CBN dollar supply boosts manufacturing as PMI rises

Improved dollar liquidity and a greater availability of raw materials powered the Purchasing Managers’ Index (PMI) to 52 index points in the month of March, from 50.0 in February, according to FBN Quest, which publishes a monthly report on the index.
PMI reports take the temperature of manufacturing, and a reading above 50 suggests that the sector is expanding. FBN Quest’s PMI for Nigeria has now risen for the second time this year.
“The increase in the headline reading from 50.0 posted in February reflects an improvement in business confidence within the sector,” according to a team of FBN Quest analysts in an April 03 note.
“Responses to our trigger questions refer to naira appreciation and greater availability of raw materials. The driver has been the CBN’s measures at end-February, to boost foreign exchange liquidity,” the team which comprise Gregory Kronsten, Bunmi Asaolu and Chinwe Egwim, noted.
There were five negative PMI readings in 2016 alone and so far, there has been one this year (January:48.6 index points), as acute dollar shortages, brought on by the collapse in oil prices and below trend production levels, crimped manufacturing output.
Starved of sufficient dollars at the official market, where the CBN had begun rationing scarce dollars, manufacturers often turned to the black market to meet the bulk of their needs, but it came at a premium, almost 40 percent higher than the official exchange rate.
This drove up their operation costs and slashed capacity utilisation, even as they contended with lower sales on the back of falling consumer demand and higher energy costs attributed to a fall in electricity generation, and more expensive fuel.
But since the apex bank, desperate for an exchange rate convergence between the official and black market, upped its dollar sales last February, manufacturers say they are getting more dollars to import critical raw materials and at cheaper costs, Frank Jacobs, chairman of the Manufacturers Association of Nigeria (MAN) disclosed in an interview with BusinessDay.
“The dark days are gradually winding down on the back of increased dollar supply, which is supporting manufacturers,” Jacobs said.
“The outlook for the sector is benign and is consistent with the milder contraction recorded in the last quarter of 2016, compared to the third quarter,” Jacobs added.
Real growth in manufacturing remained negative in Q4 2016, as in the previous quarters, after a contraction of 2.54 percent (year-on-year).
However, this was an improvement, relative to the decline of 4.38 percent in the third quarter, according to the National Bureau of Statistics (NBS).
The sector first entered recession in 2015, a year before it was joined by the Nigerian economy, contracting 1.46 percent in 2015, and a further 4.32 percent in 2016.
Worried by the sector’s decline, the CBN initially ordered commercial banks to allocate 60 percent of dollars to manufacturers who needed to import raw materials.
This had little impact compared to the recent CBN policy, according to Jacobs.
The CBN, on February 20 stated its intention to increase intervention in the FX interbank market, to increase dollar supply.
The first of these interventions was $500 million in forward contracts, one million to each commercial bank, to meet retail needs, ranging from school fees to medical and travel allowances.
Currently, the CBN sells to the banks at N357 per US dollar (and the banks to retail at N362) and has since injected about US$1.8bn through forward transactions for importers, according to CBN data.
The naira has appreciated by 35 percent on the parallel market since the inception of the CBN’s foreign exchange interventions.
The naira fell to N385 per dollar at the black market on Monday, erasing a two-week rally, while it was quoted at N306 per dollar on the CBN website.
The gap between them is down by more than half to N79 per dollar from N194/$ when the naira went for a premium of N500 per dollar in the wake of February.
“The recovery in the headline reading is not dramatic and we are not sure whether the appreciation has further legs to run. Yet we have to acknowledge the impact of the measures on at least part of the manufacturing sector,” according to FBN Quest.
In continuation of its determination to sustain liquidity in the foreign exchange market, the Central Bank of Nigeria (CBN) announced plans to commence twice weekly forex sales to Bureaux de Change (BDCs) from Monday, April 3.
The CBN is also to increase sales to BDCs to $10,000 weekly from $5,000.
Four of the five sub-indices picked up in March, FBN Quest noted.
The output sub-index increased significantly, from 50 to 54.5, as the major chunk (37 percent) of respondents reported higher output.
Based on recent data released by the NBS, the allocation of credit to the manufacturing sector in Q4 2016 totalled N2.2trn (representing 15% of credit to the private sector.)
The employment sub-index reading declined marginally in March, from 50 to 49. The decrease was pronounced in both large and small companies, while no change was prominent in the middle-sized firms.
The reading for new orders, the most forward-looking of the five sub-indices, showed an increase from 50.5 to 52.
The suppliers’ delivery times’ sub-index climbed from 51.5 to 53.5 is inverted for respondents (i.e. a fall in delivery times is a positive indicator).
This reading has been in positive territory since February 2015.
The stock of purchases sub-index also improved to 55 from 48 in February, as business activities peaked on the back of the naira appreciation on the parallel market.

 

LOLADE AKINMURELE