Eko Hot Blog reports that Nigerians are bracing themselves for another surge in the prices of goods as major manufacturers increasingly rely on loans to sustain operations.
Financial investigations reveal that, grappling with challenges like foreign exchange scarcity and cash flow issues, major manufacturing firms borrowed a substantial N1.833 trillion during the first nine months of 2023, marking a 52.6% increase compared to the N1.2 trillion borrowed in the corresponding period of 2022.
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This growing dependence on loans is triggering concerns among financial experts, who fear that manufacturers may find themselves ensnared in a debt trap.
The rise in the Monetary Policy Rate (MPR) by the Central Bank of Nigeria (CBN) to control inflation, which soared to 28.92% in December 2023, has led to elevated lending rates across the banking and finance sector.
The finance cost (interest on borrowing) for 17 leading manufacturing companies listed on the Nigerian Exchange Limited (NGX) surged by a significant 332.3%, reaching N589.623 billion in the first nine months of 2023 compared to N136.379 billion in the same period in 2022.
Companies affected 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.
Analysts and investment experts have expressed concern over the high cost of borrowing from banks, advocating for the capital market as a more sustainable financing option for manufacturers, providing long-term funds.
Victor Chiazor, Analyst and Head of Research & Investment at FSL Securities Limited, warned, “The manufacturing sector will continue to be negatively impacted by the high finance cost, especially given that the banks all responded to the high MPR.”
He emphasized the need for a reduction in the Benchmark interest rate by the CBN to ease the burden on manufacturers.
Chiazor also highlighted the potential for raising equity capital as a viable option, stating, “In the course of the year, we may see one or two manufacturing companies raise equity capital from the capital market to support their businesses.”
David Adonri, an analyst and Executive Chairman at Highcap Securities Limited, pointed out that the manufacturing industry faced challenges due to rising inflation in 2023, leading to increased costs.
He noted, “With higher credit, finance cost will escalate.”
Adonri highlighted the need for refinancing to repair balance sheets and suggested that fiscal intervention could include subsidies to manufacturers, while monetary policy should target a low-interest-rate environment.
Tajudeen Olayinka, CEO of Wyoming Capital and Partners, emphasized the importance of borrowing that improves operational efficiency and benefits customers and stakeholders. He cautioned against short-term borrowing from banks during a period of rising inflation and interest rate hikes.
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As the manufacturing sector navigates the challenges brought about by increased borrowing, the impact on production efficiency, consumer prices, and dividends remains a subject of concern for analysts and industry observers.
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