Nigeria’s manufacturing sector experienced a quarterly decline in 2024 for the first time in two years, as rising interest rates dampened the sector’s demand for bank loans.
The Central Bank of Nigeria (CBN) has raised the benchmark interest rate, the Monetary Policy Rate (MPR), 13 times since April 2022, reaching 27.5% by November 2023, up from 11.5%. This increase led to higher bank lending rates, now averaging 31.06%, up from 27.37%.
As a result, credit to the manufacturing sector fell by 6.67% quarter-on-quarter (QoQ) to ₦8.67 trillion in Q3 2024, a drop from ₦9.29 trillion in the previous quarter. This marks the first quarterly decline since Q3 2022, breaking the upward trend that had seen a steady rise in credit allocation from Q3 2022 through Q2 2024.
Experts attribute this shift to multiple challenges facing the sector, including the prohibitive cost of credit. Dr. Muda Yusuf, CEO of the Centre for the Promotion of Private Enterprise (CPPE), stated that the soaring interest rates, which exceed 30%, have pushed manufacturers to seek alternative funding sources. He also cited ongoing issues like foreign exchange volatility, rising energy costs, and declining consumer purchasing power as factors dampening loan demand.
According to Segun Ajayi-Kadir, Director General of the Manufacturers Association of Nigeria (MAN), the combination of high lending rates, soaring production costs, and a deteriorating macroeconomic environment has discouraged borrowing for investment. He explained that increased energy costs, particularly the 250% hike in power prices, have further compounded the challenges, reducing manufacturers’ ability to expand or seek financing.
Additionally, banks’ cautious lending practices, driven by rising non-performing loans (NPLs) and increased risk, have played a role in the reduction of credit flow to the sector. The CBN reported a rise in NPL ratios to 4.58% in Q3 2024, up from 3.9% in June of the same year.
Experts are urging the Federal Government and CBN to introduce policies that would reduce borrowing costs and provide more stability in the exchange rate, ensuring that the manufacturing sector can recover and thrive. Support for key manufacturing sub-sectors such as food, beverage, and cement will be crucial for driving economic growth and boosting domestic production.
