Nigerian manufacturers are facing high production costs due to the naira’s devaluation and since they rely on imported raw materials.

Over 70 percent drop in the naira’s value from 460 to the dollar around 2023 to 1,579 now has increased their input expenses.

The Manufacturers Association of Nigeria (MAN) has constantly lamented the impact of the rising production costs that is threatening their profitability and existence.

A BusinessDay analysis showed that Nigeria’s consumer goods firms are in dire need of a turnaround in sourcing raw materials as the cost of items needed for production has pushed input costs to new records.

“The critical driver of input cost in Nigeria’s manufacturing process is the naira exchange rate because for many of the manufacturing firms close to 80 percent of their inputs are imported,” Muda Yusuf, chief executive officer of the Centre for the Promotion of Private Enterprise (CPPE) said.

“The depreciation in the exchange rate over the last three years had had a very profound impact on their input costs,” Yusuf said.

According to the National Bureau of Statistics (NBS) foreign trade report, manufacturers imported manufactured goods worth N8.5 trillion in fourth quarter 2024.

The figure showed a 113 percent increase from N3.97 trillion in the fourth quarter of 2023 and a 21.37 percent rise from N6.98 trillion recorded in Q3 2024.

Despite the challenges presented by the naira’s devaluation, opportunities exist for Nigerian manufacturers to address increasing input costs by sourcing local raw materials, leading to reduced production costs and increased consumer purchasing power.

Backward integration is a business strategy whereby a company expands its operations to include the production of inputs or raw materials used in its manufacturing process.

Yusuf said that some manufacturers have been trying to look inward through the process of backward integration and import substitution.

He said the progress that has been made is more visible with the agro-allied industries. “Many of them actually have made deliberate efforts to source their materials locally,” he said.

He said they patronise local grains while stating that this local sourcing has also been disrupted by a problem of insecurity, which again has been contributing to their costs.

“The insecurity has contributed to disruptions in backward integration, but some of them have been looking inward,” Yusuf said.

He added that some industries have been using a lot of scraps, doing a lot of recycling, and depending largely on recycled materials that are obtained locally.

Nestlé Nigeria, a global food and beverage company and one of Nigeria’s largest fast-moving consumer goods firms has also utilised the backward integration strategy by investing in and controlling its raw material sourcing, particularly in areas like milk and cocoa production, to ensure quality and supply chain stability.

He said very soon we expect to see a lot more momentum as far as backward integration is concerned, especially in the packaging, pharmaceutical, and plastic industries.

“The Dangote refinery, the Dangote Petrochemicals, which is also part of the refinery, is coming up with a huge capacity of production of polypropylene, which is the main raw material for the production of plastics,” Yusuf said while stating that Nigeria is currently spending a lot on foreign exchange importing polypropylene.

“By the time the Dangote refinery commences production of polypropylene, we are likely to see a lot more backward integration by the plastic manufacturing firms, some packaging firms, and even some pharmaceutical industry firms,” Yusuf said.

He further said that the government has a major role to play by driving or calibrating its fiscal and monetary policies to support the core industries to facilitate backward integration.

“And the beauty of backward integration is that there’s a lot more multiplier effect for the economy, a lot more jobs are created, the industries are more competitive, and the pressure on our foreign reserves is much less if we’re able to do that,” Yusuf said.