Manufacturers face 24.4% surge in production, distribution costs in Q2

By Merit Ibe                                               [email protected] 

The Manufacturers Association of Nigeria (MAN) has revealed that production and distribution costs within the manufacturing sector experienced a sharp rise of 24.4 percent in the second quarter of this year. This marks a significant increase from the 20.7 percent growth recorded in the first quarter. The report, featured in MAN’s latest aggregate Manufacturers CEO’s Confidence Index (MCCI), highlights the toll that Nigeria’s challenging macroeconomic environment has taken on manufacturing, driving up costs across the board.

The MCCI, a flagship quarterly publication of MAN, serves as both a research and advocacy tool, providing crucial insights into the state of the manufacturing sector. It captures the pulse of industry leaders, monitoring trends and shifts in response to economic movements and government policies. This index is built on comprehensive primary data obtained through direct surveys of over 400 CEOs from MAN member companies, offering a clear window into the realities faced by manufacturers.

The report underscores that the rising costs in production and distribution are symptomatic of broader issues within the Nigerian economy. Persistent inflation, volatile exchange rates, and rising energy prices are among the key drivers exacerbating operational costs for manufacturers. Additionally, challenges with infrastructure, logistics, and access to finance continue to create hurdles, further pressuring businesses within the sector.

As the Nigerian government rolls out new policies and initiatives to stabilize the economy, the MCCI provides a critical barometer of their effectiveness, allowing policymakers to gauge the real-world impact of their actions on the manufacturing sector. The index is not just a reflection of the current economic climate but also a call to action, emphasizing the urgent need for sustainable interventions that will ease the burden on manufacturers and stimulate growth in the sector.

The report, released yesterday, revealed that persistent insecurity, soaring energy costs, and high lending interest rates continue to intensify inflationary pressures, rendering the operating environment increasingly hostile for manufacturers. As a result, profit margins have tightened, making it harder for businesses to thrive in these challenging conditions.

The report also highlighted the negative impact of the current macroeconomic environment on manufacturing capacity utilization, production output, and sales volume in the second quarter of 2024.

The report further revealed that capacity utilisation of manufacturers declined further by 14.1 percent in Q2 2024 from 9.8 percent witnessed in the preceding quarter; the volume of production slid further by 11.9 percent in Q2 2024 from a contraction of 10.1 percent recorded in the previous quarter; Manufacturing investment dipped by 5 percent in Q2 2024 from 5.2 percent contraction recorded in the preceding quarter; Manufacturing employment declined by 4.9 percent in Q2 2024 from the 5.3 percent contraction recorded in the preceding quarter; Sales volume fell by 9.3 percent in Q2 2024 compared to the decline of 7.2 percent witnessed in the preceding quarter; Cost of shipment rose by 17 percent in Q2 2024 from the 22.2 percent increase recorded in Q1 2024.

All the  manufacturing indicators recorded unfavourable changes during the period under review.

MAN said in addition to the forex scarcity, high exchange rate and heightened inflation, the unfavourable macroeconomic environment was aggravated by the skyrocketed increase in the electricity tariff, the consistent increase in interest rates, the perennial fuel scarcity and the nationwide industrial action during the reviewed quarter.

“All of these grossly escalated the cost of manufacturing operations, distorted the manufacturing value chain, discouraged investments, increased job losses and reduced sales volume.”

In the report, manufacturers identified and ranked the challenges facing their operations to include multiple taxation; high energy cost/hike in electricity tariff/inadequate power supply; high exchange rate/ forex scarcity; high inflation; limited sourcing and high cost of raw materials; declining sales; high interest rate and low access to credit; insecurity; over-regulation by government agencies; and high cost of transport and logistics.

In its summary, the MCCI revealed that  the Aggregate Index Score of the manufacturing sector relapsed from 53.5 points to 51.9 point in the second quarter of 2024, which proved the difficult operating clime in the sector, adding that all the current indicators of manufacturers’ confidence went South due to other added challenges like  the reoccurrence of fuel scarcity as well as the disruptive effect of the Industrial Action observed by the National Labour Congress.

MAN noted that the situation calls for concern as the business environment begins to threaten the longstanding resilience of many manufacturers.

“Notwithstanding, the expectation of the manufacturers on Business Condition and Production Level in the Next Quarter remain above the threshold point as there are high hopes that inflation will subside to slightly ease production cost and improve demand for manufactured products.

MAN is low that Nigeria’s path to sustained industrialisation and steady economic growth remains threatened as little to no attention is given to the numerous pressing challenges that limit the performance of the manufacturing sector—a sector widely regarded as the driver of economic growth and sustainable development.

“Undoubtedly, a rapidly growing economy is only achievable when the binding constraints hindering the performance of the manufacturing sector are confronted head-on.’

In line with the position of MAN, it recommended that the government should tackle  the burning challenges that are waning manufacturers’ confidence and deviating the country from the path of a sustainable robust growth:

Also, the association urged the government to tame inflation, stabilise the  exchange rate and improving access to forex; promote energy security

ensuring affordable lending rate and increased access to credit; upgrade infrastructure and address high and multiple taxation, among others.

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 that consume diesel and petrol.

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

The Director-General of MAN, Mr. Segun Ajayi-Kadir, has continued to harp  that the challenges facing the manufacturing sector, particularly due to the current macroeconomic conditions, are exacerbated by the ongoing foreign exchange volatility and high electricity tariffs.

He criticized the multiple and high rates of taxes and levies imposed by the three tiers of government and their agencies, noting that  by reducing the tax burden on businesses, especially in times of economic uncertainty, the government can provide the much-needed support to manufacturers and other economic actors.