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Nigeria’s manufacturing sector crawled back into negative territory in the month of September, erasing a three month positive run, as the Purchasing Managers’ Index (PMI) which takes the temperature of the sector, saw headline reading fall to 47.9.
September’s reading represents a month-on-month decline of 8.2 percent compared to August’s 52.2, according to PMI data compiled by FBN Quest.
It is also the worst reading since April, which saw a 14.5 percent decline to 46.5 from 54.4 in March.
Manufacturing PMI has been above 50 in the three months before the latest reading, printing at 52.2, 51.0 and 50.2 in the months of August, July and June respectively.
Industry sources say September’s decline is brought on by a myriad of challenges ranging from dollar shortages to the high cost of gas.
Read also:https://businessday.ng/real-sector/article/bitter-sweet-tale-of-nigerias-manufacturing-sector/
“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 FX at the interbank market to manufacturers,” said Hamma Kwajaffa, the director-general of the 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 (FX) market to channel 60 percent of total FX purchases from all sources (interbank inclusive) to end users, strictly for the purpose of importation of raw materials, plant and machinery.
“The 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 added.
Dollar shortages were always going to be a headache for the manufacturing sector, which accounts for the largest share of outstanding futures contracts of $2.8 billion (out to August 2017) in the OTC market, as deduced from data compiled by FX trading platform, FMDQ OTC.
The challenge brought on by an increase in gas prices to $7 per million standard cubic feet (MMSCF) is also biting hard on manufacturing. “Gas prices have not been reviewed after the drop in global oil and gas prices and the current domestic tariff is three times the price of gas in the international market,” said Kwajaffa.
Robert Kretschmer, chief executive officer 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, partly due to a slump in oil revenue, which accounts for 90 percent of dollar earnings.
The manufacturing sector has since then slumped into recession with negative growth of -7.0 percent and -3.4 percent y/y in 2016.
The new flexible exchange-rate regime, which ousted a hard currency peg in June, has been in place for almost four months. Yet manufacturers still decry lack of dollars to import raw materials and machineries.
“The readings for delivery times and stocks of purchases, which are the secondary sub-indices and employment drove the decline in the headline,” the PMI report penned by FBN Quest analysts Gregory Kronsten and Chinwe Egwim noted. “Following three successive modest upticks in the headline reading, we now have a decline for the third month of the quarter, which acts as a reality check.”
A PMI is a simple exercise, where selected companies are asked their view each month on core variables in their business.
The respondent, who is characteristically the purchasing manager in a larger firm, has three choices of reply: better, unchanged or worse than the previous month.
According to the most used methodology, 50 marks a neutral reading and anything higher suggests that the manufacturing economy is expanding.
PMI readings are released at the very beginning of the new month in developed and developing markets.
The United States’ Institute for Supply Management’s Manufacturing PMI rose to 51.5 in September 2016 from 49.4 in August, way above market expectations of 50.3. New orders and production rebounded sharply while employment contracted at a slower pace.
LOLADE AKINMURELE
