In one of the clearest but unfortunate indicators of the current sorry state of the nation’s economy, the Manufacturers Association of Nigeria recently revealed that as many as 335 manufacturing companies became distressed while 767 shut down in 2023. This state of affairs in the sector, MAN explained, was due to “multidimensional challenges” that have beset the sector. This calls for an urgent response from the government because it touches on the heart of all our economic policies.
“The capacity utilisation in the sector has declined to 56 per cent; interest rate is effectively above 30 per cent; foreign exchange to import raw materials and production machine inventory of unsold finished products has increased to N350 billion and the real growth dropped to 2.4 per cent,” MAN said in its statement. With this, the group painted a picture of an industry that is indeed facing an existential threat. What Nigerians have now is a slow but steady decline in the manufacturing sector that portends grave danger for the well-being of the populace.
MAN’s grim picture comes amid reports of foreign companies shutting down and relocating from Nigeria. A few months ago, we had reports about companies, including P&G, and Sanofi, leaving Nigeria. In each case, these companies cited rising costs and difficulty in doing business in the country, as reasons for their relocation decisions.
These companies and others realised that it was no longer in their interest to continue to operate in Nigeria because of the impact of the government’s current economic policies.
From MAN’s statement, the manufacturing sector is clearly in the doldrums and cannot operate optimally within the current context. It is not easy to envision how companies can operate profitably with about 50 per cent of installed capacity utilisation. First, that would mean producing at exorbitantly high unit costs, even in normal circumstances.
Now, given the present high-cost environment, it means that such companies would produce only at a loss because they would incur the same costs to produce at higher output levels as they can now.
This is why Nigeria is witnessing this level of mortality among manufacturing companies. It is clearly in the interest of many of them to shut down now because of the high costs. And if this continues, the country may witness more companies shutting down. It is the same principles of cost minimisation that apply to all firms. Already, many of those remaining in operation are beginning to scale their operations.
The solution to this lies squarely in the hands of the government. In the first place, the present crisis is policy-induced. The high-cost environment in Nigeria is a creation of the government’s policies, including floating the naira without adequate preparations, and the sudden, chaotic removal of subsidy on petrol. Both actions, clear examples of good policies done very badly, helped to push costs out of control in the country.
With the naira devalued and interest rates so high (MAN says members are paying an “effective” rate of over 30%), the cost of funds for companies is now a hindrance to firms’ continuing operations. This is not likely to change soon, as the Central Bank of Nigeria is poised to pursue a tightening monetary policy stance to fight inflation.
This is one of the contradictions that the government must address in its reform agenda. The government says it’s attracting investors, but at the same time, the central bank is raising interest rates. So companies have to borrow at a high interest rate and this is adding to the high cost of doing business in the country.
The government must care about the costs at which companies can produce in the country. It does not make sense for firms to invest in plant and equipment, borrow funds at current high interest rates, and be unable to recoup their costs plus a profit margin to serve as an incentive for investors.
