Manufacturing hits new low as headwinds take toll on capacity

Nigeria’s manufacturing sector has hit a new low in recent times as economic headwinds have cramped growth, capacity and output in the productive sector of the economy.

Fourth quarter (Q4) 2014 release by the National Bureau of Statistics (NBS) shows growth in the country’s manufacturing sector declined to 19.2 percent, 13.28 percentage points lower than 32.40 percent recorded in the corresponding period of 2013. The Q4 figure was also 2.46 percentage points less than the third quarter 2014 estimate.

NBS attributes the slow growth to headwinds such as poor electricity supply, coupled with high input cost occasioned by depreciating.

“The industrial sector had a more erratic output than the other sectors, partially due to electricity output, and the need to import key manufacturing inputs,” the NBS notes in an earlier note on the 2014 economic review and 2015 – 2017 Outlook.

According to the latest release by the Manufacturers Association of Nigeria (MAN), the production value (output) of manufactured goods fell 23.3 percent to N271 billion in the first half of 2014 (H1 2014), as against N353.2 billion in the corresponding period of 2013. The figure of H1 2014 also represents 44 percent decline from N484 billion reported in the second half of 2013 (H2 2013).

“This is a reaction to challenges posed by some indices in the economy, particularly the problem of power outages, which have continued to produce greater effect on small and medium industries,” MAN says in its January to June 2014 Economic Review, while explaining the reason for the slump.

Similarly, inventory of finished goods, which refers to stocks of manufactured products that are ready for sale, rose 30 percent to N22.55 billion in H1 2014, from N17.34 billion reported in the second half of 2013 (H2 2013). This increase occurred despite that output in H2 2013 was higher (N483.5bn) than that of H1 2014 (N271bn).

This is no good news for the manufacturing sector as rise in inventory of unfinished goods signifies that more goods are in warehouses rather than bought by consumers.

“As much as manufacturers were very tactical and cautious about stock-piling finished products, recent survey revealed that consumers also reduced their level of consumption,” says MAN, in the report.

While capacity dropped slightly to 52 percent in H1 2014 from about 53 percent in H2 2013, local raw materials sourcing equally dropped to 48 percent in H1 2014 from 59 percent in H2 2013.

High cost of funds is one of the key headwinds that have so far dragged the manufacturing sector backward within the last 14 months.

MAN’s survey shows the average lending rate charged manufacturers by banks and other financial institutions in H1 2014 was 22 percent. Worse still, banks that agreed to lend to these real sector players did so at short-term basis, usually a year or less.

“How do you expect them to compete with the Chinese and the other Asians when the latter obtain credit facilities in their countries at a single-digit rates?” asked John Isemede, immediate past director-general, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), in an earlier interview with BusinessDay.

Similarly, this decline in manufacturing fortunes also affected its exports segment. Export of local aluminium products and articles declined from $144.65 million in 2013 to $113.36 million at the end of 2014, representing 21.63 percent slump.

Similarly, export of leather, skins and hides was $531.3 million by end of 2013, but declined to $488 million in 2014. Generally, non-oil exports fell 18 percent to $2.43 billion in 2014, from $2.97 billion recorded by the end of 2013, data compiled by Cobalt International Services and released by the Nigerian Export Promotion Council (NEPC) have shown.

One reason for this decline is high cost of funds as experts say banks are often uninterested in funding exports. Another suspension of the Export Expansion Grant (EEG), the only export incentive given to exporters, since August 2013, while the next are significant drop in electricity supply (resulting in high energy costs from the use of generators) and multiplicity of taxes.

Another big drawback to manufacturing, particularly the export segment, is the closure of the Wholesale/Retail Dutch Auction (RDAS/WDAS) window by the Central Bank of Nigeria (CBN).

The CBN recently closed the official window, where importers sourced foreign exchange, to bring sanity into the forex market.

But manufacturers say this will increase production costs by at least 20 percent, lead to lay-offs and closure of firms.

“Many manufacturing firms will simply close down,” Frank S.U. Jacobs, president, MAN, told Real Sector Watch.

“Given the fact that oil prices are falling, we all say there is the need to diversify the economy. But how can you diversify without manufacturing,” Jacobs said.

ODINAKA ANUDU