Inflation: Manufacturers plot new survival strategy

Inflation induced low sales

Inflation induced low sales

• Manufacturers Adjust Priorities
To Make Goods Affordable

The Bureau of Statistics had in April reported that price index, which measures inflation, had maintained strong increase for three consecutive months, beginning from January. It put inflation rate for April at 13.7 percent, attributing the cause to structural constraints, including increase in electricity tariff and impact of higher prices of premium motor spirit. Although, the Bureau said April inflation was the highest since January, when the cost price index (CPI) rose by 13.74 percent, it has risen to 15 percent going by the latest record.

The spiraling inflation has brought intolerable levels of hardship on Nigerians, many of whom have adjusted their priorities because of decreased purchasing power. Manufacturers are also feeling the pinch. They have more products than they can sell, even as production cost keeps rising. Moves to increase price, have been relaxed so as not to drive away customers and for them to remain in business. They are now absorbing production cost locally by re-ordering their priorities.

Many companies may declare losses this year, as a result of inflation. A lot of them are putting together figures in preparation for their Annual General Meeting (AGM)

Alex Goma, Managing Director, Family care, PZ, Cussons Nigeria Plc., told The Guardian in a telephone chat that manufacturers have been going through tough times on account of numerous challenges worsened by inflation.

“The market is highly depressed, demand is going down, while cost of production is going up everyday,” he said. “Forex is unavailable, there are no raw materials, as well as lack of disposable income for consumers. We have challenges of infrastructure. It is a tough time to manage.”

“These are not problems of one day or one year. We did not save for the rainy day and we did not put in place the right infrastructure,” he lamented.

He acknowledged that inflation has affected commodities prices, but he was quick to add that price increase was reasonably managed by many companies so as to make them affordable to the masses.

Said he: “The price increase cannot absorb the increasing production cost, which is why there are different product prices in the market. The manufacturing companies are themselves absorbing the greater part of the production cost by cutting cost internally. We are looking at options that will make us not to pass increasing production cost to consumers. People have to choose based on their real need.”

President of Manufacturers Association of Nigeria (MAN), Dr. Frank Udemba Jacobs, said manufacturers, government and consumers are feeling the pain of the rising inflation. But if manufacturers are not making profit, they would be unable to pay tax. He, therefore, urged government to halt the rising inflationary trend, while measures should be put in place to reflate the economy.

“Manufacturers in Nigeria have been facing very serious challenges, as we all know. These have been compounded by the current scarcity of forex, which has further constrained the sector, especially those products with high imported inputs. Because of the current inflationary trend, manufacturers, who, unfortunately, do not have the luxury of increasing their prices, even in the face of rising costs and reduced purchasing power of the citizens, have had to pile up their unsold inventory. Of course, this has a cyclical effect as, with high unsold inventory, production would be constrained and eventually reduced, productivity would decline, competitiveness would be affected and could, as a final unfortunate consequence, lead to down-sizing or, if you like, right-sizing of employees.

“High inflation has led to higher cost of production, at a time that there is scarcity of forex and in the face of dwindling working capital and has, consequently, led to declining capacity utilisation. All these also mean loss of revenue to government in terms of reduced taxes and other revenues. It is, therefore, important that efforts be made to halt the rising inflationary trend and measures that would reflate the economy should be fast–tracked. The ongoing drive to diversify the economy from the present over-dependence on the oil sector should be intensified. Serious attention should be paid to the repositioning of the productive sectors of the economy, especially the manufacturing sector, as it has the capacity, if well nurtured, to drive the economy to achieving the desired diversification and eventual stability.”

On his part, the Director General of Lagos Chamber of Commerce and Industry, Mr. Muda Yusuf, attributed the high inflationary rate to electricity tariff increase, high price of petroleum products, and high exchange rate.

“The recent inflationary spiral, which pushed the country’s inflation to an all time high of 15.6 per cent did not come as a surprise,” he explained. “The key drivers are basically factors relating to cost. The cost of transportation had risen over the last few months because of the cost of fuel. Energy costs for purposes of products and business operations have also risen considerably because of the poor power supply and hike in electricity rate.”

A major factor in the current inflationary trend, he said, is the exchange rate depreciation, which has pushed up costs across all sectors of the economy. The effect has been profound because of the import dependent character of the Nigerian Economy. The uncertainty around the forex policy also negatively impacted the confidence of investors, which consequently affected output.

According to him, the restrictive import policy is also a major contributing factor to the new wave of inflationary pressures. This had widened the supply and demand gap in the economy, leading to pressure on the general price level. Raw material imports were also affected by the restrictive import policy. This also took a toll on the capacity of many firms to produce, especially in the fast moving consumer products sector.

To overcome problems created by inflation, Yusuf said there should be deliberate efforts to increase productivity level in the economy through investment in infrastructure.

“CBN’s decision to adopt a flexible exchange rate will boost investors’ confidence and consequently improve output in the economy in the medium to long term,” he said. “The policy will also have a moderating effect on the exchange rate and will consequently exert a downward pressure on price level. There is a need to rethink the current restrictive import policy in order to reduce the supply and demand gaps in some consumer product sectors. The inflationary situation currently being experienced is not a monetary phenomenon.

Therefore, the use of monetary policy tools by way of hiking interest rates will not be of much value. Tackling inflation has to be situated within the context of the factors driving the increases in the general price level.” Emmanuel Richard, a renowned economist and financial analyst, attributed the rising inflation to increase in pump price of petroleum products and the high exchange rate.

“Inflation occurs, when there is sustained increase in level of prices for goods and services across board. In Nigeria, that has been the case since this government came on board. Every naira Nigerians earn and have in their pocket is becoming worthless everyday. We are now going the way of Zimbabwe, where we need a truckload of the naira to buy a fraction of goods and services we used to enjoy. The recent fuel price increase has worsened the situation. The implication of this is that the purchasing power of the naira and by extension, Nigerians has reduced. People struggle to make ends meet. This is also having a telling impact on the patronage of goods and services. As a result of the mess we are in, there is low or no patronage.

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