Production, Distribution Costs Rise By 17.3%

The production and distribution costs of businesses in the manufacturing sector rose by 17.3 per cent in the second quarter of this year, according to Manufacturers Association of Nigeria (MAN).

In its latest aggregate Manufacturers CEO’s Confidence Index (MCCI), the association said the cost in Q2 was a slowdown from the 24 per cent increase witnessed in the preceding quarter.

“Amidst the harsh business-operating environment evidenced by poor macroeconomic indices, the underperformance was largely driven by the slow recovery from the cash crunch, high cost of energy, high transportation cost and partially by the abrupt removal of subsidy that took effect towards the end of Q2,” the report said.

It said the economic turmoil disrupted the manufacturing value chain, escalated cost of manufacturing operations and resulted in reduction in manufacturing patronage.

The MCCI is a quarterly research and advocacy publication that measures changes in the pulse of operators and trends in the manufacturing sector, in response to movements in the macro-economy and government policies, using primary data mined through direct survey over 400 CEOs of MAN member-companies.

It is computed using data generated on standard diffusion factors of current business condition, business condition for the next three months, current employment condition, employment condition for the next three months and production level for the next three months.

It has a baseline score of 50 points and scores above the baseline indicate improvement in manufacturers’ confidence in the economy, while an index score of less than the baseline suggests deterioration in the operating environment.

MAN revealed that sales volume plummeted by 6.3 percent in Q2 against the 13 per cent contraction witnessed in the preceding quarter.

“Cost of shipment rose by 14.3 per cent in Q2 though witnessed a slowdown from the 20 per cent increase recorded in the previous quarter,” it said.

On May 29, President Bola Tinubu announced the removal of the petrol subsidy, and pump prices have surged to as high as N617 per litre from N184, while the value of the naira has plunged following the floating of the currency.

The floating of the currency has increased the official rate from N463.38/$ to N744.97/$ as at Tuesday. The gap between the official and black market expanded to N175.

The high cost of dollars and the implementation of a 7.5 percent value added tax on diesel imports have pushed its pump price by about 20 percent to as high as N870 per litre.

According to the National Bureau of Statistics (NBS), the inflation rate quickened for the seventh consecutive month to 24.08 percent in July 2023, the highest in nearly 18 years from 22.79 per cent in the previous month.

The latest Purchasing Managers’ Index by Stanbic IBTC Bank also shows that business activities in the country dropped to 50.2 in August, the lowest in five months, from 51.7 in the previous month.

Energy is a key element of the production process. Nigeria’s inability to supply and distribute sufficient electricity has left businesses at the mercy of generators that consume diesel and petrol.

Manufacturers spend 40 per cent of their total production cost on generating energy for their businesses, according to MAN.

Data from the association also show that on average, manufacturers spent at least N144.5 billion on sourcing alternative energy (gas and diesel) in 2022, up from N77.22 billion in 2021.

“High cost of energy was top on the list of major manufacturing challenges. This was accordingly followed by high cost of credit/inadequacy of loanable funds, multiple taxes/charges/levies/same tax policy for local producers and importers, unavailability of raw materials/delay in receiving imported raw materials/high cost of raw materials and scarcity of forex/high exchange rate/poor allocation of forex,” manufacturers said.

The challenging macroeconomic issues impacted on the manufacturing sector as its growth rate slowed to the lowest in three years.

Data from the NBS shows that the real GDP growth of the sector stood at 2.2 per cent in Q2, the lowest since Q2 2020.