The Pandemic and The Manufacturing Sector

Friday, July 17, 2020 / 10:06 AM / by FBNQuest Research / Header Image Credit: Market Watch

Nigeria's manufacturing sector continues to struggle, mainly due to the economy's many structural challenges. It is regarded as an underperformer. In 2019 the sector accounted for 9% of total GDP and grew by a paltry 0.8% y/y. Its largest segment (food, beverage and tobacco) grew by 2.2% y/y while the second largest (textiles, apparel and footwear) contracted by -0.1%. In Q1 2020 manufacturing growth was flat. Prior to the Covid-19 pandemic, the sector was struggling with soft consumer demand, operational challenges with epileptic power supply as a major deterrent and difficulties with securing production inputs regularly.

Manufacturing has been severely hit by the pandemic. Factory closures, particularly in China, led to supply chain disruptions, which have affected manufacturing plants in Nigeria. The results have been raw material shortages, increased costs of inputs and reduced orders.

The current economic downturn, emanating from lower oil prices and the virus spread, has resulted in fx policy adjustments by the CBN. Both fx illiquidity and pricing pose additional challenges for manufacturers.  According to a local manufacturing company focused on personal care products, fx is more accessible in the parallel market (N455/US$) but the transaction volumes are not sufficient to cover its necessary dollar-denominated costs.

Most local manufacturers are considering passing on increased production costs to consumers but worry they could lose market share to their foreign competitors due to their relative affordability.

Although there would be short-term pain before the efficiency gains, the Manufacturers Association of Nigeria is pleased with the CBN's steps towards fx unification. This will enable stable planned production for manufacturers, encourage a market-friendly business environment and may attract foreign direct investments beneficial to the sector.

Given Nigeria's heavy reliance on imports for both inputs and finished products, boosting domestic production is now imperative more than ever. The FGN has announced some relief packages that should assist local producers. However, the impact may be minimal since structural issues are yet to be addressed.

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