Let’s save the manufacturing sector from collapse
Nigeria’s manufacturing sector is under siege. Current statistics from the Manufacturers Association of Nigeria (MAN) show that capacity utilisation in the country’s manufacturing sector in the first six months of 2016 fell to 44 percent from 50.69 percent obtained in the corresponding period of 2015.
For starters, capacity utilisation measures the extent to which productive capacity of a plant is being used in the manufacturing process and 44 percent capacity indicates that the manufacturing sector of Africa’s most populous country is not realising half of its production potential, according to experts.
Apart from drop in capacity, there is also one big surprise. Contrary to popular belief that scarcity of dollar, which started in late 2015, forced manufacturers to obtain more raw materials locally, data show that fewer local inputs were actually sourced in the first six months of 2016. Hence local input preference, which determines the percentage of raw materials sourced locally, declined to 46.3 percent in the first six months of 2016 (H1 2016) as against 48.77 percent obtained in the corresponding period of 2015.
The reason for this is simple; manufacturers could not source raw materials because they couldn’t find foreign exchange. An industry source revealed that
“Most manufacturers held onto the inputs they had, because they could not get any more raw materials. This cut production targets of many manufacturers and subsequently reduced capacity utilisation.”
The belief that manufacturers will source their raw materials locally if they can’t import was also shows the level of ignorance in the policy space. Changing source of raw materials requires time. It may also require, sometimes, machine modification and refinement of raw materials.
It may well be that the numbers for the last six months of 2016 are worse.
Twelve months before August 2016, 54 manufacturing companies, mostly those in the SME category, closed shop on the back of dollar scarcity and poor business environment.
The biggest factor that has been blamed for these manufacturers’ woes is dollar crunch. The Central Bank of Nigeria (CBN) last August directed that manufacturers be given 60 percent of foreign exchange in the market. However, many manufacturers complained they could only get two to five percent of their dollar needs. This may not be blamed on the CBN because there is no dollar anywhere.
However, facts show that the fortunes of the sector are dipping and must be urgently arrested if the present government’s non-oil sector claims are to be taken seriously.
Since the emergence of the present administration, capacity utilisation has been below 50 percent. Capacity utilisation in the second half (last six months) of 2013 was 52.7 percent as against 46.3 percent in the first half of the same year. In the first and second halves of 2014, capacity utilisation in the sector was 51.95 and 54.2 percent respectively. In the first half of 2015, out of which Goodluck Jonathan spent five of the six months, capacity utilisation was 50.69 percent.
However, the second half of 2015, when the present administration was in office for seven months, saw capacity drop to 49.6 percent. And in the first six months of 2016, it crashed to 44 percent.
Again, local input sourcing, which stood at 51 percent and 59 percent in the first and second halves of 2013, is 46.3 percent in the first half of 2016.
What this means is that the backward integration projects (BIPs) done by manufacturers in the immediate past administration is losing steam. Up till today, some manufacturers still complain that some local raw materials are not available in the right quantity and quality.
It is our considered opinion that the Bank of Industry, Bank of Agriculture and the upcoming Development Bank of Nigeria should provide cheap and special funds for manufacturers sourcing raw materials locally and those in BIP projects. We believe that government should begin to pay attention to processing by providing cheap funds to farmers seeking to buy equipment. The reason is that if a ton of cassava sells at $2, a ton of processed cassava (starch or flour) can go as high as $8 to $12 in the global market. Hence value-addition will bring in more dollars into this cash-strapped economy and kick-start boom.
With the oil price rising, it is our conviction that every genuine manufacturer deserves to get dollars at least 30 days after application. Waiting for three to six months to get dollars to import inputs kills factories and therefore need be discontinued.
Since electricity generation and distribution companies cannot provide power to Nigerian homes and factories, we believe that government should come into the on-going negotiations by manufacturers with private power providers to supply electricity to industrial clusters by way of guaranteeing payment and raising the amount of megawatts that will be supplied.