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FX scarcity: Local inputs sourcing hits 3-yr high

The lingering scarcity of foreign exchange, FX, in Nigeria surged local sourcing of raw materials, to the highest in three years for the first half of 2023, according to the Manufacturers Association of Nigeria (MAN).

In MAN’s latest half-yearly review report, local raw materials utilisation in the manufacturing sector rose to an average of 55.3 percent in H1 from 48.0 percent in the same period of 2022.

It also increased by 1.8 percentage points when compared with 53.5 percent in H2 last year.

Ordinarily, when local input sourcing is less than 50 percent, it means that manufacturers import more than they source locally. And when it exceeds the 50 percent mark, they source more locally.

“The observed increase in the utilisation of local raw materials within the sector can be attributed to the growing challenges associated with sourcing foreign exchange,” the report said.

It said the situation compelled manufacturers to shift their focus towards obtaining raw materials domestically, despite the substantial cost implications involved.

The Central Bank of Nigeria in June merged all segments of the FX market into the Investors and Exporters window, and reintroduced the willing buyer, willing seller model.

The naira has depreciated against the dollar and other major foreign currencies since then.

The official exchange rate increased from N463.38/$ to N755.08/$ as of Tuesday. The naira depreciated to N1, 000/$ from 762/$ at the parallel market.

The high cost of sourcing FX was one of the major factors that pushed Nigeria’s inflation rate to an 18-year high of 25.80 percent in August from 24.08 percent in July, according to the National Bureau Statistics (NBS).

In the first six months, manufacturers spent N1.12 trillion to import raw materials from N696.1 billion in the same period of last year, data from NBS shows.

A recent survey of 400 manufacturers showed that manufacturing activities continued to suffer due to persisting scarcity of forex and further depreciation of the naira.

“Only 14.7 percent of manufacturers enumerated claimed that the rate at which forex was sourced improved in Q2; 66 percent disagreed while 19.3 percent were not sure if forex sourcing had improved in the quarter under review,” it said.

The association added that the lingering forex scarcity and continuous depreciation of the naira have left manufacturers bleeding and limited their capacity utilisation since the importation of non-locally produced critical input has become a nightmare.

“The short-term remedy will require managing the floating exchange rate system within an acceptable lower and upper bound, pending the actualisation of a net-exporting economy,” it added.

BusinessDay reported last year that the FX liquidity challenge was helping businesses produce local substitutes as the demand for their products from manufacturers increased.

“When we started producing our chicken and egg powder in 2016, we reached out to a couple of manufacturers in the country who use them as raw material, but they didn’t want to buy from us since they were importing the products,” said Samuel Sewonike, the head of operations at Answer Industries Limited.

He said patronage from manufacturers had been on the rise owing to FX scarcity in recent years. “We now have these manufacturers patronising us,” Sewonike added.

Baker Magunda, managing director of Guinness Nigeria Plc, in a 2020 interview, said the brewer was investing locally to mitigate import challenges.

“We will continue to substitute imports with local production. We have moved quickly from 53 percent local sourcing two years ago to about 80 percent of total production,” he said.

According to Uchenna Uzo, professor of marketing and faculty director at Lagos Business School, local producers should not be too relaxed as they should further improve the quality of their products, so that they can be competitive.

“Once the FX situation improves, importers will go back to importing again which would be a disadvantage to them,” he said.

MAN recommends that it is important for the government to re-evaluate its role in local development and production of raw materials in terms of funding.