June 6, 2022

Economy: Manufacturers lose confidence, bemoan falling disposable income

*MAN lists forex scarcity, insecurity, neglect of economy for politics, others

*Policy environment should motivate investment — LCCI, CPPE

By Yinka Kolawole

Worsening structural and  fiscal challenges, coupled with the fallout of the ongoing Russian-Ukrainian war seem to have dampened the enthusiasm of manufacturers in the nation’s economy in the first quarter of 2022 (Q1’22).

A survey conducted by the Manufacturers Association of Nigeria (MAN) on over 400 Chief Executive Officers (CEOs) of its member-companies tagged, Manufacturers CEO’s Confidence Index (MCCI) Survey Q1 2022, shows that the confidence index of CEOs in the manufacturing sector declined by 1.5 points to 53.9 points in Q1’22 from 55.4 points recorded in Q4’21, indicating lowering confidence in the economy.

The report is a reversal of the confidence of the manufacturers in Q4’21 when the index increased to 55.4 points from 54.0 points obtained in the preceding quarter (Q3’21).

MAN President, Engr. Mansur Ahmed, however, noted that despite the decline in the confidence index in Q1’22, the MCCI figure remained above 50 points indicating the confidence of the sector in the economy is not totally lost.

The MCCI has a baseline index of 50 points that suggests a stationary point in the economy and affirms the level of confidence and performance in the quarter under review, with points above 50 showing manufacturers have confidence in the economy, while index points below 50 indicate otherwise.

MCCI is an index constructed by MAN to measure changes in the quarterly pulsation of manufacturing activities in relation to movement in the macroeconomy and government policies.

According to MAN the standard diffusion factors deployed in the MCCI analytic processes include the Current Business Condition, Business Condition for the next three months, Current Employment Condition (Rate of Employment), Employment Condition for the next three months and Production Level for the next three months.

Meanwhile, sectoral analysis of the survey report shows that operations of manufacturing concerns in the Wood & Wood Products; Electrical & Electronics; and Motor Vehicle & Miscellaneous Assembly groups were the most heavily challenged in Q1 2022.

“Index Score of Wood & Wood Products sector (48.9 points); Electrical & Electronics (49.9 points); and Motor Vehicle & Miscellaneous Assembly (49.2 points) were all below the 50 base points, affirming low confidence in the economy, poor performance and the struggling status of these manufacturing sectoral groups,” the report stated.

Contributing factors

The MAN’s survey report stated: “Contributory factors to the decline in the index score for Q1’22 include eroding disposable income of consumers, high interest rate, excessive drive for revenue by government, obvious neglect of the economy for politics, the persistent acute shortage of Forex; insecurity, the immediate impact of the Russian invasion of Ukraine as seen in the hike in price of diesel, wheat and other imported manufacturing inputs.

“Although, on the overall, the score suggests fairly stable confidence in the economy driven primarily by improvement in current business conditions, the performance was affected by declining employment and production conditions arising from familiar supply-side constraints.”

MAN further said: “Although the Q1’22 MCCI index score of 53.9 points fell below that of Q1’21, the overall result shows that even though the economy recorded positive improvement despite unstable macroeconomic fundamentals, the manufacturing sector is still largely under severe pressure, its health very well in the fringes and below the desired performance threshold.

“In addition, feedbacks from manufacturers identified limited supply of electricity; high cost of local and imported raw-materials; persisting acute shortage of forex for importation of machine, raw materials not available locally and persisting insecurity in the country as the first out of the challenges limiting the performance of the manufacturing sector in the period under review.”

In his reaction, Chairman, Motor Vehicle & Miscellaneous Assembly Sectoral Group, MAN, Mr. Robert N. Ugbaja, lamented that capacity utilization declined during the period, due to reduced demand for finished assembled vehicles and scarcity of forex also affected the frequency of importation of KD (knocked down) parts for local assembling process.

He stated: “Cost of production increased significantly, with the forex rate leading to increase in the cost of importing KD parts, translating to increase in selling prices of locally assembled vehicles. Also, high energy cost, high cost of transportation and multiple taxation compounded the problem of high cost of production.

“Selling prices of locally assembled vehicles increased sharply as the Naira depreciates in value against foreign currencies. Sales volumes declined due to reduced demand for vehicles in stock as corporate customers and individuals migrate to purchasing second-hand vehicles due to high cost of new ones.”

Ugbaja called for diversification of forex sources by promoting exportation of products in which Nigeria has comparative advantage.

“There is need to give special incentive to auto industry for development of local content for the sector. Government should consider creation of new vehicle purchase loan facilities through some banking and non-banking institutions to assist buyers,” he added.

Survival plan

As a way forward, the manufacturers called for the establishment of a National Response and Sustainability Strategy (NRSS) as a survival plan for the sector.

“The general decline in the index point and the dimmed outlook for the second quarter evidenced by expectations of lower production, employment and unfriendly business conditions, is a cause for concern.

“Undoubtedly, the precarious situation that the manufacturing sector is currently in and the looming dangers ahead call for the crafting of a National Response and Sustainability Strategy to guarantee the survival of the sector and avoid further de-industrialisation,” MAN declared.

Experts chart way forward

Commenting on the development, Director General, Lagos Chamber of Commerce and Industry (LCCI), Dr. Chinyere Almona, said there is a need for a stable policy environment to motivate investment and lift manufacturers’ sentiment.

She stated: “The manufacturing index as a measure of sentiments by manufacturers at 53.9 points shows a positive sentiment, but less optimistic when compared with the sentiments as of Q4 2021.

“The factors responsible are rising cost of production, illiquidity in the forex market, insecurity causing disruptions to supply chains and rising uncertainties from the tensions in Eastern Europe and how the war in Ukraine has affected us.

“The impact of this on the Nigerian economy is that with rising cost of production, manufacturers are faced with slimmer profits since all costs cannot be transferred to consumers. If this continues, it can force manufacturers to reduce production capacity which can lead to job losses or total shutdown of operations.

“Clearly, prices of goods will rise above the purchasing power of consumers and this will lead to weakened demand and lesser revenue to companies and lower tax revenues for the government.

“There is a need to subsidize manufacturing of food and other products that require forex to import their inputs.

“Also, the CBN must resolve to intervene with supply of forex to the productive sectors to ease their difficulties in sourcing forex for import of inputs. The policy environment must be stable to motivate investment and lift manufacturers’ sentiments in the coming months.”

In his comment, Dr Muda Yusuf, CEO, Centre for the Promotion of Private Enterprise (CPPE), said the waning confidence in the economy is a reflection of the very challenging investment climate faced by manufacturers.

He stated: “This would definitely impact adversely on the national economic outlook. The fragile growth outlook may be further depressed by the surge in energy costs, challenges with access to foreign exchange for raw materials and equipment procurement and the intense inflationary pressures.

“And only recently, the CBN announced an interest rate hike which would put additional pressure on operating costs.

“To boost investors’ confidence, issues around energy cost, foreign exchange, and infrastructure deficit would have to be addressed. The distractions of the electioneering activities and engagements at this time are not helping matters.

“Besides, electioneering seasons heightens political and policy risks in an economy.  This often causes a deceleration in investment and dampening of growth outlook.” 

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