Nigeria’s local manufacturing sector has witnessed a significant downturn in output growth, with its average growth rate between 2015 and 2022 standing at -0.01%, according to the World Bank. Recently, the National Bureau of Statistics (NBS) reported a marginal year-on-year growth rate of 0.48% in the manufacturing sector during Q3 2023. These figures underscore the challenges faced by the sector, stemming from adverse macroeconomic conditions influenced by both domestic and global factors.
The reliance of many manufacturers on imported raw materials is evident, as data indicates a substantial increase in raw material imports, reaching N950.93 billion in Q3 2023, reflecting a 67.48% surge from the Q2 value of N567.8 billion. This underscores the critical role of imports in the manufacturing sector and highlights the impact of the exchange rate on its dynamics.
Over the past year, Nigeria has witnessed a drastic 96.55% depreciation against the US dollar due to the federal government’s devaluation policy and the overall weakening of the naira. The current exchange rate stands at approximately N1200 to the dollar in the parallel market and around N900 in the official window. A weakened naira inevitably leads to higher costs of raw material imports, resulting in lower production volumes, reduced profit margins, a decline in new investments, and cost-push inflation.
Given the intricate relationship between local manufacturing and the exchange rate, addressing these challenges and fostering manufacturing growth despite a weakened naira becomes imperative.
I propose three key strategies for the Nigerian manufacturing sector to enhance productivity in the face of a depreciating naira: prioritizing local sourcing of raw materials, strengthening local supply chains, and adopting hedging strategies.
Firstly, manufacturers should prioritize local sourcing of raw materials. Establishing partnerships with local raw material producers is crucial. Collaboration with these producers ensures that locally sourced raw materials meet quality standards. Incentivizing raw material producers through training, skill development, and funding can create a dependable supply chain, diminishing reliance on imported materials.
Secondly, manufacturers should focus on improving local supply chains by fostering partnerships within the local manufacturing ecosystem, including suppliers, distributors, and related businesses. A robust manufacturing ecosystem can decrease dependence on imported raw materials.
Lastly, manufacturers should adopt hedging strategies to navigate the depreciation of the naira. Exploring foreign exchange risk management procedures such as forward contracts, options, or futures can effectively mitigate losses resulting from fluctuations in the naira’s value against the dollar. Employing forward contracts to secure fixed exchange rates for future transactions, purchasing “put options,” or utilizing future contracts to lock in exchange rates can safeguard against potential naira depreciation.
Dr. Chimere Iheonu