The situation has left many manufacturers in a precarious position, with some considering shutting down their operations due to the high cost of production.

The persistent foreign exchange volatility has made it difficult for manufacturers to import raw materials, which has led to a shortage of inputs and a decline in production. This has resulted in a reduction in the number of goods available in the market, leading to higher prices for consumers.

The rising energy costs have also been a major challenge for manufacturers, with many struggling to pay their electricity bills.

This has led to a decline in production and a loss of jobs, which has further worsened the economic situation in the country. The government has been urged to take urgent action to address the challenges facing manufacturers in the country.

This includes stabilising the naira, providing incentives for local production, and addressing security issues that have been affecting businesses in the country.

Failure to take action could lead to a further decline in the manufacturing sector, which could have serious implications for the Nigerian economy.

“Naira needs to be stable for manufacturers to plan and budget their inputs and outputs,” Obadimu said, adding that producers are being forced to produce at reduced capacity or shut down operations amid declining consumer purchasing power.

“Consumer demand level is elastic, so you cannot just increase prices anytime you want to because their wages are also declining,” he said in a response to questions.

The naira has lost 49.11 percent of its value against the dollar in 2023 at the Nigerian Autonomous Foreign Exchange Market, data compiled by BusinessDay from the FMDQ indicated.

The worsening FX volatility is inflicting more pain on businesses as the cost of production doubled amid low demand from cash-strapped consumers dealing with inflationary pressures.

“The outlook for the manufacturing sector in 2024 may not be a positive one, at least in the first half of the year,” Segun Ajayi-Kadir, director-general of the Manufacturing Association of Nigeria (MAN), said in a statement from the association.

“The period will be challenging, with a subtle possibility of recovery from the third quarter,” he said, adding that the envisaged recovery is highly dependent on the deployment of policy stimulus supported with a synthesis of domestic growth-driven, export-focused, and offensive trade strategies.

“This will promote resilience and steady growth and ensure that the sector gains meaningful traction in the later part of the year,” he said.

Apart from F volatility and higher costs, the country’s huge infrastructure gaps are also increasing the burden of doing business in Africa’s most populous country.

The availability of adequate infrastructure is a major determinant of the success of every country’s industrial sector; however, Nigeria does not have adequate infrastructure to grow businesses, especially developed transport systems such as roads and railways connected to the nation’s seaports.

Energy is a key element of the production process. Nigeria’s inability to supply and distribute sufficient electricity has left businesses at the mercy of generators powered by diesel and petrol, whose prices have surged in recent months.

Manufacturers spend 40 percent of their total production cost on generating energy for their businesses, according to MAN.

In a June 2023 statement, the association put the annual economic loss caused by inadequate power supply at N10 trillion, accounting for almost two percent of the country’s Gross Domestic Product.

While the government has pledged commitments to power projects including the Siemens Energy initiative and enhance the reliability of transmission lines towards addressing power shortages in the country, experts have stressed the urgent need to address the structure of the power sector.

“The government needs to consider bringing private sector investment into the transmission segment of the power sector,” Chinyere Almona, director-general of the Lagos Chamber of Commerce and Industry, said in a statement following President Bola Tinubu’s New Year Address.

“This would ensure adequate technical and financial capacity for a well-functioning sector to power economic growth,” she said.

The rising cost of energy and FX pushed the country’s inflation rate to an 18-year high of 28.2 percent in November, according to the National Bureau of Statistics.

The challenging macroeconomic issues impacted the manufacturing sector as its growth rate slowed to 0.48 percent in the third quarter of 2023, lower than 2.20 percent in the preceding quarter and 1.61 percent in Q1.

“The two biggest changes to our manufacturing sector are the huge exposure to the external sector, specifically imported raw materials, and the rising burden of high energy cost,” said Muda Yusuf, chief executive officer at the Centre for the Promotion of Private Enterprise.

“The sector outlook will depend to a large extent on the stability of the foreign exchange market and the related forex liquidity,” he said, adding that with the extent to which the CBN had demonstrated a clear commitment to the stabilisation of the foreign exchange market, the outlook may be more on the upside in 2024.