Impact of Electricity Tariff Hike on Nigerian Manufacturers

The recent 250% increase in electricity tariffs imposed on manufacturers in Nigeria is having a crippling effect on the country’s industrial sector. The Manufacturers Association of Nigeria (MAN) has raised alarm over the rising energy costs, particularly for its members in Band A, who are now faced with unsustainable electricity bills. According to MAN, the tariff hike threatens not only the profitability of the sector but also the survival of numerous businesses that are key contributors to the national economy.

The increase in electricity tariffs is a significant burden for over 2,500 manufacturers in Nigeria, who are already grappling with a challenging operating environment. The Director General of MAN, Segun Ajayi-Kadir, voiced his concerns during a media briefing at the association’s 52nd Annual General Meeting (AGM) held in Lagos. He explained that the substantial increase in energy costs was putting manufacturers at risk, with many considering shutting down operations due to their inability to cope with the new tariffs.

Ajayi-Kadir urged the Federal Government to intervene by subsidizing a portion of the electricity costs, as it has done in other sectors such as education. He emphasized that while a moderate increase might be manageable, the current 250% hike is excessive and unsustainable. “We wouldn’t mind if we are made to pay a 100% increase. But hiking electricity tariffs by 250% for manufacturers is not just done. It is not sustainable. Many of our members cannot afford it,” he said.

The DG further warned that if manufacturers were forced to shut down, it would have dire consequences for the national economy. The closure of businesses would lead to significant job losses, a reduction in productivity, and a negative impact on Nigeria’s Gross Domestic Product (GDP), exacerbating the country’s already fragile economic situation. “Some of our members are thinking of shutting down. But you can imagine what would happen if this number of businesses shut down. It would definitely not be in tune with the President’s economic agenda,” Ajayi-Kadir added.

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Broader Economic Implications of the Tariff Hike

The hike in electricity tariffs comes at a time when Nigeria’s manufacturing sector is already under strain from multiple challenges, including fluctuating exchange rates, inflation, high-interest rates, and an unstable power supply. The cost of production has surged, making it increasingly difficult for local manufacturers to compete with cheaper imported goods. This, in turn, is affecting the sector’s contribution to national GDP.

In 2023, Nigeria’s manufacturing sector contributed around 8.74% to the country’s GDP, according to the National Bureau of Statistics (NBS). However, the sector has struggled to maintain steady growth due to persistent structural issues, such as inadequate infrastructure, poor energy supply, and a challenging regulatory environment. The tariff hike adds another layer of difficulty for manufacturers, particularly small and medium-sized enterprises (SMEs) that lack the financial resources to absorb such significant cost increases.

Energy costs are a major component of manufacturing expenses in Nigeria, with many businesses already spending up to 40% of their operating costs on electricity. The 250% increase could push some manufacturers into insolvency, leading to factory closures, job losses, and reduced industrial output. This would have a ripple effect across the economy, affecting not only the manufacturing sector but also related industries such as logistics, retail, and construction.

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Calls for Government Intervention

MAN is calling on the Federal Government to take urgent steps to mitigate the impact of the electricity tariff hike. Ajayi-Kadir suggested that the government could provide subsidies to reduce the cost burden on manufacturers, similar to the subsidies provided in the education sector. He also called for a review of the current tariff structure to make it more equitable and sustainable for industrial users.

The tariff hike also contradicts President Bola Tinubu’s economic agenda, which aims to revitalize the Nigerian economy through increased industrial output, job creation, and infrastructure development. For the manufacturing sector to play its role in driving economic growth, Ajayi-Kadir emphasized the need for a stable and affordable energy supply. He noted that electricity remains a critical input for the sector, and without reliable power at competitive rates, Nigeria’s manufacturing potential will remain untapped.

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Advocacy for Sustainable Industrial Policies

MAN’s upcoming 52nd AGM, scheduled for October 22-24, 2024, will provide a platform for further discussions on the challenges facing the manufacturing sector. The event will feature the 4th edition of the Adeola Odutola Lecture, which will focus on the “Imperatives of an Intentional Development of the Nigerian Manufacturing Sector.” The lecture will be delivered by Mr. Samaila Zubairu, President and CEO of the Africa Finance Corporation (AFC), who is expected to provide insights into the strategies needed to boost industrial development in Nigeria.

The AGM will also serve as a forum for MAN to present its policy recommendations to the Federal Government. According to the association’s president, Otunba Francis Meshioye, the theme of the AGM reflects the need for deliberate efforts to address the challenges facing the sector. “The high and rising cost environment continues to shrink profitability and, in many cases, threaten the existence of many operators in this critical sector of the economy,” Meshioye said.

He stressed the need for policymakers to address the structural constraints that make local products uncompetitive in both domestic and international markets. Meshioye highlighted the importance of creating a favorable business environment that supports the growth of the manufacturing sector. This includes addressing issues such as inadequate infrastructure, high energy costs, and an over-reliance on imports.

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Electricity as a Major Challenge for Nigerian Manufacturers

The issue of electricity supply has long been a significant challenge for Nigerian manufacturers. Despite the country’s vast energy resources, the power sector has struggled to provide reliable and affordable electricity to businesses and households. Nigeria’s electricity generation capacity is around 13,000 megawatts (MW), but actual output often falls below 4,000 MW due to inefficiencies and infrastructure deficits in the transmission and distribution networks.

To compensate for the unreliable grid power, many manufacturers rely on expensive diesel generators to keep their operations running. This increases their operating costs and reduces their competitiveness, both domestically and internationally. The World Bank estimates that unreliable electricity costs Nigerian businesses an estimated $29 billion annually in lost revenues.

In response to the electricity challenges, the Nigerian government has implemented several reforms in the power sector, including the unbundling of the state-owned Power Holding Company of Nigeria (PHCN) and the privatization of power generation and distribution companies. However, these reforms have not yet resulted in a significant improvement in electricity supply, and manufacturers continue to face high energy costs.

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The Path Forward: A Call for Strategic Action

The tariff hike has reignited calls for a comprehensive overhaul of Nigeria’s energy sector. Industry experts argue that the government must adopt a more strategic approach to address the power supply issues that have plagued the country for decades. This includes investing in renewable energy sources, such as solar and wind power, which could provide a more sustainable and cost-effective solution for manufacturers.

In addition to energy sector reforms, MAN has also advocated for the implementation of industrial policies that promote local content development, enhance access to finance, and reduce the cost of doing business in Nigeria. The association believes that with the right policies in place, Nigeria’s manufacturing sector has the potential to become a major driver of economic growth and job creation.

As the country navigates its current economic challenges, the manufacturing sector will remain a critical component of Nigeria’s long-term development strategy. However, without urgent action to address the rising cost of energy and other structural constraints, the sector’s ability to contribute to national growth will continue to be undermined.

In conclusion, the 250% hike in electricity tariffs represents a significant threat to Nigeria’s manufacturing sector. The government must act swiftly to mitigate the impact of the tariff increase and provide the necessary support to ensure the survival of the country’s manufacturers. By doing so, Nigeria can unlock the full potential of its industrial sector and achieve its economic goals.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

16th October, 2024