Forex paucity for manufacturers dip local raw materials utilisation to 52.8%

Manufacturers in Nigeria production output fell by 9.7 percent to N6.67 trillion in 2022 from N7.39 trillion in 2021 on account of forex scarcity, high inflation, high cost of energy and limited household purchases.

Director General, Manufacturers Association of Nigeria (MAN), Segun Ajayi-Kadir, disclosed this as part of the findings of MAN’s survey of the manufacturing sector for the second half of 2022 (H2 2022).

Ajayi-Kadir also disclosed that increased difficulty in sourcing foreign exchange (forex) compelled the manufacturers to embrace the use of expensively sourced local raw materials for their operations in 2022 and this pushed up  average  local raw materials utilisation to  52.8 percent in the period compared to 51.5 percent recorded in the preceding year.

The MAN DG stated: “Manufacturing sector factory output value declined to N2.68 trillion in the second half of 2022 (H1’2022)  from N3.73 trillion recorded in the corresponding half of 2021 (H2’2022), thus, indicating N1.05 trillion or 28 percent declined over the period.  It also declined N1.31 trillion or 32 percent when compared with N3.99 trillion recorded in the preceding half (H1’2022).

“The value of manufacturing production totaled N6.67 trillion in 2022 as against N7.39 trillion recorded in 2021. Manufacturing production was severely affected in the second half of 2022 by absence of implementation of new capital projects by the government as they focused on the election. Production in the sector was also negatively affected by limited purchases by households due to the Naira redesign policy, the high inflationary pressure in the country, high cost of energy, particularly diesel and gas, acute shortage of forex for importation of raw materials and machinery needs of the sector that are not locally manufactured in the time being and many more.”

The Naira redesign policy, he said, created a cash crunch that debilitated economic activities in the last quarter of 2022 and this particularly affected the manufacturing sector adversely as it was extremely difficult to sell most of the Fast-Moving consumer Goods and other commodities by the sector in the period.

The MAN stated that “the withdrawal of large amounts of the ‘old Naira’ without commensurate replacement with the ‘new notes’ resulted in a cash crunch in the economy with very limited means of purchasing items by households across the country.”

In the second half of 2022, the report stated that average lending rate to the sector from the commercial banks slowed to 22 percent from 24 percent recorded in the corresponding half of 2021 and the first half of 2022 respectively. The trend showed two percentage points declined over the periods.

The report also noted that commercial bank lending rate to the industries was grossly influenced by the incessant increase in Monetary Policy Rate (MPR) in quest to maintain an appreciable real interest   in order to attract foreign investment inflow, stressing that in the last quarter of 2022, the MPR was retained at 16.5 per cent; CRR was 32.5 per cent; and liquidity ratio, 30 per cent.

Therefore, the performance of the manufacturing sector based on the outcome of the survey is corroborated by the Gross Domestic Product (GDP) reports of National Bureau of Statistics, (NBS) which showed that output growth of the sector declined to -1.91 percent in the third quarter of 2022 from 3.0 percent recorded in the second quarter before moving up to 2.83 percent in the fourth quarter of the year.

Ajayi-Kadir declared that in a bid to ensure that the nation’s manufacturing sector remains competitive, it is expedient for the government to direct more funding towards backward integration development in the country.

According to him, “Local raw materials utilisation in the sector averaged 52.8 percent in 2022 as against 51.5 percent recorded in 2021.

“The increase in the local raw materials utilization in the sector during the period is due to increased difficulty in sourcing forex which compelled manufacturers to look more inward for raw materials notwithstanding the associated huge cost.

“It is therefore important for the government to re-evaluate its role in local development and production of raw materials in terms of funding.”

The MAN recommended the prioritisation “of forex intervention through the official market, particularly to support the raw materials and machine needs of the industries; improve forex allocation to industrial sector and enhance the capacity of designated banks to  efficiently process  application  of  forex by manufacturers; grant concessional forex allocation at the official forex market to industries  for importation of productive inputs that are not locally available and the unification of the various forex windows in the country.”

“It is, therefore, important for the government to re-evaluate its role in local development and production of raw materials in terms of funding.

“For instance, the development and production of Active Pharmaceutical Ingredients (APIs) has continuously eluded due to limited funding of the Raw Materials Research and Development Council (RMRDC) by the government. The absence of local production of APIs has been having dire consequences on pharmaceutical production, particularly in the current situation of acute shortage of forex,” MAN said.