Nigerians are on the brink of facing a surge in the prices of goods from major manufacturers due to an increasing reliance on loans to fund their operations. This shift has led to higher interest payments and an overall escalation in the cost of production.
Investigations by Financial Vanguard reveal that major manufacturing firms, grappling with challenges such as a scarcity of foreign exchange and economic headwinds, resorted to bank loans totaling N1.833 trillion in the first nine months of 2023. This amount signifies a substantial 52.6% increase compared to the N1.2 trillion borrowed in the corresponding period of 9M’22.
Financial experts caution that these companies might be entering a debt trap, exacerbated by the rise in the Monetary Policy Rate (MPR) sustained by the Central Bank of Nigeria (CBN) throughout the review period. The MPR increase aimed to curb inflation, which had reached 28.92% as of December 2023. The consequence has been a surge in lending rates across the banking and finance sector.
This predicament implies that companies heavily reliant on borrowing in 9M’23 are now facing a serious debt situation, with the cost of operating capital escalating. This scenario is expected to adversely impact their profits and limit their ability to distribute higher dividends.
Analysis of financial data from 17 leading manufacturing companies listed on the Nigerian Exchange Limited (NGX) reveals a significant 332.3% increase in finance costs (interest on borrowing), reaching N589.623 billion in 9M’23, up from N136.379 billion in 9M’22. These companies include Nigerian Breweries, Dangote Cement, Lafarge Africa, Guinness Nigeria, GSK, Beta Glass, Unilever Nigeria, Dangote Sugar, Okomu Oil, Nestle Nigeria, BUA Cement, Notore Chemicals, NASCON Allied Industries, Cadbury Nigeria, BUA Foods, Vitafoam Nigeria, and International Breweries.
Industry experts and investment analysts express concern over the high cost of borrowing from banks, advocating for the capital market as a preferable financing option for manufacturers seeking long-term funds.
Top 5 Borrowers
In terms of borrowing, International Breweries topped the chart, securing N323.25 billion in 9M’23, compared to N148.99 billion in 9M’22. Nigerian Breweries followed closely, with borrowing rising to N307.99 billion from N113.69 billion in the corresponding year of 2022. Dangote Cement claimed the third position, recording N267.13 billion in 9M’23, slightly down from N269.19 billion in 9M’22. BUA Cement and BUA Foods secured the fourth and fifth positions, with borrowings surging to N258.26 billion (from N97.46 billion) and N237.79 billion (from N211.67 billion) in 9M’23, respectively.
Insights from Analysts
Victor Chiazor, Analyst and Head of Research & Investment at FSL Securities Limited, pointed out that the manufacturing sector is poised to face continued negative impacts due to high finance costs. He emphasized that until the Central Bank of Nigeria reduces the benchmark interest rate, banks are unlikely to lower their interest rates, keeping the high interest expense a persistent challenge for manufacturing companies and potentially pushing some into loss positions.