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Tuesday, August 16, 2022

Rising Costs, Foreign Exchange Shortages hit Manufacturers

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In G.R.R Martin’s buster Novel, The Game of Thrones, Tyrion Lannister, the intelligent dwarf tells his arrogant nephew and King of the Seven Kingdoms, Joffrey that: “Monsters are dangerous, now that kings are dying like flies”

We can liken the above quote to Nigeria, but the monster killing manufacturers are spiraling operating costs.

Of course, the government should not be treating the plight of manufacturers with kid gloves because the sector is the lifeblood of any economy.

It is saddening that on average the total operating costs for the largest listed companies that span different sub sectors have exceeded their sales, which is why they are finding it difficult to break even.

For instance, analysis by MoneyCentral reveals that the average total operating cost ratio has hit 106.98 percent as at March 2021, and that compares with 2020’s 89.25 percent.

A ratio above 100 percent means that total costs are increasing relative to sales or that firms are spending copious amounts of money to produce each unit of products.

They collectively incurred N827.83 billion in total production cost as of March 2021, which is 18.70 percent higher than 2020’s N697.39 billion , data gathered by MoneyCentral shows.

Aside from the fact that spiraling cost of production erodes profitability and undermines margins, it hinders an entity from delivering returns to shareholders.

Manufacturers are operating in a difficult environment where rising inflation is increasingly eroding the purchasing power of consumers, while high unemployment rate means a lot of Nigerians do not have money in their purse spring.

And the coronavirus pandemic that disrupted the supply and the demand side of the market, tipped the country in its second recession in 5 years compounded the woes of companies.

Over the past five years (2015- 2020), the manufacturing sector has averaged real GDP growth of -0.9 percent, according to data from the National Bureau of Statistics (NBS).

This is a stark contrast to prior five years where the sector averaged growth of 13.3 percent.

Manufacturers are in a precarious situation because they can not comfortably pass on rising cost to the already beleaguered consumers. A lot of them had hiked the price of key products a few years ago to ward off the impact of severe dollar scarcity.

Nigeria’s annual inflation climbed to a more than four-year high in March, rising 82 basis points from a month earlier to 18.17 percent, according to a recent data by the National Bureau of Statistics (NBS).

The jobless rate in the country rose to 33.3 percent in the three months through December, the second highest on a global list of countries monitored by Bloomberg. That’s up from 27.1 percent in the second quarter of 2020, the last period for which the agency released labor-force statistics.

The government’s policies have not been grandiose enough to remove infrastructure bottleneck and foreign exchange scarcity undermining operators in the industry.

Incessant devaluation of the currency by the central bank to protect the external reserve from the vagaries of crude oil price is ballooning raw material cost especially for those that cannot source the chunk of raw materials locally.

If sales continue to be swallowed by rising costs, then recurring losses are inevitable, and such huge losses can tip a company over the edge, which means it ceases to exist in the foreseeable future.

In a gloomy tone, the Director General, Manufacturing Association of Nigeria (MAN), Segun Ajayi-Kadir, stated that foreign exchange restriction policies by the central bank as well as the impact of the Covid-1 9 pandemic has forced 415 companies to stop manufacturing over the past one year.

The DG listed several supply-side constraints limiting productivity within the sector, including traffic logjam at the ports slowing down access to imported raw materials, infrastructure (including power & transportation), land acquisition, multiplicity of taxes & levies from different tiers of government and inconsistent government policies.

Analysts at United Capital Research in a recent note to clients believe an overhaul of the business environment including physical infrastructure (like ports, transportation, & power) and policy framework (resource control, foreign exchange, taxation, land laws and regulations etc.) would be needed to stimulate a rebound in the fortunes of the manufacturing sector.

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