The foreign exchange crisis is hurting many manufacturing firms today as many cannot get dollars to import inputs.
A lot of factories are empty because manufacturers only get two to 10 percent of dollars needs.
Nigeria manufacturers imported 40 percent of their raw materials in 2019, according to the Manufacturers Association of Nigeria (MAN), with the exchange rate standing at N360/$ last year as against N470/$ at the parallel market today. This means it costs Nigerian manufacturers more to import inputs today than in 2019.
The scarcity of dollars is down to the pandemic, which has cut crude oil demand and then price. Crude oil and minerals provide over 90 percent of Nigeria’s FX.
“We are really struggling to import our inputs because there is no dollar anywhere,” a chief executive of a manufacturing firm said on anonymity.
The COVID-19 pandemic has been a sore in manufacturers’ throats.
The manufacturing sector experienced its worst contraction in five years, declining to -8.78 percent, from the 0.43 percent recorded in the previous quarter and the -0.13 recorded in the corresponding period of 2019, a GDP report by the National Bureau of Statistics (NBS) released last week said.
Real manufacturing contribution to the economy in the second quarter of 2020 was 8.82 percent, lower than the 9.08 percent recorded in second quarter (Q2) of 2019 and the 9.65 percent recorded in the first quarter (Q1) of 2020,” the report stated.
Vincent Nwani, a Lagos-based economic consultant, said the contraction the sector witnessed generated from the GDP figure itself, which was the lowest in 15 years from 2005. He further said that recovery will not be swift, though further decline is not to be expected.
“Looking at the GDP figures itself, the figures represent the lowest in 15 years since 2005. The manufacturing sector was seriously hit by the impact of the pandemic which reflected in the contraction. The economy was shut down and is still being reopened gradually, due to the underlining challenges of the economy and the impact of the pandemic,” he noted.
Israel Odubola, a senior research analyst at the Lagos Chamber of Commerce and Industry (LCCI), said the contraction highlights the struggles of the manufacturing sector prior to the outbreak of the pandemic, adding that it already showed traces in Q1 and the PMI figures.
“The nine percent contraction was driven by the supply chain disruption and lockdowns measures, particularly in Asian region, which is a strategic import hub for Nigerian manufacturers,’ he said.
In addition to this, the underwhelming performance was equally driven by FX crisis, in which most manufacturers could not access FX to source critical import needs,” Odubola further said.
He added that activities in the sector are still weak, evidenced by manufacturing PMI still in contractionary region, saying that when the various challenges in the sector are considered, there is a possibility that the sector will most likely contract in the next two quarters.
Akinloye Ayorinde, equity research analyst at CSL Stockbrokers Limited, said the steep decline in the manufacturing sector was primarily down to weaker domestic and international economic activities in Q2 due to the lockdown measures enforced to contain the spread of coronavirus.
As a recommendation, he said that “to revive the sector, significant amount of stimulus would be required. Particularly, vulnerable sub-sectors in the manufacturing space should be provided with funds at low cost to sustain operations and encourage capital expenditure (CAPEX) spending. In addition, solving the FX challenges faced by these manufacturers would be an important factor to kick-start growth.”Ayorinde said.
