Dollar scarcity dips manufacturing capacity by 44% – Businessday

Dollar scarcity has forced down capacity utilisation in the Nigerian manufacturing sector to 44 percent in the first six months of 2016, BusinessDay has gathered exclusively.

This 2016 figure represents a 6.69 percent decline from 50.69 percent obtained in the corresponding period of 2015, data from the Manufacturers Association of Nigeria (MAN) exclusively obtained by BusinessDay said.

“What happened in 2016 was that many manufacturers could not source raw materials because they couldn’t find foreign exchange. Most of them held onto the inputs they had because they could not get any more raw materials,” Frank Udemba Jacobs, president of MAN told BusinessDay in a telephone interview.

“This cut production targets of many manufacturers and subsequently reduced capacity utilisation. It is also a piece of evidence showing that many manufacturing companies closed shop in 2016,” Jacobs said.

Capacity utilisation measures the extent to which productive capacity of a plant is being used in the manufacturing process. It is calculated by dividing the total capacity by the portion being utilised. Capacity utilisation is a key determinant of the health of the manufacturing sector and 44 percent capacity indicates that the manufacturing sector in Africa’s most populous country is not realising half of its production potential, experts say.

The first six months in 2016 were tough for Nigerian manufacturers who could not find dollars to import inputs, spare parts and machinery. Manufacturers complained that they opened letters of credit (LCs) at banks and waited for 30 to 90 days to get dollars to import inputs. The dollar crunch was worsened by the Central Bank of Nigeria’s delisting of 41 items, some of which are manufacturing inputs, from the exchange market. The decision made importation of inputs harder for some manufacturers.

“For the past three months, we have been having challenges procuring the foreign exchange we need to bring in raw materials and other imported supplies we need for production,” Sesan Sobowale, spokesman for  Guinness Nigeria, the country’s second-biggest brewer, said in March 2016.

The dollar crunch in Nigeria was caused by an over 50 percent drop in oil prices, which correspondingly led to a fall in Nigeria’s dollar earnings from oil. Nigeria depends on crude oil for 85 percent foreign exchange earnings and 75 percent revenue.

  “Our company, bid for forex at N282/Dollar, but we were not given. They said there are not enough dollars and we should wait for another 30 days,” said Taiwo Adeniyi, group managing director, Vitafoam Nigeria Plc.

The CBN introduced the flexible exchange rate in June 2016 and later directed that 60 percent of dollars be allocated to manufacturers.

But there was barely an improvement in oil price that would guarantee more dollar inflows. The situation was worsened by low foreign direct investment inflows within the period.

Joseph Babatunde Oke, immediate past chairman, A.G Leventis, told BusinessDay that the company could only get two percent of its dollar needs.

Babatunde said the company’s bread production fell from 1.5 million loaves weekly by June 2015 to 400,000 loaves within the first six months of 2016, as foreign exchange scarcity hit the firm.

The Manufacturing Purchasing Managers’ Index (PMI) in February 2016 was 45.5 percent and 45.9 per cent in March. The figure was 43.7 percent in April and 45.8 index points in May 2016. A  less than 50 percent PMI indicates that the manufacturing sector is not in a healthy state.

A report done by NOI Polls Limited and the Centre for the Studies of Economies of Africa, said in August that 222 SMEs and 50 manufacturing firms had shut down in 12 months preceding August 2016. MAN says the actual number is 54 firms.

  “The second half of 2016 may even be worse. The situation did not improve,” Jacobs said.