How Surge In Headline Inflation Will Hurt Manufacturing, Economy

How surge in headline inflation will hurt manufacturing, economy

Manufacturers have cried out that soaring headline inflation, which stood at 18.6 per cent last month, will lead to increase in cost of production input with negative trickle down effects on capacity utilisation, inventory and profitability of manufacturing firms, among other unsavoury implications for the sector and the economy.

The Manufacturers Association of Nigeria (MAN) lamented that surge in inflation rate would lead to higher Monetary Policy Rate (MPR) and lending interest rate, which will further constrain access to credit and increase the cost of borrowing for manufacturers, especially those in the Small and Medium Industry (SMI) cadre.
MAN was reacting to latest data released by the National Bureau of Statistics (NBS), which put Nigeria’s headline inflation for June 2022 at 18.6 per cent, indicating a further rise of 0.85 per cent point from 17.75 recorded in the corresponding period of 2021.

On monthly, the NBS report also show that the headline inflation rate increased to 1.82 per cent in June 2022, indicating 0.04 percentage point increase above the 1.78 per cent recorded in May.
Food inflation also increased to 2.05 per cent, when compared to 2.01 per cent recorded in May, while core inflation declined from 1.87 in May to 1.56 in June.

The NBS attributed the surge in headline inflation to increase in prices of gas, liquid fuel, solid fuel, garments, passenger transport by road, cleaning, repair and hire of clothing, and passenger travel by air, meat, bread, cereals, fish, potatoes, oil, fat, wine, yam and other tubers.
MAN lamented that inflation rate has assumed an upward swing, which signals worsening economic times ahead.

A statement by MAN Director-General Segun Ajayi-Kadir said, for instance, that a cursory look at the report shown that the 18.6 per cent rate portends a gradual journey towards the 18.72 per cent peak inflation rate recorded in January 2017.

“Obviously, this is a worrisome acceleration of inflation rate that should be halted, especially giving the fact that socio-political and economic activities that trigger spike in inflation are imminent,” Ajayi-Kadir said, pointing out that in addition to the familiar triggers of inflation in Nigeria, there were three top drivers of inflation in the month under review.

The MAN DG, in the statement, listed the three drivers of inflation in June to include fuel scarcity, continuous growth in broad money supply, and Naira depreciation. He said, for instance, that the nationwide fuel scarcity witnessed in June was largely responsible for the rise in inflation.

His words: “The fuel scarcity necessitated further hike in energy prices, particularly prices of diesel, aviation fuel and petrol, which all had trickle down effects on the cost of food, manufactured products, other commodities, transportation and accommodation nationwide. Most notably, the price of diesel has spiked by about 230 per cent in the last one year.”

He also said in the midst of rising oil prices, the fiscal authority strategically reduced payment from the Federation Account Allocation Committee (FAAC) in May by about 9.51 per cent, representing N62.4 billion reduction. He said while this, ideally, to some extent, should have reduced inflationary pressure, the CBN expansionary policy stance, which influenced the growth in broad money supply by 25.51 per cent in the last 12 months, fueled inflation.

Ajayi-Kadir also said Nigeria remains a highly import-dependent economy, as such, the exchange rate pass-through effect continues to worsen inflation with the domestic currency depreciating by over 22 per cent within the last 12 months. “At present, the exchange rate premium has further widened by N194 with the Naira trading at about N610/$ and N415.83 at the parallel and official markets,” he stated.
learly, the prevailing inflation rate, according to the MAN DG, would have severe impacts on the economy, particularly consumers, as well as the manufacturing sector. He said, for instance, that the inflation rate would force a sharp decline in consumer welfare and an excruciating demand crunch for the extreme poor.

He also said the situation will lead to a reduction in consumption by the middle class occasioned by continuous erosion of disposable income, a high incidence of panic buying and hoarding, which may further worsen the inflation trend.

Ajayi-Kadir further said soaring inflation rate would have implications like reduction in demand for manufactured products, leading to poor sales and turnover; lower competitiveness as the high inflation rate further mounts pressures on the already very high-cost operating environment, which may hinder the prospect of beneficial trade in the region and the continent.

He listed other implications to include further loss in the value of the Naira; increase in the tempo of hoarding dollars; deepening of downward swing of export earnings, which of course, will worsen the forex challenge in the country and closure of more companies, as the capacity to meet obligations to internal and external stakeholders is greatly impaired.

The MAN chief said the association believes that high inflation is a major indication of macro-economic inadequacies, noting that failure to take steps to address the contributory factors will further limit economic growth and increase the rate of unemployment in the country.

“By reducing purchasing power, high inflation reduces aggregate demand and limits production which eventually results in a fall in employment. On the flip side of the coin, it will escalate the value of public debt servicing expenditure due to the exchange rate pass-through effect in the face of increase in fuel subsidy cost and rising global oil prices,” he stated.

To avert the negative trickle-down effects of high inflation on the economy and the manufacturing sector, manufacturers said the government should, among others, deploy a bouquet of supply-driven policies backed with more structural measures to combat the peculiar inflationary pressures from insecurity, energy and transport cost.

They also suggested further reduction of Nigeria’s reliance on imported products and raw materials by encouraging local sourcing through a comprehensive and integrated incentivised system since, according to them, “Nigeria is largely bearing the brunt of imported inflation”.

Manufacturers also said there is the need to intentionally resolve all forex-related challenges confronting the productive sector by making a detour from the CBN’s foreign exchange regime that greatly contradicts one of the goals of the National Development Plan, which seeks to attain quick convergence of the foreign exchange rates.

Similarly, manufacturers pushed for government to sustain effort at improving infrastructural developments and ensure they are economically driven.

This, according to them, is to reduce susceptibility to externally-induced inflation, as adequate provision of infrastructure in strategic hubs reduces operation and logistics cost and promote competitiveness.

Ajayi-Kadir also said there is need to accelerate the process of ensuring sustainable local refining of petroleum products by reactivating those inactive, and also support the coming on stream of Dangote Refinery and issue licences for new refineries.

“This will clearly reduce the pressure on the foreign reserve and mitigate the vulnerability of the economy to the external supply shock that has resulted in energy crisis,” he said, adding that the oil and gas industry should be strategically positioned to benefit maximally from future interruptions in global supply that triggers increase in price of crude oil.

“It is appalling that an oil-producing country like Nigeria is at a disadvantage at a time when global oil prices are rising,” Ajayi-Kadir charged, urging government to “strive to always meet the oil production quota set by the Organisation for Petroleum Exporting Countries (OPEC), increase oil revenue and reduce budget deficit that has worsened inflation.”

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