Nigeria’s manufacturing sector performed dismally in 2016 as manufacturers faced several challenges which affected them negatively.
The Central Bank of Nigeria, CBN, said the industrial sector recorded a general decline between January and November as indicated by the Purchasing Managers Index (PMI).
The PMI is an indicator of the economic health of the manufacturing sector.
The index stood below 50 index point in the months of January to November which indicated decline in industrial production.
The PMI is based on five major indicators – new orders, inventory levels, production, supplier deliveries and the employment environment.
Operators said that the sector was faced with myriads of challenges ranging from scarcity of foreign exchange, infrastructure deficit, high banking charges and lack of raw materials.
About 272 firms were shut, while some reduced their production, staff strength and remuneration of workers.
Frank Jacob, the President, Manufacturers Association of Nigeria (MAN), said that industrial capacity utilisation hovered around 20 per cent during the year.
“More than half of the surviving firms are classified as ailing which posed serious threat to the survival of the manufacturing sector.
“The business environment was plagued by epileptic power supply, bad roads, high interest rate and high cost of energy which contributed to high cost of production and impediment to competitiveness of the sector,” Jacob said.
A major challenge was the acute scarcity of foreign exchange which restricted the ability of manufacturers to import raw materials for production.
The apex bank had earlier maintained an official exchange rate with the bound of N197 to N199/USD from February 2015 to June 2016.
To address the problem of foreign exchange scarcity, the CBN introduced a new foreign exchange system and some monetary controls in June 2016.
Under the new flexible exchange rate system, the naira exchange rate to the dollar depreciated to the average of N320 in the official market and N485 in the parallel market during the year.
The CBN also banned 41 raw materials from getting foreign exchange for importation at the official segment of the foreign exchange market.
MAN, however, said that the new foreign exchange system worsened the plight of manufacturers as it led to a cumulative loss of N500 billion for manufacturers in 2016.
Babatunde Odunayo, the Chairman, Apapa Branch of MAN, said that some Letters of Credit and Form Ms, approved to manufacturers at N197/US$ before the introduction of the flexible exchange system, were redeemed at N320.
He said this meant a huge loss to manufacturers as the related goods had mostly been sold before the commencement of the new exchange rate system.
Mr. Odunayo said that the exchange rate loss of N500 billion reflected in their accounts and led to factory closures, unemployment and loss of investments.
According to him, the exchange rate losses required additional working capital to shore up cash differences of between N320 and N197.
To further address the foreign exchange crisis, the CBN, on August 22, directed banks to allocate 60 per cent of their foreign exchange sales to manufacturers for procurement of raw materials, plants and machineries.
In spite of this directive, the problem of foreign exchange scarcity persisted.
Mr. Kwajaffa said that no textile manufacturer had accessed foreign exchange in spite the $660 million earmarked for manufacturers at the official interbank market.
Nnamdi Okafor, the Managing Director, May and Baker, said the inability of manufacturers to access foreign exchange through the interbank affected industrial production and contributed to inflation.
“It has been a herculean task running any business in Nigeria, especially import-dependent manufacturing business.
“I can confirm to you that as a company, we have not been able to access official forex allocation in the past six months.
“In fact, some of the letters of credit we opened as far back as the fourth quarter of 2015 have not been funded by the banks.
“Consequently, we incurred huge exchange rate losses in 2016 and these will likely impact on bottom-line at the end of the year,” Mr. Okafor said.
Erisco Foods Limited, an indigenous tomato paste manufacturer, relocated its 150 million dollars tomato paste processing plant to China due to the same problem.
Erisco Foods had a production capacity of 450,000 metric tons of tomato paste annually and had 22 brands with over 2,000 workers in Nigeria.
Eric Umeofia, the Chief Executive Officer, Erisco Foods, said that the company relocated to friendlier business environment since it lost over N3.5 billion in Nigeria.
He urged the Federal Government to ensure more liquidity in the foreign exchange market to restore investors’ confidence in the economy.
Industry experts also urged the CBN to review its policy on the 41 items restricted from the official foreign exchange market as it had stifled production and forced many firms out of business.
They urged the apex bank to redirect its policies towards stimulating the economy rather than tightening money supply.
They said that monetary and fiscal policies should be coordinated for economic revival and growth.
The experts also called for review of some monetary and fiscal policies that had hindered the growth of the manufacturing sector.
However, there seems to be a ray of hope for the sector in 2017 as indicated by the PMI.
The PMI recorded some improvement in December which elicited optimism that 2017 will be a better year for the sector.