PMI back in the red signals Nigeria’s struggling manufacturing sector 

Nigeria’s Purchasing Manufacturers Index (PMI) shows that sentiments among manufacturers crawled back into negative territory in November, taking the tally of negative readings to five in 2016, the worst number of readings in a single year to date, data compiled by BusinessDay show.

PMI, which takes the temperature of manufacturing, slumped by an estimated 8 percent to 48.8 points in November from 52.9 in October, according to a report published December 1 by investment bank, FBN Quest, which releases a monthly index.

“The return of the headline reading to negative territory in November is consistent with statistical and anecdotal evidence. The contraction of manufacturing picked up from -3.4 percent to -4.4 percent in Q3 2016,” the report penned by Gregory Kronsten and Chinwe Egwim stated.

“We have posted eight negative headline readings since our launch in April 2013 including five in 2016. This is to be expected since Nigeria has entered a recession this year.” This implies that 2016 has been the worst year for manufacturers in Africa’s largest economy with a total of 5 negative readings in the year alone.

Manufacturers in Nigeria are hard hit by plunging domestic production brought on by a dollar crunch and high borrowing costs, according to Frank Jacobs, the chairman of the Manufacturing Association of Nigeria (MAN).

To soften the hurdles thrown at manufacturers, Jacobs says it will take incentives like single-digit interest rates and enforcing a directive by the Central Bank that commercial banks allocate 60 percent of their foreign exchange to manufacturers to avert the dollar shortages.

Asked if there may be any improvement in the year ahead, Jacobs says, “That will depend on if borrowing costs subside and the dollar scarcity eases for manufacturers to import raw materials.”

Nigeria slid into recession in 2016, as GDP contracted in the three consecutive quarters through the year. “For GDP we see a return to growth of 0.6 percent in  the fourth quarter (from -2.2%) on the back of a modest seasonal boost to household demand as well as positive base effects for the oil sector,” FBN Quest’s Kronsten said by phone.

“We should add the squeeze in demand and the fall-off in capital projects to the acute foreign exchange shortage in our list of drivers of shrinking output, but demand is set to benefit from the government’s expansionary fiscal stance.

“Manufacturing, however, will likely be one of the last non-oil sectors to recover on account of the foreign exchange constraint,” Kronsten said.

Based on the Gross Domestic Product report for the third quarter released by the National Bureau of Statistics, the manufacturing sector’s growth rate was recorded at -2.93 percent in the third quarter.

This is 1.02 percentage points lower than what was recorded in the second quarter of the year. The report blamed the decline in manufacturing activities to the continued drop in the country’s currency, naira to the dollar exchange rate, which has made industrial inputs more expensive.

The outlook for the manufacturing sector is gloom and will remain so until monetary policy makers walk the talk of their mandate to allot 60 percent of foreign exchange at the interbank market to manufacturers,” said Hamma Kwajaffa, the Director General of Textile Manufacturers Association of Nigeria (TMAN).

Worried by the negligible proportion of foreign exchange channelled towards the importation of raw materials for the manufacturing sector, Nigeria’s Central Bank had in August, issued a circular directing authorised dealers in the foreign exchange market to channel 60 percent of total purchases from all sources (interbank inclusive) to end users strictly for the purpose of importation of raw materials, plant and machinery.

“CBN should make direct disbursements to the manufacturers because we simply aren’t getting dollars to import these items, and the futures market is yet to have an impact. These are clearly evidenced in the slump in PMI,” Kwajaffa said.

Robert Kretschmer, CEO of Kabelmetal Nigeria plc, and a member of the Manufacturing Association of Nigeria (MAN) says “manufacturers are in survival mode and are hoping the dollar situation improves in the near term.”

“There has been no improvement in dollar supply,” Kretschmer said, despite the implementation of a flexible exchange rate regime and other policy decisions aimed at unfreezing dollar inflow. “The major challenge remains acute dollar shortages.”

Dollar supply has been constrained for almost two years now in the oil exporting country, partly due to a slump in oil revenue, which accounts for 90 percent of dollar earnings.