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Nigerian Manufacturers are Feeling the Heat from Inflationary Pressures

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It is obvious that Nigerian Manufacturers have not recovered from growing inflationary pressures as rising cost of production is deepening their misery.

The corporate profit growth that we are seeing is a temporary euphoria because rising energy costs exacerbated by the war in Eastern Europe has compounded the woes of companies who are yet to recover from the coronavirus pandemic that undermined consumer spending and tipped the country into a recession.

Perhaps more worrisome is that quoted Nigerian manufacturers have spent N0.85 on average on total cost (input plus cost of sales) to produce every N1 of a product, which means they have little left to pay out as dividend or splurge back into the business for future expansion.

A big elephant in the room is the inability of firms to further pass on higher input costs to consumers whose pockets are squeezed in the form of higher prices.

Managers are saddled with the responsibility of reducing cost and maximising profit or wealth of owners, but the reality is that the current macroeconomic environment makes it sometimes practically difficult for managers to attain such a corporate goal.

For instance, retailers in the United States posted their worst results in 40 years citing supply chain disruptions, inflationary pressures, and a high interest rate environment for deteriorating margins.

Of course, it is discombobulating that Nigerian manufacturers have been reeling from foreign exchange scarcity that balloons raw material costs, which makes manufacturers susceptible to policy paralysis.

The largest manufacturers on the NGXASI index collectively incurred N1.90 trillion in total cost of production in March 2022, which is 36.75 percent higher than 2021’s N1.39 trillion, according to data gathered by MoneyCentral.

A breakdown of the numbers per sub sectors shows consumer goods firms (consisting of 14 sector players) saw combined total cost increase by 39.07 percent to N1.52 trillion as at March 2022.

It is obvious that flour millers incur the bulk of the over sector cost as the bedlam between Russian and Ukraine, the two largest producers of the grains sent the price of wheat to a 14 year-high.

Flour Mills of Nigeria, Honeywell Flour Mills, and Northern Nigeria Flour Mills saw combined total costs spike by 49.29 percent to N882.64 billion as at March 2022.

The average industry total cost of sales stood at 94.12 percent, leaving them with little to cover finance costs and exceptional items.

In a pessimistic tone, Frank Onyebu, Chairman of MAN, Apapa branch, noted that the manufacturing sector is on the brink of collapse as many are struggling with rising energy costs, widening supply gap and increased tax burden.

If more Nigerian manufacturers close shop, then the country will be poised for crisis capable of crippling a fragile economy, a double whammy for a nation where over 50 percent of a population of 200 million are living below the poverty line.

Nigeria’s unemployment rate rose to 35 percent in 2021, according to a report by a credit rating agency, Agusto & Co.

While the statistics office, the National Bureau of Statistics (NBS) is yet to publish the official labour data for the period, the 35 percent estimate by Agusto & Co shows the jobless rate in Africa’s largest economy was up 6.06 percentage points from the 33.3 percent reported in 2020, when the impact of COVID-19 pandemic forced businesses to lay off staff.

The Manufacturing sector remained resilient, rising by 5.89% in Q1 2022 compared with 2.28% in Q4 2021 and 3.40% in Q1 2021 even as the negative impact of the oil refining subsector has continued to drag performance.

However, there are concerns the level of growth seen will be weighed against increasing inflation as the central bank has hiked its benchmark interest rate.

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