The performance of manufacturing sector and utilization capacity in nigeria

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  • 1. NAME: JOLAYEMI OLAWALE SHERIFMATRIC NO: 0927EC050RESEARCHTOPIC: THE PERFORMANCE OFMANUFACTURING SECTOR AND UTILISATIONCAPACITY IN NIGERIACOURSE TITTLE: RESEARCH METHODS INECONOMICSLEVEL: 300LEVELDEPARMENT: ECONOMIC DEPARTMENTLECTURER IN CHARGE: MR. OLALEKAN SALIU1
  • 2. THE PERFORMANCE OF MANUFACTURING SECTOR AND UTILIZATIONCAPACITY IN NIGERIAAbstractThe study attempted to evaluates the performance of the manufacturing sector capacityutilisation in Nigeria. The objectives of the study are to assess the capacity utilisation ofmanufacturing sector in Nigeria and identify factors which influence capacity utilisation. Thesecondary data used for the study cover 1985 – 2009.the sources for this data are statisticalbulletin. Annual report and statement account of account from federal office of statistics andCentral Bank of Nigeria. The data were analyzed using Ordinary least square method (OLSM) ofmultiple regression models. The major factors that influences the level of capacity utilization areinflation rate, exchange rate, interest rate, loan and advances, per capital income, electricity etc.based on the finding that government should concentrate on macro economics stability thatrelative low are of inflation. Government should give relief to manufacturer and improveinfrastructure to restore the glory of the nations manufacturing sector, and government shouldadopt trade restriction on imported goods that are locally produced. The result showed that thecoefficient of determination R2 explains about 62 percent of the total variation in the capacityutilization.IntroductionCapacity utilization refers to the extent to which an enterprise or a nation actually uses itsinstalled productive capacity. thus it refer to the relationship between actual output produced andpotential output that could be produced with installed equipment, if the capacity was fully used,one of the most used definitions of capacity utilization rate is that, the ratio of actual output tothe potential output. But the potential output can be defined at least two different ways. One isthe engineering or technical approach according to which potential output represents themaximum amount of output that can be produced in the short-run with the existent stock ofcapital (Nelson, 1989, p.273). Johanson, (1968) defined capacity utilization as the ratio between the actual output of firms tothe maximum that could be produced per unit of time with existing plant and equipment. Theeconomics approach, on the other hand, defines the potential output as being the optimum levelof output from the economic point of view.Before independence, agricultural production dominated Nigerian economy and accounted forthe major share of its foreign earnings. Early efforts in the manufacturing sector were orientedtowards the adoption of an import substitution strategy in which light industry and assemblyrelated manufacturing ventures were embarked upon by the former trading companies.2
  • 3. However, since the late 1960s, the Nigerian economy has been based mainly on the petroleumindustry. In the 1970s a series of increases in the international oil price generated substantialwindfall revenues for the government. It soon became apparent that these oil price shocks were,at best, a mixed blessing. Like many other African countries, Nigeria early independence yearshad seen an industrial strategy that relied heavily on import substitution.According to the 2010 annual report of the Manufacturers Association of Nigeria, (MAN)presented during the 39th Annual General Meeting of the association, the Nigerianmanufacturing sector only contributed 4.1 percent to the 2010 GDP, compared to 4.21 in 2009.The decline also manifested in the capacity utilisation of industries in the country. According tothe report, average manufacturing capacity utilisation dropped from 47 percent in 2009 to 45 percent in 2010. Production output declined from N183.8 billion in the first half of 2009 to N165.7billion in the same period of 2010. Investment profile in the first half of 2010 had a sharp declinefrom N1 trillion in the first half of 2009 to N360 billion in the corresponding period of 2010.Employment figures in the first half of 2010 dropped from 998,086 in January – June 2009 to996,395 in the corresponding period of 2010. Business unplanned inventory increased fromN5.15 billion in the first half of 2009 to N11.4 billion in the same period of 2010. The reason for their poor performance of the sector was as a result of the harsh economicenvironment. Some of the challenges that led to the harsh economic environment are: acute stateof infrastructure deficiency, especially energy, general insecurity and perceived threat to politicaland economic stability, smuggling and dumping of cheap and substandard goods which usuallysuffocate local manufactured products, high cost of funds and inadequacy of long-term loanwindows to support long-gestation investments; multiple taxation which is threatening thesurvival and growth of business in the country, weak demand as a result of low purchasingpower, among others.(MAN)Failure of the sector since independence has been quite remarkable. Successful governmentsover the years, realizing the potentials of the sector have put in place policies and establishedinstitution to aid the development of the sector. In 1986 structural adjustment programme (SAP)was initiated to stimulate domestic production, SAP brought with it escalation in exchange rateresulting in high cost of raw materials and spare parts. The SAP programme ended up being afailure. The harsh economic situation triggered a chain reaction, such as high cost of production,scarcity of raw materials and spare parts and huge inventory of unsold goods due to lowpurchasing power. All these factors impacted negatively on capacity utilization.(Banjoko 2002).Current governmental programmed aimed at reversing the economic trend are Nationaleconomic empowerment and development (NEEDS) and vision 2020, which according to theproponents will put Nigeria among the first twenty (20) developed economies by the year 2020.It is against this background that it becomes imperative to access the effects of power supply andsome macroeconomic variables on capacity utilization of the Nigerian manufacturing industry.3
  • 4. OBJECTIVE OF THE STUDYThe aim of this paper is to appraise the performance of manufacturing sector and capacityutilization in Nigeria between 1985-2009. Therefore the specific objectives of this paper are asfollows: to assess the capacity utilization in manufacturing sector in Nigeria and indentify the factors which influence capacity utilization Identify lingering problems of the manufacturing sectorLITERATURE REVIEWA lot of research have been carried out which identified several variables influencing capacityutilization. Mojekwu and iwuji (2011, p.157-163) identified that power supply had positive andsignificant impact on capacity utilization while inflation rate and interest rate had negativeimpact on capacity utilization.Eniola (2009) reported that Exchange rate, Inflation rate, Imports Federal capital expenditure,foreign direct investment (FDI) and Real loans and advances accounted for 50 percent variationin capacity utilization. Out of the six variables only inflation rate had a negative impact oncapacity utilization while the other five had positive impact. The finding also revealed that therewas a very strong positive and significant relationship between imported manufactures andcapacity utilization, showing that Nigeria is highly important dependent. From the study 1percentchange in imported manufactures resulted in 18.33 percent increase in capacity utilization,indicating that Nigeria is highly important dependent.According to Oladokun (1979), the proportion of labour employed in manufacturing has sloweddown greatly. This may be due to the under-utilization of capacity. In the manufacturingindustry, the capacity utilization in 1980 was 70.1 and by 2000, it was below 35%.Awujola (2004) suggested that high productivity in the Nigerian manufacturing industry isnecessary conditions for the sectors recovery, achieving competitiveness, boosting GDP anduplifting the standards of living of the people, require to attacks the problems of low level oftechnology, low level of capacity utilization rate, low investments, high cost of production,inflation and poor infrastructure. The capacity utilization and productivity remain very lowcompared with other African manufacturing firms. In most Africa countries, performance in thissector has been poor (UNIDO, 2002, p.6).Omobowale (2010) revealed a number of problems confronting these local industries wererecorded. These include erratic power supply, cost of raw materials, level of automation, noisepollution, occupational hazards, instability in government policies, marketability and a generalbias for machines fabricated locally.Kayode (1987), made us to believe that the industrial sector and in particular, the manufacturingsub-sector is the heart of any economy. He went further to confirm that faulty or poor industrialdevelopment policies have long been recognized as major factors that adversely affect the well-being and socioeconomic improvement of the people in developing countries. He argued thatsuch policies are the major contributing factors to low value added and low economic growth.4
  • 5. Obasi (2000), showed that the manufacturing sector is typically the most dynamic component ofthe industrial sector and the degree of manufacturing is a measure of the extent to which theother components of the industrial sector. Söderbom and Francis (2002) the most frequently cited number-one problem for the firms isphysical infrastructure, followed by access to credit, insufficient demand, cost of imported rawmaterials and lack of skilled labour. Uzaoga (1981) also threw more light on the low performance of the manufacturing sector inNigeria. He made us to believe that Nigeria being a colony of Britain had to specialize on theproduction of raw materials while Britain serves as the main supplier of manufactured goods.According to him, this unfortunate pattern of investment promoted the theory based on a staticscheme of comparative advantage whereby diverting the Nigerian economy into activities thatoffered little opportunity for technical progress. The few industries established depended onforeign inputs. All these distortions according to him affected the performance of the industrialsector in terms of its contribution to the gross domestic product, employment generation,capacity utilization; export and value added which are indices for measuring the performance ofthe manufacturing sub-sector.FACTOR THAT CONSTITUTE TO POOR PERFORMANCES OF MANUFACTURING SECTOR IN NIGERIAThe Manufacturing sector is also crucial for employment generation, wealth creation and raisingthe quality of life of Nigerians. However, the sector remains weak due to some of challengesincluding the poor state of the nation’s infrastructure which imposes high cost of production,Weak technological support and low levels of innovation which lead to production of low qualityproducts. Low Level of Technology: This is perhaps the greatest obstacle constraining productivity inNigeria as developments in technology and innovations are the primary forces propellingindustrialization today. Due to frequent breakdown reduction the capacity utilization rates, Lowtechnology is responsible for the inability of local industry to produce capital goods such as rawmaterials, spare parts and machinery.Poor Performing Infrastructure: Poor performance of infrastructural facilities, characterizedby frequent disruption in electric power and water supplies and high cost of transportationsystems, is a major constraint on productivity. As firms have to invest huge capital to providealternative infrastructural facilities to run their businesses, enterprises are forced to carry highcost structure which reduces efficiency and results in loss of competitiveness for their productsPolicy instability: Investment in manufacturing requires long range planning; consequentlystable and consistent macroeconomic policies are a pre-requisite for high performance in thesector. However the increasing policy inconsistency resulting in instability in the macro-economic environment, affects the corporate planning adversely.5
  • 6. Low Investments: Lack of funds has made it difficult for firms to make Investments in modernmachines, information technology and human resources development which are critical inreducing production costs, raising productivity and improving competitiveness. Due to financialconstraints, industries in Nigeria are unable to acquire modern technologies. Consequently, theequipment frequently breakdown and this reduces capacity utilization rates.High Cost of Production: Since the introduction of SAP, high and increasing cost of productionhas been recorded by most business organizations as a major constraint on their operations (CBNBusiness Surveys). Increased cost, traced largely to poor performing infrastructural facilities,high interest and exchange rates, has resulted into increased unit price of manufactures, loweffective demand for goods, liquidity squeeze and fallen capacity utilization rates.Inflation: which can be described as persistent increase in the general price level constitutes adisincentive to saving for future use and thereby retards investments and growth. It alsoencourages speculative activities and diverts resources from productive ventures.Lack of funding: Funding challenges have made it difficult for manufacturing firms to invest inmodern machines, Information Technology and human resources development, which are criticalto reducing production costs, raising productivity. High interest rates and the reluctance on thepart of financial institutions to comply with laid down lending guidelines tend to frustratecorporate investment and fail to ensure protection and growth of local industries.The chart below shows the sectoral contributions to the GDP: Nigeria’s GDP by sector 2008 (per cent NAME OF SECTOR PERCENTAGE CONTRIBUTE TO GDP Whole sale, Hotel and Restaurant 18% Crude petroleum and Natural Gas 41% Building and construction 2% Manufacturing 4% Agriculture 18% Other service 17%Sources: Central Bank of Nigeria Bulletin 2009 percentage whole sales, Hotel and Restaurants Crude petroleum and Natural gas Building and construction Manufacturing Agricultural other services6
  • 7. The contribution of the industrial sector to the GDP in Nigeria is further compared with those ofselected countries to further emphasize the poor performance of the sector.Nigeria’s manufacturing as percentage of GDP and those of Selected Countries 2004-2007. Period Brazil China Egypt India Malaysia Nigeria Singapore Canada USA 2004 23 41 18 16 30 3.68 27 18 13 2005 23 42 17 16 29 3.79 27 18 13 2006 23 41 17 16 29 3.91 27 18 13 2007 23 43 17 16 29 4.03 27 18 13Source National Bureau of Statistics 2009 In terms of capacity utilization, the capacity utilization in the manufacturing sector that was 73.3per cent in 1984 fell to 54.3per cent by 2009.MethodologySecondary data were collected to determine capacity utilization in the Nigerian manufacturingsector. Secondary data were collected form Central Bank of Nigeria publication, journals,articles etc.The paper employed ordinary least square method (OLS) of multiple regression analysis. This isto establish the relationship between the capacity utilization as dependent variable and variablesthat affect capacity utilization in the manufacturing sector, namely inflation rate, exchange rate,interest rate, loan and advance, per capital to real GDP and electricity generation as independentvariables.Models specificationThe model used to explain manufacturing capacity utilization in Nigeria is seen below: thismodel was borrowed from the literature reviewed and modifiedY = b0 + b1x1 + b2x2 + b3x4 + b5x5 + b6x6 + µ1Where: Y = capacity utilization Bo = intercept X1 = inflation X2 = exchange rate7
  • 8. X3 = interest rate X4 = loan and advance X5 = per capital at GDP X6 = electricity generation µ1 = error termDiscussion and interpretation of the resultsResults of the regression modelY = 41.9 – 0.04X1 + 0.10X2 – 0.09X3 + 7.48X4 + 9.54X5 – 0.01X6 R2 = 0.62 F = 4.82Where X1 = inflation X2 = exchange rate X3 = interest rate X4 = per capital at GDP X5 = electricity generation X6 = electricity generation Y = capacity utilizationFrom the estimation equation, the R2 which is the coefficient of determination explains 62 percent of the total variation on the capacity utilization in the manufacturing sector as reflected inthe above results meaning that the regression line give a good fit to the observed data.On the coefficients of the variables, X1 (inflation rate) is statistically significant and it has aninverse relationship with the capacity utilization in the manufacturing sector. This means thathigh inflation reduced, capacity utilization also increase while, increase in inflation rate lead tolow capacity utilization.On the other hand, X2 (exchange rate) has a direct or positive relationship with capacityutilization in manufacturing sector, this means that deregulation of the exchange rate policy ofthe government really favoured the manufacturers to have favoured capacity utilization in this8
  • 9. sector, availability of foreign exchange to manufacturing sector improves capacity utilizationhence; shortage of foreign exchange reduced capacity utilization in this sector.The coefficient of interest rate X3 showed a negative relationship. This means that if interest rateis reduced, productivity will increase, as many manufacturers we like to borrow and thereforecapacity utilization will also increase. On the other hand, if the interest rate is increase,productivity will reduce and capacity utilization in manufacturing sector will also reduce becausethe manufacturers are discouraged to borrow.The coefficient of loan and advances X4 the relationship between capacity utilization and thisvariable is positive, meaning that there is positive correlation between variable. If thecommercial bank makes the loan available at minimum interest rate has a positive impact in thecapacity utilization of the manufacturing sector that will increase their productivityThe coefficient of per capital X5 showed direct relationship with capacity utilization (positivelyrelated). The implication is that, as real income increased, demand also increases. There will beeffective demand. The implication is that as purchasing power increased, standard of livingincreased.Finally, the relationship between capacity utilization and electricity generation indicated directrelationship. The negative sign show that as power generation X6 reduced, manufacturerproductivity also reduced. Therefore low power generation reduced capacity utilization.This result is in line with Awojola (2004), Mojekwu and Iwuji (2011) which show that, one ofthe constraints of capacity utilization of the manufacturing sector is poor performance ofinfrastructure such as road, transport, water, electricity etc.CONCLUSION AND RECOMMENDATIONThe sector remains weak due to some of challenges including the poor state of the nation’sinfrastructure which imposes high cost of production, Weak technological support and low levelsof innovation which lead to production of low quality products, lack of funding .To ensuresustained growth in the manufacturing sector.Recommendation and suggested as follows:Government should give relief to manufacturer and improve infrastructure to restore the glory ofthe manufacturing sector.The manufacture sector must free from multiple taxes and levies in order to encourageproductionAggregate demand of individuals should be raised to eliminate insufficient demand by increasingthe purchasing power of the individuals in NigeriaTherefore, all the above problems need to be addressed urgently to put the economy back on thepath of growth.9
  • 10. References:Abayomi, A. (2010) “An appraisal of performance of the manufacturing sector and capacityutilization in Nigeria” Department of banking and fiancé university of Abuja Vol.2 p 96-105Adenekan, S. (2010). “Low Capacity Utilisation, Bane of the Nigerian Manufacturing Sector” [Online] Available: http://www.punchng.com/Articl.aspx?theartic=Art201001072339196.(April 8, 2010)Ajayi, D. D., “Recent trends and patterns in Nigeria’s industrial Development” Development of social science Research in Africa, Vol. XXXII, N. 2 p139- 155Loto, M. A.(2012) “Global economic downward and the manufacturing sector performance inthe Nigeria economy” Emerging Trends in Economics and Management Sciences journal vol. 3 p38 -45Malik, M; & Teal, F; and Baptist, S. (2006), “The Performance of Nigerian ManufacturingFirms: Report on the Nigerian Manufacturing Enterprise Survey 2001” UK: Centre for the Study of African Economies University of Oxford.Mojekwu, J. N. and Iwuji, I. I. (2011),“factors affecting capacity utilization Decision in Nigeria” Canadian centre of science and Education. Vol. 5, p157-163Soderbom, M; & teal, F. (2002). “The Performance of Nigerian Manufacturing Firms: Report onthe Nigerian Manufacturing Enterprise Survey 2001” UK: Centre for the Study of African Economies University of Oxford.10
  • 11. AppendixCAPACITY UTILIZATION INDICATOR Y X1 X2 X3 X4 X5 X6 Year Capacity Inflation Exchange Interest loan and Real GDP Electricity utilization Rate Rate Rate advances Generation leading % megawatts 1985 38.3 5.5 0.89 11.75 3232.2 253013.3 2038.4 1986 38.8 5.4 2.02 12 4475.2 257784.4 1331.8 1987 40.4 10.2 4.01 19.2 4961.2 255997 1393.2 1988 42.4 38 4.53 17.6 6078 275409.6 1404.2 1989 43.8 40.9 7.39 24.6 6671.7 295090.8 1518.8 1990 40.3 7.5 8.03 27.7 7883.7 472648.7 1656 1991 42 13 9.9 20.8 10911.3 328644.5 1656 1992 38.1 44.5 17.29 31.2 15403.9 337288.6 1847 1993 37.1 57.2 22.05 36.09 23110.6 342540.5 1874.8 1994 30.4 57 21.88 21 34823.2 345228.5 2013.6 1995 29.2 72.8 21.88 20.79 58090.7 352648.6 1981.4 1996 32.4 29.3 21.88 20.86 72238.1 367218.1 2025 1997 30.4 8.5 21.88 23.32 82823.1 377839.8 2012.8 1998 32.4 10 21.88 21.34 96732.7 388468.1 1881.8 1999 34.6 6.6 92.69 27.19 115759.9 393107.2 1906.4 2000 36.1 6.9 102.1 21.55 141294.8 412332 1944.4 2001 42.7 18.9 111.94 21.34 206889 431783.1 2278.1 2002 54.9 12.9 120.97 29.7 233474.7 451785.6 2250.2 2003 56.5 14 129.35 22.47 294309.6 495007.1 2397.8 2004 55.7 15 133.5 20.62 332113.7 527576 2762.3 2005 54.8 17.9 132.14 19.47 352038.3 561931.4 2687.1 2006 53.3 8.2 128.65 18.7 445792.6 595821.6 2650.2 2007 53.3 5.4 125.83 18.36 487576 634251.1 2789.1 2008 53.8 11.6 118.56 18.74 932799.5 672202.6 2845.9 2009 54.3 12.4 148.9 22.9 993457 716949.7 2900.3SOURCES: CENTRAL BANK OF NIGERIA STATISTICAL BULLETIN 201011