Effect of Changes in Economic Variables on the Performance of Manufacturing Firms in Nigeria

The paper investigates how changes in key economic variables—specifically consumer price index (CPI) and exchange rate—affect the performance of Nigerian manufacturing firms, measured by earnings per share (EPS). It frames the study within the broader importance of the manufacturing sector to economic growth, foreign reserves, currency competitiveness, and overall economic stability. The Nigerian context is characterized by persistent inflation and exchange rate volatility, which raise production costs and potentially erode profitability. Research objectives: (1) assess the extent to which changes in CPI affect EPS of firms manufacturing consumable goods in Nigeria; (2) evaluate the effect of exchange rates on EPS of these firms. Hypotheses: H0: Changes in CPI do not affect EPS; H0: Exchange rate does not affect EPS. The study’s purpose is to provide empirical evidence guiding economic policy and firm strategy in an environment of inflationary pressure and exchange rate fluctuations.

The review covers conceptual, theoretical, and empirical strands. Inflation is discussed as a key macroeconomic indicator measured via CPI or the GDP deflator, with adverse effects on purchasing power and potential disruptions to firm profitability (Akers, 2014; Alimi, 2014; Bora, 2013; Boyd et al., 2001). Exchange rate dynamics influence input costs, trade, and firm competitiveness; appreciation reduces costs of imported inputs, while depreciation raises them (Kirui et al., 2014; Kuwornu, 2012). The review highlights how inflation types (cost-push, demand-pull, built-in) differentially impact production, profitability, and resource allocation, and suggests managerial strategies for inflation risk mitigation (Ulrich et al., 2010; Pettinger, 2016; Chioma et al., 2015). EPS (IAS 33) is emphasized as a key performance metric tied to profit after tax and shares outstanding, pivotal for investment decisions (Smart & Graham, 2012; Mlonzi et al., 2011; Owen & Smullen, 2012). Theoretical grounding includes Inflation Theory (monetarist vs. structuralist perspectives) suggesting policy-driven causes and remedies for inflation (Asuquo, 2012), and the Managerial Theory of the Firm (Baumol, 1967) focusing on revenue maximization, cost minimization, and the dynamic manufacturing environment’s sensitivity to economic policies and technologies. Empirical studies present mixed evidence: some find inflation and interest rates negatively related to manufacturing growth while exchange rate is positive and significant (Modebe, Ezeaku & Hillary, 2016); others find CPI significantly affects firm performance measures like net asset per share, with exchange and interest rates insignificant in the short run (Idaka et al., 2021). Additional studies report macroeconomic variables significantly relate to manufacturing performance (Ezu et al., 2020), and mixed effects of inflation and other macro factors on reporting quality and firm performance across contexts (Ghareli & Mohammadi, 2016; Maimunah & Patmawati, 2018; Nnado & Ugwu, 2016).

Design: Ex-post-facto using quantitative secondary data. Data sources: Central Bank of Nigeria (CBN) statistical bulletins, National Bureau of Statistics (NBS), and annual financial statements of selected manufacturing firms. Period: 2004–2022. Population: 20 quoted firms producing consumable goods on the Nigerian Exchange Group (NEG). Sample: 12 firms (purposive sampling; 60% of population). Variables: Dependent variable—Earnings per Share (EPS). Independent variables—Average Consumer Price Index (ACPI), Average Exchange Rate (AEXR). Estimation: Panel data analyzed using Ordinary Least Squares (OLS) and descriptive statistics. Model specification: EPS = f(ACPI, AEXR). Linear form: EPS = b0 + b1·ACPI + b2·AEXR + e. The reported regression results use log-transformed independent variables: EPS = c + β1·log(ACPI) + β2·log(AEXR) + e. Diagnostic/fit statistics reported include R-squared, Adjusted R-squared, F-statistic with p-value, and Durbin-Watson statistic. Descriptive statistics summarized distributions, indicating approximate normality and platykurtic distributions for EPS, ACPI, and AEXR.

- Descriptive statistics (n=19 years): Mean values—EPS 65.60, ACPI 167.31, AEXR 231.34; variables approximately normally distributed; EPS slightly negatively skewed, ACPI and AEXR positively skewed. - OLS regression (with log ACPI and log AEXR): • Constant (C): 4.1307 (t=6.7023, p=0.0000) • LOG(ACPI): 0.6999 (t=3.3067, p=0.0045) – positive and statistically significant; a 1% increase in ACPI associates with ~0.70% increase in EPS. • LOG(AEXR): -0.6410 (t=-2.2125, p=0.0418) – negative and statistically significant; a 1% increase in AEXR associates with ~0.64% decrease in EPS. • Model fit: R-squared 0.5922; Adjusted R-squared 0.5412; F-statistic 11.6166 (p=0.000765); Durbin-Watson 1.5310. - Interpretation: Inflation (via ACPI) is associated with higher EPS, consistent with manufacturers’ price adjustments passing higher costs to consumers. Exchange rate depreciation (higher AEXR) is associated with lower EPS, reflecting increased costs of imported inputs and pressure on margins.

The findings indicate that higher consumer prices (CPI) are linked to increased EPS, suggesting firms can adjust prices to buffer cost increases and protect profitability—aligning with studies observing positive or significant inflation–performance relationships. Conversely, exchange rate increases (indicative of naira depreciation) are associated with lower EPS, reflecting Nigeria’s import dependence and cost-push pressures on inputs. The results speak directly to the hypotheses: CPI changes significantly affect EPS, while exchange rate movements negatively affect EPS. The discussion situates these outcomes within Nigeria’s macroeconomic context of persistent inflation and exchange rate volatility and references mixed prior evidence, noting some studies report insignificant exchange rate effects while others find significance. Overall, the model indicates that macroeconomic conditions materially influence manufacturing firms’ earnings performance, with pricing power partly offsetting inflation but currency weakness eroding profitability.

The study concludes that changes in key economic variables materially affect the performance of Nigerian manufacturing firms. Rising CPI is associated with higher EPS, implying manufacturers often pass increased costs to end users through price adjustments, sustaining margins. In contrast, exchange rate depreciation raises input costs and is associated with lower EPS, underscoring Nigeria’s import dependence and exposure to foreign currency pressures. Policy recommendations emphasize: (1) fostering an enabling environment for manufacturing, boosting exports, and strengthening foreign reserves (including revitalizing refineries and supporting SMEs); (2) mitigating inflationary pressures by curbing excessive import dependence and addressing fuel importation to reduce transport-driven price surges; (3) encouraging firms to adopt rigorous budgeting approaches (value proposition/priority budgeting and activity-based budgeting) that account for internal and external cost drivers to enhance EPS.