Impact of FX Woes on Manufacturing

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Thursday, August 25, 2016 8:57am /FBNQuest Research

Nigeria’s manufacturing sector accounts for just 10.6% of the country’s total GDP. In the past eight quarters it has grown at an average of 2.5%. The country’s economic downturn has hit the sector such that there has been a steady contraction since Q1 2015.

For manufacturers heavy on imported inputs, the fx scarcity has forced them to source fx from the parallel market at a premium to the interbank rate. This has resulted in a drop in output as manufacturers have struggled to maintain their profit margins as they try to pass on their higher input cost.

The Manufacturer’s Association of Nigeria (MAN) revealed that over 200 SMEs within the sector have shut-down while some have downsized or relocated their business to neighboring countries.

Our latest purchasing managers’ index report shows that due to staff retrenchment a number of firms have been reclassified by size. The most common reclassification in July was from large to medium-sized.

Some manufacturers have been able to boost their processing of local raw materials, particularly food, beverages and textile focused companies. However, the availability of most imported input substitutes in the country is low as Nigeria needs to develop capacity to produce these inputs locally.

Given the strain the fx scarcity has placed on the sector, this week the CBN directed commercial banks to allocate 60% of their fx sales to manufacturers. This should help alleviate some of the pressure.

Since the launch of the new fx regime in June, the naira has depreciated considerably – a reflection of the scarcity of fx. Until stability in fx supply is achieved, the manufacturing sector is likely to continue to suffer. We expect growth to be flat at best in Q4.

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