COVID-19 and the Manufacturing Sector


Friday, March 12, 2021 / 11:49 AM / by CSL Research / Header Image Credit: Africa Press

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A Business Day report says investment inflow into the manufacturing sector declined by 76% in 2020 according to the Manufacturers Association of Nigeria (MAN) in its H2 2020 economic review. The decline was attributed primarily to the outbreak of the Coronavirus pandemic which disrupted economic activities globally and locally. According to the report, in H1'2020, the sector recorded an investment inflow of N62.08bn, a 74% decline from the N248.45bn achieved in H1 2019. In the second half of the year, investments further dipped by 78% to N56.44bn from N257.66bn realised in the same period of 2019.


The report also noted that beyond the decline in investments, manufacturers also suffered a decline in the volume of demand resulting in an increase in the inventory of unsold goods amidst a rise in the production and operations cost. It showed that the inventory of unsold manufactured goods in the sector increased by 44% to N577.61bn in 2020 from N402.42bn in 2019. The increase in inventory is attributable to reduced consumption as Nigerians got more impoverished and renewed imports as global economies opened gradually.


The outbreak of the coronavirus has significantly impacted manufacturing activities within the country. Vast majority of Nigerian manufacturers rely on several raw materials from China and Europe. Apart from the fact that the ability to get supplies was significantly disrupted by the pandemic, the scarcity of FX and low demand due to the significantly reduced purchasing power of many Nigerians were major problems for many manufacturers. As a result, many were forced to shut down or suspend operations within the period.


Foreign currency constraints, devaluation, and shrinking disposable incomes are all factors that significantly strain the performance of the manufacturing sector. A prolonged constraint in the ability of manufacturers to conduct businesses seamlessly leads to a crisis in the sector. The scarcity of foreign exchange from the official window compels manufacturers to source funds from the black market, which trades at a significant premium to the I&E window and inflation leads to increased production costs. The obvious solution would be for these manufacturers to pass on these cost increases to consumers by increasing prices. However, increasing prices comes at a huge cost to volumes for goods that have relatively elastic demand and current economic pressures are pushing more goods into that category.


The real GDP growth of the Manufacturing sector has been dismal in the past five years with only 0.8% growth recorded in 2019. Shrinking disposable income, high infrastructure costs and FX challenges are factors that will continue to impede growth in the near to medium term in our view. However, there is hope that the partial border reopening and the implementation of the African Continental Free Trade Area (AfCFTA) may result in improved investment inflow into the sector.


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