MAN releases economic review for H2 2020

416

EXECUTIVE SUMMARY

BI-ANNUAL REVIEW OF THE ECONOMY

JULY – DECEMBER 2020

 

EXECUTIVE SUMMARY

1.0      GLOBAL AND NIGERIAN MACROECONOMIC HIGHLIGHTS
COVID-19 pandemic disrupted the economic activities in the early part of the year 2020, which resulted in enormous global shock that led to steep recessions in many countries. Consequently, the World Bank output forecast for 2020 was -5.2%, showing thedeepest global recession in decades, but it is expected to rise to 4.2 percent in 2021. According to International Monetary Fund (IMF), global growth was projected at 4.4% for 2020, but was projected to rise to 5.2% in 2021.

     

Output growth of Sub-Sahara Africa was projected at -2.8%   by the World Bank in 2020 and was estimated to rise to 3.1% in 2021. IMFforecast for output of the region was -3.0% for 2020 and 3.1% for 2021. Nigeria’s output growth was projected at -3.2% and -4.3% for 2020 by the World Bank and IMF respectively. The economy was projected to grow by 1.7% in 2020 and 2021 by the IMF and World Bank apiece.

Manufacturers CEOs Confidence Index computed from a survey of over 400 manufacturing companies in Nigeria for the 4th quarter of 2020 declined to 42.06 points from 43.3 points achieved in the in the 3rdquarter of the years. Unfortunately, points for 3rd and 4th quarters lie below the 50 neutral points, thus, indicating lack of confidence in the economy by manufacturers.

Real GDP of Nigeria grew by 0.11% in the 4th quarter of 2020 from –3.62%  recorded in the 3rd quarter of the year.  It however, declined by 2.44% when compared with 2.55% recorded in the corresponding quarter in 2019 according to National Bureau of Statistics (NBS).

Non-oil sector output grew by 1.69% in real terms in  the 4th quarter of 2020, slower than the 2.26% recorded in the corresponding quarter of 2019, but better than the 2.51% negative growth rate recorded in the preceding quarter

Oil  sector output   contracted by  -19.76% in fourth quarter of 2020   down from 6.36% recorded in the corresponding quarter of 2019 and -13.89% recorded in the preceding quarter of year according to NBS GDP report.

Manufacturing sector real output grew by 1.51% in the 4th quarter of 2020 from 1.24% recorded in the corresponding quarter of 2019 and   1.52% recorded in the preceding quarter; thus, indicating –2.75 and 0.01% increase over the periods respectively.
World inflation was projected  at  3.18%  for 2020 and 3.39% for 2021 (statista.com).  Globally, inflation remained highest in Venezuela with 200,000%; 161.8% in Zimbabwe and 54.8% in Argentina. In Nigeria, inflation rose to 15.8% in December 2020 from 14.9% recorded in the month of November.  This is the highest inflation rate in the economy since 2017.
Monetary authorities, following the global economic downturn thrown up by COVID-19, deployed expansionary policy stance, whichresulted in the retention of lower benchmark interest rates   across countries.  The US Federal Reserve Bank lowered  the Federal Fund  to 0.25% in December 2020 and the same for Bank of England at 0.1%. Bank of Japan maintained -0.1% policy rate in December  2020 just as the European Central Bank  retained  its rate at 0.0% for the month.   The Central Bank of Nigeria (CBN) retained its interest rate in December 2020 at 11.5% with the intent  of  stimulating growth in the economy despite  high inflationary pressure.

According to CBN, Maximum Lending rate declined to 28.51% in the fourth quarter of 2020 from 30.23% recorded in the corresponding quarter of 2019; thus, indicating -1.72 percentage point decrease over the period.   It also declined by 0.28 percentage point when compared with to 28.79% recorded in the preceding quarter.   Similarly, Prime Lending rate fell to 11.42% in fourth quarter of 2020 from 14.99% recorded in the corresponding quarter of 2019; thus, indicating 3.57 percentage point decline over the period.  It also fell by 0.38 percentage when compared with  11.80% recorded in the preceding quarter.

Data   on crude oil price from OPEC reports show that prices of crudeoil fell significantly low and remain under $50 per barrel in the second half of 2020.  Bonny Light sweet crude  was $43.46 per barrel (pb) in July 2020; $45.40 pb in August; $40.75 pb in  September; $39.64 in October; $41.91 in November; and $49.59 pb in /December 2020.
WTO projected  growth in world merchandize trade for 2020 at -9.2% following the distortion of global  economic activities by COVID-19 pandemic.   However, it was projected to rebound to 7.2% in 2021.
In the Inter-Bank Foreign Exchange Market (IFEM),exchange rateaveraged N381/US$ in the 4th quarter of 2020 as against N306.95/ US$ recorded in corresponding quarter of 2019, thus indicating N74.05/US$ or 24.12% depreciation in the value of Naira over the period. Naira value also depreciated  by N1.27US$ or 0.3% when compared with N379.73/US$ recorded in the preceding quarter.   However,  in the BDC segment of the market, Exchange rate averaged N467.95/US$ in the fourth quarter of the year as against N359.42/US$  recorded in corresponding quarter of 2019; thus, indicating N108.53 /US$ or 30.19% depreciation in the Naira value over the period. Naira value also depreciated by N3.99/US$  or 0.85% when compared with N463.96/US$  recorded in the preceding quarter.
The exchange rate premium between Interbank and BDC rate increasedto 22.82% in the 4th quarter of 2020 from 17.09 percent recorded in corresponding quarter of 2019; thus, indicating 5.73 percentage point increase over the period. It also increased by 0.64 percentage point when compared with 22.18% recorded in the preceding quarter.

CBN report shows that Nigeria’s External Reserves slowed further to US$35.37 billion in the 4th quarter of 2020 from US$38.60 billion recorded in the 3rd quarter of 2019; thus, indicating US$3.23 billion or 8.4% decline within the period.  It also declined by  US$0.38 billion or 1.1% when compared with US$35.75 billion recorded in the preceding quarter. The continuous decline in External Reserves is attributed to  fall in foreign exchange earning by the country due to low crude oil prices.

Debt Management Office (DMO) report  shows that Nigeria’s external debt increased to US$31.99 billion in  the 3rd quarter of 2020 from US$26.94 billion recorded in the  corresponding quarter in 2019; thus,  indicating US$ 5.05billion or 18.75% increase over the period. It also increased by US$ 0.51 billion or 1.62% when compared with US$31.48 billion recorded in the second quarter of 2020.

Likewise,  domestic debt increased  to N15.85 trillion in the3rd  quarter of 2020 from N13.90 trillion recorded in the corresponding quarter of 2019; thus,  indicating N1.95 trillion or 14.03% increase over the period. It also increased by N0.39 trillion or 2.52% when compared with N15.46 trillion recorded in the preceding quarter.

Foreign Direct investment increased to US$414.79 Million in the 3rd quarter of 2020 from US$ 206.58 Million recorded in corresponding quarter of 2019; thus indicating US$ 208.21 Million increase over theperiod.  It also increased by US$ 266.2 Million  when compared with US$ 148.59 Million recorded in the preceding quarter.

Conversely, Foreign Portfolio Investment (FPI) fell to US$407.25Million in the 3rd quarter of 2020 from US$ 3.027 billion recorded in corresponding quarter of 2019; thus, indicating   US$2.619billion decrease over the period. However, it increased by US$21.93million when compared with US$385.32 million recorded in the 2ndquarter of 2020.

Manufacturing sector Foreign Direct Investment increased to US$400.09Million in the 3rd quarter of 2020 from US$153.77 million recorded in the corresponding quarter of 2019; thus, indicating US$ 246.32 million  increase over the period. It also increased by US$289.31 million when compared with US$110.78 million recorded in the preceding quarter.

According to NSE statistics, the Market Capitalization increased to N31.68 trillion  in the 3rd  quarter of 2020 from N26.96 trillion recorded in the corresponding quarter of 2019; thus, indicating N4.72 trillion or 17.51% increase over the period. It also increased by N3.06 trillion or 10.69% when compared with N28.62 trillion recorded in the preceding of 2020.

All share Index statistics showed contraction to 26831.76 units in 3rdquarter of 2020 from 27630.56 units recorded in the corresponding quarter of 2019; thus, indicating 798.8 units reduction over the period. However, the unit increase by 2352.54 units when compared with 24479.22 units recorded in the preceding quarter.

Information from  the  National Bureau of Statistics (NBS) Trade Summary report  shows that Nigerian merchandize trade fell to N8.37 trillion in the 3rd Quarter of  2020 from N9.19 trillion recorded  in the corresponding quarter of 2019; thus, indicting  N0.82 trillion  or 8.9% decrease over the period.   However, it increased by 34.15% when compared with N6.24 trillion recorded in 1st half of the year.   Balance of Trade fell to -N2.39 trillion in the 3rd quarter of 2020 from N1.39 trillion recorded in the corresponding half of 2019 and -N1.80 trillionrecorded position in the 2nd quarter of the year.

Nigeria’s import trade increased   to N5.38 trillion in the 3rd quarter of from N3.9 trillion recorded in the corresponding  quarter of 2019 and N4.02 trillion of   2nd quarter of the year. Export trade of the country fell to N2.99 trillion in the  3rd quarter of 2020 from N4.6 trillion recorded in  the corresponding  quarter of 2019; thus, indicating N1.61 trillion or 35% declined over the period.   However, it increased by N0.77 trillion  or 34.7% when compared with N2.22 trillion recorded  in the  2nd quarter of the year.

NBS trade report shows that India came 1st among Nigeria’s export trade partners with goods worth N500.63 billion in the 3rd quarter of 2020;  Spain came 2nd with goods worth N328.47 billion;  the Netherlands came 3rd with goods worth N 227.76 billion; South Africa ranked 4th with goods valued at N203.93 billion ; and Turkey came 5th with export valued at N 150.01 billion.

In terms of import, China ranked 1st among Nigeria import trading partners with import goods valued at N1641.87 billion or 30.51% share of total imports; United Stated came 2nd with imports goods valued at N482.25;; Netherlands came 3rd with N443.45 worth of goods;  India ranked 4th with goods worth of N354.09 billion; Belgium came 5th with goods valued at N212.32 billion.

Manufactured goods accounted for only 4.44% of total export merchandize, but 43% of total import merchandize in the 3rd quarter of 2020. Crude oil accounted for 81.1% of  total Nigeria’s   export trade  merchandize in the quarter.

2.0MANUFACTURING SECTOR PERFORMANCE

2.1 Global Manufacturing Output

According to UNIDO, in the third quarter of 2020, global manufacturing output declined by 1.1%  in a year-over-year comparison due to COVID-19 containment measures, following a significant drop of 11.1%  in the second quarter of 2020. COVID-19, a pandemic that  began in Wuhan China spread  across the world, decapitating  global economies as evident  in the record death toll of man power; the crashing of crude oil price, the slowed  global supply and demand; and  the total halting of economic activities  at the highpoint of the  period.

2.2 Capacity Utilization

Manufacturing capacity utilization edged up to 53.7% in the 2nd half of 2020 from 43.2% recorded in the 1st half of the year; thus, indicating 8.5 percentage point increase over the period.  However,  it declined by 5.74% when compared with 59.44% recorded in the corresponding half of 2019. Capacity utilization in the sector averaged  49.5% in 2020 as against 56.8% recorded in 2019. The uptick in capacity utilization in the period is attributed to the relaxing of the  COVID-19 containment measures, particularly the opening of  the economy for business activities in the 2nd half 2020. The increase is also seasonally influenced as a result of   Christmas celebration boosted economic activities in the last quarter of the year.

2.3Manufacturing Production Value

Manufacturing production value declined to N2.36 trillion in the 2nd half of 2020 from N7.38 trillion recorded in the corresponding half of 2019; thus, indicating N5.02 trillion decline over the period.   However,  it increased by N0.32 trillion or 15.5% when compared  with N2.04 trillion  recorded in the  1st half of the year. Production value in the  sector totaled N4.4 trillion in 2020  as against N11.99 trillion  achieved in 2019.   The uptick in manufacturing production in the 2nd half over the performance in 1st half of the year was due to the opening up of the economy for businesses  after  over 5 months of lockdown to contain the spread of COVID-19.

2.4Raw-Materials Sourcing

Utilization of Local Raw-materials by manufacturers in the 2nd half of 2020 declined to 56.5%  as against 64% recorded in the corresponding half of 2019; thus, indicating 7.5 percentage point decline over the period.   It also declined by 1.9 percentage point when compared with 58.4% recorded in the 1st half of  the year. Local raw-materials utilization in the sector declined to  57.45% in 2020 from 60.5% recorded in 2019. The decline in  local raw-materials utilization in the sector was attributed to the  opening up of world  economies  for  trade after months of global lockdown.  Manufacturers are therefore, able  to increase   import raw-materials.

2.5Unsold Inventory of Locally Manufactured Goods

Inventory of unsold finished manufactured goods increased to N303.22 billion in the 2nd half of 2020 from N202.16 billion recorded in the corresponding half of 2019; thus, indicating N101.06 billion or 50% increase over the period.    It also increased by N28.83 billion or  10.5% when compared with N275.39 billion recorded in the 1st half of the year. Inventory of unsold manufactured goods in the sector  totaled N577.61 billion in  2020  as against N402.42 billion recorded in the 2019.  The increase in inventory in the period was attributed to   the general low consumption and renewed imports in the economy as global economies generally opens after months of lockdown. Electrical  and Electronic sectoral group  accounted for over 33% of total inventory of unsold manufactured products in period.  The group are having the challenges of low patronage, high smuggling and products counterfeiting which rubbed-off negatively on inventory.

2.6Manufacturing Investment

Estimated cumulative manufacturing investment from 2013 to the 2nd half of 2020 was N5.73 trillion based on data generated from surveys conducted by MAN over the period. Manufacturing investment declined to N56.44 billion in the 2nd half of 2020 from N257.66 billion recorded in the corresponding half of 2019; thus, indicating N201.22 billion decline over the period. It also declined by N5.64 billion or 9.1% when compared with N62.08 billion achieved in the 1nst half of the year. Manufacturing investment totaled N118.52 billion in 2020 as against N496.11 billion  achieved in 2019.  Manufacturing investment declined in the period following the depressing fallouts from COVID-19 that gave no impetus for new investments in the sector.

2.7Manufacturing Job

At the end of the 2nd half of 2020, an estimated 1,655,331 historical cumulative jobs were created in the manufacturing sector following data generated from various surveys conducted in the last 8 years.

A total of  3451 new manufacturing jobs were created in the 2nd   half of 2020 compared to 10,735  jobs created in the corresponding half of 2019 and 5241 jobs in the 1st half of the year.  However, a total of 3903 jobs were lost in the sector in the period.   This is marked two successive negative net job  in the  sector as job loss out-numbered  new jobs created by the  time the sector  is recording  a negative net jobs beginning from the 1st half of the year.

2.8Electricity Supply to Manufacturers

Energy information generated from the sector has shown consent improvement in electricity supply to the  manufacturing sector.  In the 2ndhalf of 2020 electricity supply from the distribution companies to the sector increased to 12  hours on daily average from 10 hours per  day on the average recorded since the  1st half of 2019. Average daily power  outage  had constantly averaged 4 time per day.  However, expenditure on alternative energy in the 2nd half of 2020 increased to N57.75 billion in the 2nd half of 2020 from N34.70 billion recorded in the corresponding half of 2019; thus, indicating N23.05 billion or 66.4% increase over the period.  It also increased  by N33.59 billion  or over 100% when compared with  N24.16 billion recorded in the 1st half of  the year. Expenditure on alternative energy source in the  sector stood at N81.91 billion in 2020 as against N61.38 billion recorded in 2019. The increase in alternative energy expenditures in the sector was attributed to the general high inflationary pressures in the economy.  However, specifically, the increase in the petrol pump price exerted significant influence on prices of some of the fuel used by the sector to generate electricity.

2.9Cost of Funds to Manufacturers

Interest rate charged to manufacturers increased to 22.0% in the 2nd half of 2020 from 20% recorded in the corresponding half of 2019; thus, indicating 2 percentage point increase over the period it also increased by 2.5 percentage point when compared with 19.5% recorded in the 1st half of the year. Interest rate charged to manufacturers averaged 20.75% in 2020 as against 21.25% recorded in 2019.  The increase in the interest rate in the 2nd half of the year was adduced to the opening up of theeconomy for business after months of lockdown due to COVID-19 and the attendant increase in demand for investible fund by manufacturers in the period.

3.0SUMMARY AND RECOMMENDATIONS

The year 2020 was a very difficult year for the economy and manufacturing sector due to the onslaught of COVID-19 Pandemic.  COVID-19 had a staggering devastation on global economies as evidentin the huge death toll of manpower; the crashing of crude oil price, the slowing of global supply and demand; and the total halting of economic activities through the lockdown.   The pandemic had a crushing impact onthe manufacturing sector as the sector fell into economic recession in the 3rd quarter of 2020.  At the moment and following the impact of COVID-19 productivity in the sector is at the lowest and therefore require deliberately orchestrated action to rekindle significant productive activities in the sector. Based on the foregoing and with the intent to address the challenges of the sector, especially in this precarious time, we recommend as follows:

i. Difficulty in accessing forex
Grant concessional forex allocation at the official forex market to manufacturers for importation of productive inputs that are not locally available;
Carry out swift approval of Usage of Forex on forex sources outside the official market for manufacturers;
Unify all forex windows in the country;

ii. High cost of Electricity/Power
Review downward the current increment in electricity tariff;
iii. High cost of  transportation
Review the current increment in fuel pump-price;
iv. Low Demand  of commodity
Focus on payment of staff salaries and outstanding contracts sumson completed projects;
Construct a critical generational pricing model for the economy that will recognize changes in inflation, exchange rate, lending rate in the determination of wages (minimum wage) –   Nigeria’s Minimum wage of N30,000 (US$78.29) is about the lowest in the EMDCs and does not encourage consumption;  
Reverse the Value Added Tax (VAT) rate to 5% from the current 7.5%;

v. Difficult Access to Funds:
Implore the CBN to intervene directly to ensure that manufacturershave access the funds, particularly the N1trillion COVID-19 Stimulus Package;
Sensitize manufacturers on the current feasibility of the N220 billion Micro, Small and Medium Enterprises Development Fund (MSMED) and N300 billion Real Sector Support Facility (RSSF) and how they can be accessed;
Carry out coordinated reduction in monetary policy rate and lending rate;
Provide a Credit guarantee for industrial loans from commercial banks;

vi. Regulatory Issue:
Direct all Regulatory Agencies, especially Standards Organizations of Nigeria (SON), National Agency for Food and Drugs Administration & Control (NAFDAC) to reduce their respective administrative charges (Pre-COVID-19 rates) payable by manufacturing concerns by 50%.

vii. Poor Port Administration:
Improve on the time taken to clear container/cargoes clearance at the ports;
Improve on the trade facilitation equipment at the ports such as scanners, etc.;
Reduce the various burdensome port charges and remove demurrage for delayed clearance due to logistics and administrative constraints;
Resuscitate available rail tracks and construct new ones and linkingthem to industrial hubs;

viii. Unavailability of Raw- Materials
Select strategic product for Backward integration and further drive the resource-based industrialization agenda;
Developing the machine industry;  iron and steel; petrochemical sectors to support manufacturing;

ix. Managing COVID-19
Strike a balance in managing the economy and the second wave of COIVID-19 without implementing a second lockdown – Nigerian economy is already in recession and cannot afford a second lockdown;
Allow manufacturing to continue operation in all sub-manufacturing sectors notwithstanding any new wave of COVID-19 – These companies have already imbibed the new normal of COVID-19: they have built up the stock of capacity and adopted international measures needed to work under the current environment;
Allow   free movement of goods and persons across states but should be supported with best implementation of COVID-19 guidelines such as use of nose and face mask, social distancing, etc. Interstate travel ban will impact negatively on productive activities by the private sector and will lead to loss of jobs.



Leave a Reply

Your email address will not be published. Required fields are marked *