More factories, businesses may shut down as diesel hits N1,100/litre

  • Over N1000/$ FX, rising crude oil prices, falling grid worsen plight
  • Inflation, unemployment may rise amidst looming increase in gas prices
  • NECA urges FG to remove VAT on diesel, PMS
  • Nigerians should consider carpooling, explore electric vehicles, adopt public transit options

There are clear indications that more manufacturing companies and businesses in the country may shut down in the coming months due to the unabating energy crisis, which has now pushed diesel prices to over N1,100 per litre.

This dire situation is worsened by the foreign exchange crisis and the floating of the naira, all occurring amid dwindling purchasing power as there are signs that the prices of Liquified Petroleum Gas and Compressed Natural Gas, which are being adopted as alternative energy sources, may spike further.

The Nigerian Association of Liquefied Petroleum Gas Marketers Gas said last that the price of a 12.5kg cooking gas may hit N18,000 from the current N10,000.

Already, the number of factories shutting down yearly due to power shortages and harsh economic conditions remains worrisome as stakeholders yesterday, expressed deep concerns that without urgent actions, including halting taxes on petroleum products, job losses and revenue declines from the sector could severely impact the nation’s economic growth and its expected contributions to Gross Domestic Product (GDP).

This crisis was further exacerbated by the impacts of the Central Bank of Nigeria (CBN) Naira redesign policy. In the second quarter of this year, manufacturers witnessed a 17.3 percent increase in the cost of production and distribution. Capacity utilisation plummeted by 5.6 percent, volume of production contracted by 6.1 percent, manufacturing investment decreased by 5.6 percent, employment dropped by 5.7 percent, sales volume plunged by 6.3 percent, and the cost of shipment went up by 14.3 percent.

The Manufacturers Association of Nigeria’s Confidence Index for the second quarter of the year identified high cost of energy as the foremost challenge facing manufacturing in the country. This challenge is compounded by high credit costs and lack of loanable funds, multiple taxes, charges, levies, consistent tax policies for local producers and importers, raw material unavailability and delays in receiving imported raw materials, high raw material costs, forex scarcity, high exchange rates, and poor forex allocation.

While the nation’s electricity grid remains unreliable for manufacturing activities with over 134 system collapses in the last 10 years, manufacturers have spent nearly N1 trillion to source alternative energy in the last seven years.

The manufacturers spent N129 billion in 2016, N117.38 billion in 2017, N93.11 billion in 2018, N61.38 billion in 2019, N81.91 billion in 2020, N71.22 billion in 2021 and N144.3 billion in 2022.

With an average of 95 manufacturing companies shutting down yearly, with Gloxosmith being the latest, over 4,451 job losses are being recorded yearly in manufacturing sector alone as factory output value dropped to N2.68 trillion in first quarter of 2022 from N3.73 trillion in the first quarter of the year.

With the price of crude oil inching towards the $100 per barrel mark, stakeholders have predicted tougher times ahead for businesses in the country as the actual electricity output remains around 3500 megawatts in the last 10 years.

Director for the Centre for the Promotion of Private Enterprise (CPPE), Muda Yusuf said the implications of the increase in the pump price of diesel would result in increased production costs for industries.

“Most small-scale producers are dependent on diesel generators as alternative sources of energy and this means that the production costs for them will go up. When you combine this with the forex crisis and all the other problems manufacturers are battling with, you can only imagine what will happen in the next few months.”

“Also, it will affect the transportation of goods and services. The trucks and trailers we see on our roads are the ones delivering everything from raw materials to finished goods and they all use diesel. Almost 100 per cent of haulage in Nigeria is by road as our rail and water systems are under-developed. This will mean an increase in the cost of moving goods from one place to another, since they’re powered by diesel engines.”

Yusuf worries that these challenges would further cause inflation to skyrocket.
Concerned over the nation’s economic outlook, former Manufacturers Association of Nigeria (MAN) chairperson for Apapa, Frank Onyebu said the implications are dire both for the economy and for consumers.

“The exchange rate is scary, the price changes as much as twice a day, always reviewing upwards never downwards. We used to joke that the dollar would exchange for one thousand naira but we never imagined we would ever get there. But look at it, we’re practically at a thousand naira to a single dollar and nothing seems to be stopping it from getting there, same as diesel. Both dollars and diesel will surpass one thousand naira at this rate.”

He pleaded with the government to take deliberate steps to halt the shocking increase and mitigate the suffering of local manufacturers, who are dying out rapidly.

“We must reduce the cost of governance and cut down on government spending. Government must stop all these unnecessary appointments, reduce wastages, create policies that encourage production, rehabilitate public infrastructure, improve power supply, eliminate corruption and create an enabling environment for industries to thrive. These and many more need to be in place before the government can talk about deregulation to us.”

He further pointed out that higher diesel costs will also mean higher transport costs as the cost of moving goods will also go up significantly.

“Labour costs have also risen because we understand that workers’ transport fare has gone up. We should also increase prices but how much can we really increase knowing that Nigerians are poor and struggling?

“Remember we are competing with imported goods from foreign countries that don’t have these many barriers we are dealing with here. Manufacturers here are having it tough truth be told and no matter how much we can endure, if the present situation doesn’t improve, many companies will relocate to saner climes while others will shut down. We know what this means, even more job losses and the economy will be worse off for it. I am calling on the government to save the real and industrial sector from total collapse,” he said.

While most heavy-duty vehicles rely on diesel, Nigerians have been advised to explore other alternative transport means to cope with the rising price of diesel in the country.

Stakeholders within the transport sector encouraged Nigerians to consider carpooling, explore electric vehicles, while adopting public transit options to cushion the effect of the hike.

They noted that the increment will mean an increase in household items, commodities and other things, stating that the government must quickly address fundamentals like wages; foreign exchange regime and security.

This is even as the Nigeria Employers’ Consultative Association (NECA) has called on the Federal Government to remove the 7.5 per cent Value Added Tax (VAT) on Diesel and Premium Motor Spirit (PMS), as measures to moderate increases in the prices of fuels in the immediate term.

Chief Executive Officer, West Atlantic Cold-Chain and Commodities Limited, Henrii Nwanguma, said this will throw up issues like salary increase; changing jobs and school for children to places nearer home; working from home; carpooling; online meetings and purchases as opposed to physical.

Nwanguma also added that rationalising movement; deployment of higher capacity vehicles; increase in crime (like “one chance”); demand for more efficiency in passenger and delivery services; use of cheaper fuels like gas (and the necessary switch over of generators and heavy-duty engines to gas from diesel), among others.

Perhaps, he said this will be the push many will need to jump into self-employment but it also calls for smart use of resources including collaboration. Like everything, there are positives and negatives.

Professor of Transport and Logistics, Lagos State University (LASU), Samuel Odewumi, said it is no brainer that the cost of freight transportation and manufacturing relying on diesel for their vehicles and generators will go up.

He said that will not persuade him to advocate for a return to the corruption burdened subsidy regime.

Odewumi, who doubles as Chairman of, Road Sector Committee, Chartered Institute of Transport Administration of Nigeria (CIOTA), said after all the prices of the same commodity is far more expensive in other West Africa countries, for instance, Ghana and yet industries are closing in Nigeria and relocating to Ghana.

“Our country needs to address other fundamentals like wages; foreign exchange regime and security.

“Let us hope that Dangote will be able to roll out the production of Diesel next month as recently announced,” he said.

Associate Professor at Keele Business School, United Kingdom, Emmanuel Mogaji, said the higher diesel prices translate directly into increased transportation costs for households.

Whether it’s commuting to work, school, or accessing essential goods and services, these rising costs affect the disposable income of families. This, in turn, can lead to adjustments in household budgets, potentially resulting in cutbacks on non-essential expenditures.

Mogaji said the increased financial burden from higher transportation costs can create stress and limit access to vital services, especially for lower-income households. It can also impede mobility and restrict opportunities for employment, education, and healthcare.

Considering these challenges, he said it’s imperative for individuals and households to explore alternative modes of transportation and evaluate their need for travel. This might involve considering more fuel-efficient vehicles, carpooling, or adopting public transit options.

According to him, as the world moves towards sustainable transportation, this increase may be what Nigerians need, a push towards exploring electric vehicles, bicycles, and walking as alternatives can not only reduce the financial burden but also contribute to a greener and more environmentally friendly transportation system.

Ultimately, he said the current diesel price surge underscores the importance of reevaluating the transportation choices and seeking cost-effective, sustainable, and inclusive alternatives that can mitigate the impact on household finances and overall well-being.

Director-General of NECA, Adewale-Smatt Oyerinde, made the submission, following the hike in prices of fuels, especially diesel cost that is almost N1,000.

He lamented that the challenge of the increase in diesel prices is even more precarious for local industries and auxiliary businesses that mostly depend on diesel to generate power as the electricity supply from the national grid remained epileptic and costly.

According to him, local manufacturers and businesses are really not finding it easy to stay in business, as industries would suffer most severely as the majority of their products are price elastic.

He said this limits their ability to transfer the element of diesel price increase to the prices of the commodities.

“LPG has been the last resort of households since the price of diesel and DPK escalated to about N800/litre, but unfortunately it has been drifting beyond the reach of households.

“It is a very precarious situation for transporters, industries and households as the prices of PMS, diesel and LPG are going beyond reach,” he said.

In the short to medium term, he said there was the need for the government to denominate the price of gas in Naira and in the long term, incentivise private investment in gas aggregation as well as resuscitate the four national refineries.

Noting that the price of diesel had stayed high at N800/litre since government ended subsidy in 2023, however, he said with the removal of the fuel subsidy, the price of diesel grew by almost N200/litre (25 per cent), which conforms with the law of economics given that PMS and diesel are close substitutes.

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