Economy: GDP growth remains sluggish despite high oil prices, improvement in terms of trade -MAN

Despite the higher oil prices as well as the improvement in terms of trade, the expansion of the growth of the Nigerian economy remains sluggishly above the population growth rate, according to the Manufacturers Association of Nigeria (MAN) which also noted that the accompanying prospect of establishing a strong fiscal space and buoyant foreign reserve remains unutilized.

 The manufacturers’ umbrella body also regrets that inflation is at a 17-year-high of 21.09% and petroleum subsidy payment is not only draining the government’s coffers but accelerating the path of the economy to a debt peonage.

 MAN whose reaction is contained in a statement on  the GDP report for the third quarter of 2022 as released by National Bureau Of Statistics (NBS) argued that while fiscal indiscipline, heightening insecurity, slow COVID-19 recovery, oil theft and the war-induced energy crisis are the lingering factors driving the economic headwinds, recent environmental and climatic challenges are significantly leaving a negative mark.”

According to the statement by Director General of MAN, Segun Ajayi-Kadir,mni “recent report by the National Bureau of Statistics (NBS) revealed that year-on-year real GDP growth of the Nigerian economy stood at 2.25 percent in the third quarter of 2022. At a real GDP value of N18.96 trillion, the latest performance signifies a shortfall of 1.78 percent point from 4.03 percent real GDP growth recorded in the third quarter of the previous year.

“It also indicates 1.29 percent point decline from the value of economic activities recorded in the second quarter of 2022.

“The nominal GDP of N52.26 trillion recorded in the third quarter represented a year-on-year increase of 15.83 percent from the value of N45.11 trillion recorded in the same quarter of the preceding year. The latest nominal growth rate exceeded the 15.03 percent and 15.41 percent respectively witnessed in the preceding quarter and the corresponding quarter of 2021.”

The implication of these negative indices for the national economy is lower production and lower employment.” Therefore, the continuous downturn of the economy has further validated the urgent need to release an updated unemployment rate that corresponds with the current economic situation. The last published figure was in December 2020 at 33.33. Analysts had projected that the country’s rate of unemployment is well above the 40% mark.”

 Sid MAN: “Setback on the Fight against Poverty: In an economy with an average population growth rate of 2.6 percent, the recent real GDP growth of 2.25 percent implies that real GDP per capita growth has depreciated by 0.35 percent. This is a clear indication that more Nigerians have been thrown into the poverty trap and will also result in the country being downgraded from a middle-income to a low-income economy.

“Sub-optimal Revenue Generating Capacity: The skewness in the sectoral contribution in favour of the non-oil sector gives a clear indication that the Nigerian government has not been able to fully optimize the country’s revenue potential especially for the fact that majority of the operators in the informal segment are in the service sector. Notwithstanding, the growth slowdown will result in higher unemployment that can diminish the taxable capacity of individuals and in turn worsen the debt-to-GDP and debt service-to-revenue ratios.

Low Diversification Drive: Despite 94.34 percent contribution of the non-oil sector, the Nigerian economy is still far from being diversified considering that the oil sector currently accounts for about 80 percent of the country’s export earnings which is less balanced in comparison with South Africa’s top four export earners: mineral products (25 %), precious metal (17%), vehicles and aircraft vessels (12%) and steel products (12%). The implication is that the Nigerian economy is still highly vulnerable to oil price shock. Also, in terms of inter-sectoral linkages, a lot of domestic companies still largely depend on imported raw materials to meet more than 50 percent of their production capacity.

Further Decline in Growth: The Nigerian economy is a mono-cultural economy that is overly dependent on the oil sector while other sectors continue to suffer from Dutch Disease. Surprisingly, the rise in oil price has contributed to several headwinds, such as increasing petroleum subsidies, increasing refining cost, limited investment in oil infrastructure and theft on the pipelines which have all retrogressed the oil sector. Hence, is projected that economic growth will decline further in subsequent quarters.

Slow Development: Nigeria’s credit rating will be further affected as high economic growth is one of the indictors of sustainable debt. In recent time, Moody’s and Fitsch had downgraded the country’s credit rating. It is expected that the credit rating will further worsen and significantly limit the country’s chances in sourcing for external development funds. This will inevitably slow down the pace of developmental projects.

On the implication for the manufacturing sector, MAN  noted the following :

The data provided by the report shows that Food, Beverage & Tobacco (48.8%), Textile, Apparels and Footwear (18.6%) and Cement (11.72%) were the top three contributors of the manufacturing sector in the third quarter of 2022, although only the Cement Industry recorded a higher contribution than the figure in the preceding quarter.

 In terms of a year-on-year real growth performance, the top three leading sub-sectors included Chemical and Pharmaceutical Products (11.09%), Cement (4.13%) and Non-Metallic Products (4.00%). On the other hand, Chemical and Pharmaceutical Products, Wood & Wood Product and Basic Metal Iron & Steel were the top three improved sub-sectors in the period under review.

 However, the manufacturing sector accounted for 8.59 percent of real GDP in the third quarter of 2022 which is marginally lower than the 8.96 percent recorded in same quarter of 2021 and 8.6 percent recorded in the preceding quarter of 2022. On a year-on-year basis, the sector grew by -1.91 percent in the third quarter of 2022 compared to 4.29 percent in the third quarter of 2021 and 3 percent recorded in the second quarter of 2022.

This represented a -6.2-percentage point and -4.91 percent point decline from the growth witnessed in 2021 Q3 and 2022 Q2 respectively. The overall decline in both aggregate and sectoral performances could have far-reaching adverse effects on the manufacturers. Dominant among these are:

Lower Manufacturing Turnover: The GDP growth slowdown will most likely result in higher unemployment rate. Coupled with high inflation rate, the economy is likely to face higher misery index that worsens the poverty level and further shifts consumers away from elastic manufactured goods. This will eventually result in drastic reduction of patronage and lower sales turnover.

Heightened Forex Challenges: The slag in the diversification drive implies further dependence on imported raw material and machinery. Hence, the forex crisis bedeviling the sector is not likely to be resolved anytime soon.

Slow Infrastructural Development & Reduction in Credit Intervention: Considering that the revenue generating capacity of the government is hampered by high unemployment, the limited funds will slow down the provision of infrastructure and credit facilities necessary to boost productivity of the manufacturing companies. Otherwise, the government will resort into more borrowings and put the country in debt peonage.

Fall in Manufacturing Investment: The negative growth of the sector’s GDP sends a strong signal to potential investors in the sector. The impending result is negative investors’ sentiments and pessimism against provision of critical raw materials, technology and technical know-how required to promote the industry.

Nigeria’s path to economic growth, industrialization and sustainable development has been compromised by inadequate attention to the numerous pressing challenges of the manufacturers who are meant to be the propellers of its long-term economic agenda. Achieving a stable rapidly-growing economy would require taking head-on the daily bottlenecks confronted by business owners within the manufacturing sector, considering its active inter-linkages with other key sectoral drivers of the economy. Amidst the numerous challenges, forex scarcity, multiple taxation, exorbitant interest rate, high-cost business operating environment, smuggling, insecurity, energy crisis and epileptic power supply are leading the pack.

 In order to restore the sector to an enviable position in the global business environment and in turn propel an inclusive growth of Nigerian economy, MAN hopes that the government will committedly:

• Facilitate the formal service sector to widen tax net and avoid multiple imposition of tax on the manufacturing companies.
• Tackle insecurity and smuggling by upscaling capacity building and providing adequate security equipment and technology for surveillance and intelligence gathering.
•             Continue to involve all stakeholders to play a vital role in supporting security along the oil infrastructure while also ensuring they are beneficiaries of the awarded surveillance contract.
•             Deploy means to reduce unemployment and boost productivity of the manufacturing by encouraging local sourcing of raw materials, improving infrastructural developments, resolving all credit and forex-related challenges, ensuring implementation of the Executive Order 003 and imposing cost-reflective electricity tariff and energy prices.
•             Jettison the failing hard peg policy and establish a clear and transparent market framework to guide the interventions of the CBN in the forex market.
• Synergistically align monetary and fiscal policies while also curbing fiscal deficits by the gradual removal of fuel subsidy backed with appropriate palliatives for the poor.
•             Tackle flood disaster adopting erosion control mechanisms, early warning and emergency services as well as flood risk assessment and ecological funds
• Upscale electricity generation and build super grids that are regionalized to avoid continuous national system collapse and ensure a more robust transmission infrastructure.
• Further reduce the reliance of the country on imported products and raw materials by encouraging local sourcing through a comprehensive and integrated incentivized system since Nigeria is largely bearing the brunt of imported inflation.