October 14, 2022/CSL Research
A BusinessDay report indicates that Nigerian manufacturers are being faced with either reducing their product size or quality while prices remain the same or even increasing to combat the rising production costs. Colloquially referred to as ‘shrinkflation’, the pressures arising from economic headwinds have forced many businesses, particularly consumer companies, to cut product size or reduce quality. Elsewhere, a recent analysis by Punch, based on data collected by the Manufacturers Association of Nigeria, showed that manufacturers’ investments have nosedived from N489.44bn to N217.22bn between 2016 and 2021 (56% decline). From the persistent foreign exchange crisis to the current RussiaUkraine crisis fueling scarcity of raw materials, and more recently, the hawkish posture taken by the monetary authority elevating borrowing costs, the crisis facing the sector is indeed crippling.
The past seven years have been indeed unpleasant for Africa’s largest economy. While the country was still reeling from the effects of the 2016 recession and its impact on manufacturers’ operations, covid-19 struck without warning and worsened the state of the country’s manufacturing sector. This, coupled with existing structural bottlenecks, forced many businesses out of operations. Several companies saw demand for their products plummet on the back of movement restrictions, and a change in consumer behaviour towards the search for essential items.
However, since the reopening of the economy, gains from exports via open borders and increased credit supply to manufacturing businesses cut the sector some slack. Now, the elevated energy costs, and supply chain challenges have taken a toll on manufacturers’ operations and there is very little room to pass the increased cost to consumers before demand, especially for discretionary goods, begins to wane. In extreme cases, businesses resort to package downsizing just like we are seeing in recent times. In addition, the inability to source forex at the official window has either made them resort to the parallel market at a significant cost or unable to buy machines for their production.
Although the apex bank had planned to devote the country’s available foreign exchange to strategic imports or service obligations, many manufacturers claim they only get c.10% of their dollar demands. For as long as inflationary and FX pressures persist, the performance of the manufacturing sector will remain lacklustre. A prolonged constraint in the inability of manufacturers to conduct business seamlessly leads to a crisis in the sector and loss of loans extended to the manufacturers by the banks. The need to boost the manufacturing sector is pertinent to achieving the country’s output projection, and if structural constraints remain unaddressed, growth in the sector will remain sub-optimal.
