For the first time in two years, credit to Nigeria’s manufacturing sector recorded a quarterly decline in 2024. This drop, a 6.67% decrease from N9.29 trillion in Q2 2024 to N8.67 trillion in Q3 2024, highlights the growing impact of a high interest rate environment on manufacturers’ ability to secure bank loans. The Central Bank of Nigeria (CBN) has raised the Monetary Policy Rate (MPR) 13 times in the past two years, pushing the rate to 27.5% in November 2024 from 11.5% in April 2022. This increase has pushed banks’ lending rates to over 31%, making borrowing more expensive for manufacturers, who now face an array of financial challenges.
Many manufacturers have become reluctant to take out loans under these high interest conditions. Dr. Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise (CPPE), explained that the steep rates make borrowing for fresh investments less appealing. Given the ongoing struggles with high energy costs, foreign exchange issues, and weak purchasing power, many manufacturers are seeking alternative funding sources or postponing investments altogether.
Manufacturers’ declining appetite for loans is reflected in the sharp drop in credit to the sector. From a steady upward trend in credit allocations, including increases in each quarter from Q3 2022 to Q2 2024, the decline in Q3 2024 signals the negative effects of high borrowing costs. Yusuf emphasized that with interest rates over 30%, and the continuing depreciation of the Naira, manufacturers find it difficult to operate, let alone invest in new projects. He urged the CBN to reconsider its hawkish monetary policies to support the real sector, especially the manufacturing industry.
Segun Ajayi-Kadir, Director General of the Manufacturers Association of Nigeria (MAN), also pointed to the restrictive monetary policy as a major factor discouraging borrowing. High lending rates, along with rising production costs due to exorbitant energy prices and logistics challenges, have created a difficult environment for manufacturers. Many manufacturers are now producing less, and as output declines, so does the demand for credit.
The cautious approach of banks, wary of accumulating non-performing loans (NPLs) in a high-interest-rate environment, further exacerbates the situation. Banks are tightening their lending practices, contributing to a slowdown in credit growth. As a result, investment decisions are being postponed by businesses, including those in the manufacturing sector, which has seen only modest growth in recent years.
The macroeconomic environment, compounded by inflation and lower consumer purchasing power, has led to a contraction in the manufacturing sector, and several companies, including multinational firms like PZ Cussons Nigeria, Kimberly-Clark, and Diageo, have exited the country. Industry analysts argue that proactive measures from the Federal Government are necessary to boost the manufacturing sector, especially in key industries like food, beverage, tobacco, cement, and textiles. Without these interventions, Nigeria’s manufacturing sector may continue to struggle under the weight of high financing costs and unfavorable economic conditions.
