September 11, 2024/CSL Research
In the Q2 2024 Nigeria GDP report, the manufacturing sector’s performance remained relatively weak. According to the National Bureau of Statistics (NBS), the manufacturing sector in real term grew by 1.28% y/y in the second quarter of 2024, a decline compared to its growth rate of 2.2% in Q2 2023 and 1.49% in Q1 2024. This contraction is largely attributed to ongoing macroeconomic issues, including high inflation, elevated interest rates, foreign exchange (FX) shortages, and the persistent devaluation of the naira.
According to the report, the sector’s contribution to GDP fell from 8.62% in Q2 2023 to 8.46% in Q2 2024. In Q2 2024, this sluggish growth reflects the ongoing economic difficulties in the sector, including high production costs, foreign exchange shortages, and elevated inflation, all of which have hindered its recovery.
Nigeria’s manufacturing sector has experienced very modest growth over the past two years. Since 2023, the sector has been hit by three major challenges. First, the persistent devaluation of the naira and ongoing foreign exchange (FX) shortages have severely limited the sector’s ability to import essential materials. Approximately 60% of companies listed on the NGX30 rely heavily on FX for imports or to service foreign debt.
This situation has been especially damaging to the fast-moving consumer goods (FMCG) segment, which makes up more than half of the manufacturing sector. Many FMCG companies have reported negative equity positions as a result of the currency devaluation. Second, record-high interest rates have driven up the cost of borrowing, further increasing financial pressures on manufacturing companies. Third, inflation has exacerbated the situation by eroding consumers’ purchasing power, leading to reduced sales volumes and lower production output.
The tough macroeconomic conditions have led to several companies leaving Nigeria. In the first six months of this year, some manufacturing companies including PZ Cussons Nigeria PLC, Kimberly-Clark Nigeria, and Diageo PLC have all exited the country, adding to the several multinationals that left in 2023. Despite the slowdown in the growth of the sector, we believe the sector will see marginal improvement in the second half of the year, with a forecasted growth rate of 3.32 % for 2024. This optimism is largely attributed to the scaling up of operations at the Dangote refinery, though this has been delayed significantly.
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