FX Scarcity: Local Input Sourcing Rises To A Three-Year Peak
In the manufacturing sector, local raw material utilisation increased to an average of 55.3 percent in H1 from 48.0 percent in the same period of 2022, according to MAN's most recent half-yearly review report.When compared to the 53.5 percent in H2 of previous year, it also climbed by 1.8 percentage points.
Typically, firms import more than they source locally when local input sourcing is less than 50%. Additionally, they source more locally when it rises above 50%.
According to the report, "the observed increase in the sector's use of local raw materials can be attributed to the growing difficulties associated with obtaining foreign exchange."
Despite the significant economic consequences involved, it claimed that the circumstance prompted firms to refocus their attention towards sourcing raw materials domestically.
The willing buyer, willing seller approach was once again implemented by the Central Bank of Nigeria in June after all FX market divisions were combined under the Investors and Exporters window.
Since then, the naira has lost value in comparison to the dollar and other significant foreign currencies.
As of Tuesday, the official exchange rate climbed from N463.38/$ to N755.08/$. At the parallel market, the naira fell from 762/$ to N1,000/$.
According to the National Bureau of Statistics (NBS), one of the main reasons why Nigeria's inflation rate increased to an 18-year high of 25.80 percent in August from 24.08 percent in July was the high cost of obtaining foreign exchange.
According to data from the NBS, manufacturers spent N1.12 trillion in the first six months compared to N696.1 billion during the same period last year to import raw materials.
A recent study of 400 enterprises revealed that ongoing cash shortages and the naira's persistent depreciation were harming manufacturing activities.
"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 stated.
The group continued, saying that the persistent FX shortage and ongoing naira depreciation have left factories bleeding and reduced their capacity utilisation since importing crucial non-locally produced input has turned into 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 further stated.
According to a BusinessDay article from the previous year, as demand for firms' products from manufacturers grew, the FX liquidity crisis assisted businesses in producing local alternatives.
According to Samuel Sewonike, head of operations at Answer Industries Limited, "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."
He claimed that since foreign exchange has become more scarce in recent years, manufacturers' support has increased. "These manufacturers are now patronising us," Sewonike continued.
In an interview with 2020, Baker Magunda, managing director of Guinness Nigeria Plc, stated that the brewer was investing domestically to address import concerns.
"We'll keep replacing imports with locally produced goods. We have quickly increased our local sourcing from 53% of our overall production two years ago to nearly 80% today," he said.
Local producers shouldn't be too lax, says Uchenna Uzo, professor of marketing and faculty director at Lagos Business School, since they need to continue to raise the calibre of their goods to remain competitive.
"Importers will go back to importing again once the FX situation improves, which would be a disadvantage to them," he said.
MAN suggests that the government reexamine its function in financing for the development and manufacture of local commodities.
