By TBY | Nigeria | May 03, 2018
Nigeria's industrial sector has seen difficult times lately due to the falling exchange rate and weakening economic position, but recent growth has industry leaders optimistic that better days are ahead.
Bringing its industrial sector up to speed is one of Nigeria’s leading development goals. The petroleum sector has long been overwhelmingly the largest industry in the country, contributing more than 95% of export earnings and 85% of government revenue at its peak in 2012. In contrast, the industrial sector has struggled due to inadequate infrastructure and substandard supply chains that have kept growth low. Well aware of the need to increase diversification efforts, the Nigerian government has invested in the industrial sector, hoping to turn it into a manufacturing center for consumer products. Foreign investment has increased in recent years, with China playing an increasingly more active role in funding industrial activity. Oil and gas’ share of GDP was as high as 17.5% in 2011 (according to rebased figures), but fell to 9.61% of GDP in 2015 and 8.42% in 2016, a contraction of 13.65%. The size of the oil sector created a ripple effect in non-oil fields, but they were largely able to maintain a level of stability; the non-oil sector as a whole declined by 0.22% in real terms. However, the slight decline was not reflected evenly among non-oil industries. Sectors that depended most heavily on inflows from oil revenues saw stronger contractions. Real estate, for example, declined by 9.27% YoY. Manufacturing’s importance to Nigeria’s economic future lies in its greater distance from the oil industry. While manufacturing still relies heavily on the sector for fuel and wider aggregate demand, it can establish outside lines of supply that can give the nation new sources of revenue and foreign investment.
In 2016, manufacturing saw a contraction of 4.32% YoY, worse than the fall of 1.46% recorded in 2015. This came about largely as a consequence of the wider economic issues facing the country, with the falling exchange rate and rising energy costs the two primary factors. Due to the nation’s worsening fiscal position, the naira fell significantly against the dollar, and the Central Bank enforced a rationing system designed to maintain an official exchange rate that continued to separate from the black market system. As part of the Central Bank of Nigeria’s efforts to preserve dwindling foreign reserves, it put forth a list of 41 items that cannot be obtained through payments in foreign currencies. This list, which includes cement, steel sheets, textiles, and steel drums, hit the industrial sector particularly hard; while designed to increase local production, in effect it dramatically lessened the ability of industrial producers to obtain the needed materials from foreign markets.
Yet, despite all the challenges facing the sector, 2017 has brought signs of positive change. The Manufacturing Purchasing Managers’ Index (PMI), a metric that gauges the economic health of the manufacturing sector, increased seven consecutive months into October 2017. In late 2016, the index hit a low of 42 points, and industry leaders estimated that industrial output was at about 20% of capacity. By October 2017, however, PMI was at 55, and CBN data indicated that 11 of 16 sub-sectors had shown monthly growth, with the sector as a whole bolstered by growth in employment and more purchasing of raw materials. Purchasing, in particular, was bolstered by new government policies that increased industrial access to foreign materials. In a sign of shifting international attitudes toward the sector, several new projects reached approval in mid-2017. Conglomerate Dangote Group reached an MoU with the Niger state government to construct a USD450-million sugar production center that is projected to generate more than 15,000 jobs.
A major factor in the shifting fortunes of the industry was the Central Bank’s introduction of a new “investor and exporter window” in April 2017 that has allowed businesses to bid for dollars, and the window has seen more than USD1 billion exchanged per week. This has significantly increased access to the capital needed for manufacturing. Government figures indicated that export of manufactured goods rose from NGN76.76 billion in the first half of 2016 to NGN179.79 billion in the same timeframe in 2017. While Nigeria still posted a trade deficit of NGN4.59 trillion over that timeframe, the overall move toward economic growth—the National Bureau of Statistics reported that the nation had come out of the recession in September 2017—is a promising sign for an industrial sector that is crucial to the nation’s hopes for a more prosperous and stable economy.