Nigeria’s economic landscape presents a paradox: while the service sector flourishes, the real sector stumbles. This divergence underscores a deeper structural imbalance that raises critical questions about the country’s long-term economic stability.
A recent BusinessDay report reveals that unsold finished goods in Nigeria’s manufacturing sector surged by an alarming 357.6 percent in the past year. This indicates a troubling trend—consumers are buying less, likely due to rising prices and declining purchasing power, leaving manufacturers with unsold inventory and shrinking revenues.
Despite efforts to mitigate losses through cost-cutting and operational adjustments, many of Nigeria’s leading manufacturers continue to operate in the red. Although losses narrowed slightly in Q2 2024 due to reduced finance costs—primarily foreign exchange expenses—the sector remains under significant strain.
The Fallout of Economic Reforms
The challenges faced by the real sector particularly the manufacturers are largely a consequence of sweeping economic reforms implemented by the Federal Government over the past year. While these reforms aimed to stabilise the macroeconomic environment, they introduced uncertainties that have negatively impacted businesses, particularly in the manufacturing value chain.
One of the key pain points has been the Central Bank of Nigeria’s (CBN) aggressive monetary policy stance. The ongoing battle to control inflation has led to successive interest rate hikes, making borrowing more expensive and stifling investment in expansion.
The Service Sector’s Silver Lining
In contrast, the service sector—especially the finance and insurance industries—has thrived, although Telcos suffered some setbacks in recent times. Banks have emerged as major beneficiaries of currency fluctuations and rising interest rates, which have driven up their interest income and attracted significant capital inflows.
Olayemi Cardoso, Governor of the CBN, recently announced a 2 percent increase in Nigeria’s external reserves, which rose to $40.88 billion from the end of October to November 21, 2024. This growth is largely attributed to a series of reforms at the apex bank.
Portfolio investment has also seen a significant increase of 1,214.69 percent YoY, while Foreign Direct Investment (FDI) sustained a decline of 65.33 percent in the same period.
However, experts caution that these inflows, while substantial, are largely short-term. Portfolio investments now account for 53.93 percent of total capital importation, while Foreign Direct Investment (FDI) —a more stable and impactful form of investment—remains below 2 percent.
“FDI ensures stability in the real sector, while portfolio investments are temporary. They come today and leave tomorrow for economies offering better returns,” noted an economist who requested anonymity.
Shifting Investor Sentiment
A report by BusinessDay Deputy Editor Lolade Akinmurele highlights a growing trend among investors: a shift away from the real economy, deemed “high-risk with low returns.”
Take Temitope Akande, for example, a small business owner who recently diverted N5 million earmarked for expanding her online clothing store into treasury bills. Within a year, she expects to earn N1.5 million in returns—far more than her business could generate under current economic conditions. “Customers have been few and far between,” Akande explains.
However, some analysts believe it is irrational to be diverting funds for business expansion into treasury bills for high returns.
A Tale of Two Sectors
The latest GDP figures from Nigeria’s National Bureau of Statistics (NBS) underscore the dichotomy between the service and real sectors. In Q3 2024, the service sector grew by 5.19 percent, contributing 54.23 percent on average to the country’s aggregate GDP since 2018. In contrast, the real sector has averaged just 1.33 percent growth over the past seven years, with industrial growth turning negative during the same period.
Mustapha Umaru, an industry and equity analyst at CSL Stockbrokers Limited, explains the challenges facing the real sector.
“Every sector has its peculiar issues,” Umaru states. “For manufacturing, currency volatility, high energy costs, and the CBN’s hawkish policies—such as elevated interest rates—make borrowing expensive. In agriculture, insecurity and recurring floods disrupt productivity.”
Despite some improvements in telecommunications driven by higher average usage per subscriber, the challenges linger. “Banks, on the other hand, have consistently profited from interest rate hikes and capital inflows,” Umaru adds.
Structural Constraints on the Real Sector
Israel Odubola, a Lagos-based research analyst, attributes the divergent performance of the manufacturing and service sectors to their contrasting business models.
“Manufacturing companies are more affected by inflation, which increases their operational costs,” Odubola explains. “Devaluation further exacerbates the situation, as companies with foreign exchange (FX) liabilities must pay more in naira to service them. Even their revenues are impacted by the reduced purchasing power of consumers.”
In contrast, banks — a few of the major players in the service sector operate under a more resilient model. “Banks earn from interest income on loans and investment assets, as well as non-interest income. Additionally, many hold substantial foreign currency assets, making it difficult for them to record losses,” Odubola notes.
While the real sector’s challenges are structural, Odubola believes there are pathways to recovery. “Stability in foreign exchange rates, improved infrastructure—especially power, which accounts for about 35% of manufacturing costs—and moderate interest rate hikes could provide much-needed relief. Tax incentives would also encourage new investments,” he suggests.
The Cost of a Struggling Real Sector
Beyond its contribution to GDP, the real sector plays a crucial role in job creation. “Unlike the service sector, the real sector can employ more people,” Odubola emphasises. “A struggling real sector reduces the likelihood of creating new jobs.”
He also cautions against overinterpreting the recent NBS unemployment figures, which show a reduction to 4.3 percent. “The decline is largely due to many individuals resorting to self-employment. It doesn’t reflect a genuine increase in formal job creation,” Odubola warns.
Conclusion: Growth Without Job Creation?
While Nigeria’s GDP may continue to grow due to the service sector’s dominance, this growth offers limited prospects for addressing the country’s unemployment challenges. Unless structural issues in the real sector are addressed, the economy risks becoming a case of growth without development—a scenario where economic gains fail to translate into widespread prosperity.
The path forward requires a balanced approach: one that fosters stability in the service sector while revitalizing the real sector through targeted reforms, infrastructure development, and investment-friendly policies.
