Double-Digit Inflation Pummels Nigeria’s Manufacturing Ambitions

Segun Ajayi-Kadir, mni, Director General of the Manufacturers Association of Nigeria (MAN)

An In-depth Analysis by Segun Ajayi-Kadir, mni, Director General of the Manufacturers Association of Nigeria (MAN) says In July 2023, Nigeria confronted a distressing surge in inflation, reaching an alarming 18-year high of 24.08 percent. This worrying figure marked an increase of 1.29 percent compared to the previous month’s rate of 22.79 percent, as officially reported by the National Bureau of Statistics (NBS). The primary driver behind this surge in inflation was the soaring prices of food items. Over the course of a year, the inflation rate witnessed an increase of 4.44 percentage points, starting from 19.64 percent in July 2022.

Food Inflation in Focus:

Specifically focusing on food, the inflation rate in 2023 surged to 26.98 percent in July, up from the 25.25 percent recorded in June. In comparison to July 2022, the year-on-year food inflation rate was 4.97 percentage points higher. The escalation in food prices was attributed to the planting season and logistical costs as the consequences of fuel subsidy removal fully manifested.

A Broader Impact Across Sectors:

The repercussions of this inflationary wave extended across various sectors. Notably, the most substantial price increases were observed in gas, air passenger transport, liquid fuel, vehicle spare parts, fuels, lubricants for personal transport equipment, medical services, and road passenger transport.

Similarly, core inflation also showed a significant uptick from 20.06 percent in June to 20.47 percent in July. This represented a 4.41 percent increase in core inflation over the span of one year, starting from 16.06 percent in July 2022. The sustained surge in sub-indices of inflation indicates that Nigeria’s inflationary challenges are more than a passing phenomenon; they possess structural characteristics.

Root Causes and Contributing Factors:

It’s becoming increasingly evident that the persistently high inflationary pressure is a direct consequence of recent government policies and measures. These include the removal of fuel subsidies and the unification of exchange rates. Additionally, concerns surrounding rising energy costs and the growing insecurity in food-producing regions are compounding the inflationary pressures.

Furthermore, he said, the ongoing inflationary surge is eroding savings and incomes, prompting the Central Bank of Nigeria (CBN) to raise the country’s benchmark interest rate to its highest level in nearly two decades. In July, the CBN increased the Monetary Policy Rate (MPR) as a proactive measure to curb the soaring inflation and to stabilize the Naira, which has been depreciating both in the official and parallel markets. The 25 basis point increase brought the interest rate to 18.75 percent, reflecting a substantial 750 basis point hike from its April 2022 level of 11.5 percent.

Implications for the Manufacturing Sector:

Unsurprisingly, the current inflationary environment is adversely impacting the operations of the manufacturing sector, along with many other segments of the economy. The implications for manufacturing include:

1. Increased Cost of Production: Inflation leads to higher costs of raw materials, labor, and production inputs, straining manufacturers’ budgets and squeezing profit margins.
2. Reduced Profit Margin: Manufacturers might struggle to pass on cost increases to consumers due to rising price resistance, leading to diminished profit margins.
3. Supply Chain Disruptions: Inflation is disrupting supply chains, causing delays in production and potentially halting operations due to scarce or unavailable key supplies.
4. Uncertainty in Planning: Inflation introduces uncertainty in business planning due to unpredictable cost fluctuations, demand shifts, and economic instability.
5. Reduction in Consumer Spending: High inflation erodes consumers’ purchasing power, leading to reduced demand for manufactured goods and affecting manufacturers’ sales.

Conclusion and Recommendations:

The MAN DG noted that elevated inflation serves as a significant indicator of underlying macroeconomic weaknesses. Failing to address the root causes could further constrain economic growth and increase unemployment rates. It’s essential to recognize that addressing inflation is a complex, long-term endeavor that requires a coordinated effort from various stakeholders, including the government, central bank, private sector, and civil society.

To mitigate inflationary pressures and promote sustained economic growth, tailored recommendations for Nigeria’s specific economic circumstances include:

1. Stable Exchange Rates: Implementing effective exchange rate policies to prevent sharp depreciation of the currency can help control imported inflation.
2. Collaborative Fiscal Policies: Using fiscal measures through budgeting and effective taxation to complement monetary policy actions taken by the CBN.
3. Support for Agriculture: Providing targeted support to the agricultural sector to enhance productivity, reduce reliance on imports, and stabilize food prices.
4. Conducive Business Environment: Formulating policies that create a stable and favorable business environment to attract both local and foreign investments, leading to increased production, job creation, and price stability.
5. Effective Communication: Effectively communicating the government’s commitment to controlling inflation can help manage inflation expectations, influencing price-setting behavior.
6. Addressing Insecurity: Tackling challenges of insecurity is crucial to stabilize the supply of essential goods and services.
7. Fiscal Reforms and Infrastructure: Implementing fiscal reforms prioritizing productivity and intensifying infrastructure development can stimulate economic activity, create jobs, and improve living conditions.
8. Structural Reforms: Implementing structural reforms that enhance transparency, reduce bureaucracy, and improve the ease of doing business can lead to long-term economic stability.

Ajayi-Kadir, in conclusion, said that the challenges posed by rising inflation are significant but not insurmountable. He further noted that by adopting a holistic approach and implementing the right set of policies, Nigeria can navigate these challenges and foster an environment conducive to economic growth and stability.