Worry over job losses as local capacity utilisation falls by 5.6%

Nigeria’s local capacity utilisation nosedived further by 5.6 per cent in the second quarter, showing the economy’s ability to create jobs is getting increasingly weaker.

As local capacity utilization fell, employment conditions also dropped from 50.7 points to 50.2 points, said the Manufacturers CEO’s Confidence Index (MCCI) of the Manufacturers Association of Nigeria (MAN) released this week.

The volume of production contracted by 6.1 per cent while investment in manufacturing also dipped by 5.6 per cent, all pointing to a gloomy outlook.

The report shows that manufacturers’ confidence in the nation’s economy dropped to the lowest in nearly two years in the second quarter of this year.

The aggregate (MCCI) declined for the third straight quarter to 52.7 points in Q2 from 54.1 points in the previous quarter.

According to the latest report, major performance indicators of the manufacturing sector all recorded unfavourable changes.

The economy continues to suffer from concerns over the high cost of energy remains at the top the list of major manufacturing challenges, followed by high cost of credit, inadequacy of loanable funds, multiple taxes/charges/levies/same tax policy for local producers and importers, unavailability of raw materials/delay in receiving imported raw materials/high cost of raw materials, poor electricity supply, high costs of production and scarcity of FX, high exchange rate, poor allocation of FX among other issues.

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

“Among the standard diffusion factors, current business condition and business condition for the next three months stood at 48.9 and 58 points respectively. Current employment conditions declined to 50.2 points from 50.7 points recorded in Q1 but remained marginally above the 50-point benchmark,” it said.

It added that employment conditions for the next three months further plunged below the benchmark points to 46.6 points as against the 47.8 points obtained in the preceding quarter.

It revealed that across sectorial groups, operators in motor vehicle and 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,” it said.

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 Q2 as their index scores fell below the benchmark points.

“Amidst the harsh business-operating environment evidenced by poor macroeconomic indices, the underperformance was largely driven by the slow recovery from the cash crunch, high cost of energy, high transportation cost and partially by the abrupt removal of subsidy that took effect towards the end of the second quarter of 2023. The economic turmoil disrupted the manufacturing value chain, escalated the cost of manufacturing operations and resulted in a reduction in manufacturing patronage.”

The association said that production and distribution costs escalated by 17.3 per cent in the quarter under review.

“Sales volume plummeted by 6.3 per cent and the cost of shipment rose by 14.3 per cent in the second quarter of 2023. Over 67 per cent of manufacturers enumerated disagreed that commercial bank loans to the manufacturing sector encourage productivity. Also, manufacturing activities continue to suffer due to persisting scarcity of FX and further depreciation of the Naira,” it lamented.

The report added that sequel to the naira redesign and the new cash withdrawal limits by the Central Bank of Nigeria (CBN), 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 and the prolonged crisis nearly crippled manufacturing companies with about 20 per cent and 30 per cent decrease in sales for consumer goods and cement respectively.

The naira scarcity, the association said, wiped out numerous small and medium manufacturing businesses whose transactions were cash-based, especially those within the agro-allied industries that regularly deal with local farmers in remote towns.

“Achieving a fully 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,” the association added.

The association urged the government to tackle problems relating to low productivity and limited export diversification, excessive import-dependent production structure and dilapidated capital goods industry by bridging the huge infrastructure gap, reforming the power sector and boosting public-private investment in renewable energy, backward integration and local sourcing of raw materials.

The association also urged the government to manage the floating exchange rate system within an acceptable lower and upper bound, prioritise the sector for FX 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 to boost food security and reduce volatility in the oil sector. It also suggested better efficiency of the recently privatized NNPC, promoting investment by the full implementation of the Petroleum Industry Act (PIA) as well as the provision of appropriate palliatives to mitigate the adverse impact of fuel subsidy removal on the welfare of households and businesses.