Mr. Segun Ajayi-Kadir, Director General of the Manufacturers Association of Nigeria (MAN), has raised concerns over the financial strain on Nigerian manufacturers, revealing that the sector incurred over ₦730 billion in capital expenses in the first half of 2024. This surge in costs is largely attributed to rising interest rates, which have hampered innovation and growth, leaving manufacturers with a growing inventory of unsold finished goods. According to MAN’s report, unsold inventory has surged by 42.93% from ₦869.37 billion in December 2023 to ₦1.24 trillion by mid-2024.
The challenges faced by the manufacturing sector are further compounded by the recent decisions made by the Central Bank of Nigeria (CBN) following its 297th Monetary Policy Committee (MPC) meeting held on September 23-24, 2024. The CBN, in response to persistent inflationary pressures, raised the Monetary Policy Rate (MPR) by 50 basis points to 27.25%, marking a total increase of 15.75 percentage points since May 2022. This hike, coupled with an increase in the Cash Reserve Ratio (CRR) for banks, has caused borrowing costs for manufacturers to soar above 35%.
Despite a slight improvement in inflation rates over the past two months, new inflationary pressures related to rising fuel, electricity, and food costs led the MPC to tighten monetary policy further. However, the impact on the manufacturing sector has been profound, with many manufacturers prioritizing debt servicing over necessary investments in technology, retooling, and capacity expansion.
Implications for the Manufacturing Sector:
Ajayi-Kadir explained that the continued hike in interest rates is stifling opportunities for investment and growth in the sector. With higher borrowing costs, production costs have also risen, leading to higher prices for finished goods and lower competitiveness in both local and international markets. Manufacturers are struggling with depressed consumer demand due to reduced purchasing power, further contributing to the surge in unsold inventories.
The broader economic implications are significant. Ajayi-Kadir warned that the capacity of the manufacturing sector to absorb Nigeria’s growing youth population into meaningful employment is diminishing. High borrowing costs, coupled with weak market demand, could lead to business closures and exacerbated unemployment, thereby worsening the nation’s socio-economic challenges.
MAN’s Reaction to the CBN’s Monetary Policy Decisions:
The Manufacturers Association of Nigeria expressed its surprise at the CBN’s decision to raise the MPR, especially at a time when other central banks globally are either holding or cutting rates. MAN acknowledges the need for price stability, but urges the government to consider the broader impact on the productive sector, which is crucial for job creation and poverty alleviation.
Ajayi-Kadir emphasized that the manufacturing sector is already operating in a difficult environment due to high energy costs, foreign exchange instability, and poor infrastructure. He called on the government to adopt a more balanced approach to policy formulation that takes into account the needs of the productive sector.
Recommendations:
In light of the recent MPC decision, MAN has proposed several measures to mitigate the negative impact on manufacturers:
1. **Review Rate Hikes:** The government and CBN should conduct a comprehensive review of the effects of continuous rate hikes on inflation and the real sector over the past five years to guide future decisions.
2. **Promote Domestic Production:** The CBN should allow time for previous rate increases to take effect before implementing further hikes, focusing instead on policies that promote domestic production and economic recovery.
3. **Monetary-Fiscal Coordination:** There is a need for stronger collaboration between monetary and fiscal authorities to ensure that their policies are aligned to support industrial growth.
4. **Accelerate Loan Disbursements:** The government should expedite the release of the N1 trillion single-digit loan under the accelerated stabilization and advancement plan to ease the burden of high borrowing costs on manufacturers.
5. **Fiscal Measures for Raw Materials:** MAN advocates for the introduction of fiscal measures that support the importation of essential raw materials and technology at concessionary rates to reduce manufacturers’ dependence on foreign exchange.
6. **Support for Renewable Energy Investments:** To alleviate rising energy costs, the government should promote investments in renewable energy solutions for manufacturers.
7. **Infrastructure Improvements:** Savings from subsidy reforms should be redirected to improve infrastructure in industrial hubs, including roads, electricity, and rail networks.
Ajayi-Kadir concluded by stressing the importance of ensuring the survival and growth of the manufacturing sector, which is critical to the government’s goal of increasing domestic production, creating jobs, and reducing poverty.
