THE CHALLENGES AND PROSPECTS OF THE MANUFACTURING SECTOR OF NIGERIAN ECONOMY
BY
DR.ADEGBIE, FOLAJIMI FESTUS, AND DR(MRS). ADENIJI, NIKEANTHONIA ,
Bsc,MBA,MPhiL,PhD,FCA,ACIB,ACTI Bsc PGD,,MBA,MPhiL.PhD.
COVENANT UNIVERSITY, COVENANTUNIVERSITY,
DEPARTMENT OF ACCOUNTING, DEPARTMENT OF BUSINESS STUDIES,
OTA. OTA
ABSTRACT
Industrialization involves extensive technological development of the production system of an economy. Industrialdevelopment therefore represents a deliberate and sustained application and combination of suitable technology, management techniques and other resources to move an economy from the traditional low production to a more automated and efficient system of mass production of goods and services. Nigerian economy which was mainly agrarian pre-independence gained rapid industrialization priority after the first national development plan of 1962 to 1969.The focus of this paper is to assess the evolution of industrial development in Nigerian economy, its challenges and prospects. The capacity utilization of the industry which fluctuated between 70 and 75 in the period 1970-1980 due to overvalued naira and substantial supply of imported raw materials, dropped to 45% in 2005 and further dropped to 41.8% in 2006.The problems of weak demand for local manufactured goods, high cost of production due to inflation, incessant power outages which resulted into high cost of maintaining power generating sets, Globalization and stiff competition from cheap imports, high bank rates and down turn in Nigerian economy are the identified problems with banks regarding the sector as a high risk area for lending. The methodology adopted is empirical and exploratory by opinion survey. Five hypotheses stated in null forms were tested with analysis of variance (ANOVA) statistical tool used to analyze the survey result. The result of the survey shows that an economy can not develop if the real sector is not active. There is the need for good and viable operating environment guided by policies that will enhance development in the real sector and active participation by the banking industry to help develop the sector.
Key words: Capacity, Globalization, Industrialization, Policy and Utilization
Introduction;
Rapid industrial development has been the main focus of economic development because of its potential benefits. Industrialization tends to propel economic growth and quicken the achievement of structural transformation and diversification of economies. According to Central Bank of Nigeria-CBN (2000:61-95), before independence in 1960, the Nigerian economy was mainly agrarian both in production for domestic consumption and exports. Early manufacturing activities predating independence were limited to semi-processing of primary agricultural products as adjuncts to the trading activities of foreign companies. The Agro-based manufacturing units that were established included vegetable oil extraction and refining plants, starch making, tobacco processing, pottery, raffia crafts, mat making, saw milling. Then followed by textiles, breweries, cement, rubber processing and plastic products.
Post independence Nigeria witnessed national development plans, which provided the conceptual framework for the development objectives, strategies for industrialization, government participation in the process of industrialization, and the fiscal and related policies for influencing industrial development. Before 1972, as further analyzed by Central Bank of Nigeria,Nigeria economy was dominated by direct foreign investment capital. The second development plan of the Federal Government promoted Indigenous participation in industrial activities which became one of the prominent policy instruments designed to encourage industrial development.Nigeria’s manufacturing sub-sector is composed of a wide range of industrial activities which include large to medium and small scale manufacturing enterprises.
The factors that influenced the structural changes and performance of the manufacturing sub sector since independence include government intervention, low technological development, inward-looking strategy, and protectionism.The main objectives set by the industrial planners in Nigeria include the desire to achieve increase in the share of manufacturing, contribution to the Gross Domestic Product(GDP),replacement of imports with locally produced goods,innovations,industrial disposal and employment generation. The high import dependency was more pronounced in the heavy capital intensive industrial sub-groups, Steady output growth average 11percent in the 1970’s,while its share in GDP increased from 5.4percent in 1977/78 to a peak of 13percent in 1982.In 2000 the growth rate has declined to 0.6percent.The 2006 CBN report reflected a growth rate of 1.8%
The overall manufacturing capacity utilization which fluctuated between 70 and 75 percent between 1975 to 1980 as a result of the over-valued naira and substantial supply of imported raw material dropped to 37percent in 1985,recorded 45percent in 2005 and declined by 3.3percentage point in 2006.The sectors’ share in the gross domestic product fell persistently from 9.2 percent in 1981-85 to 8.3percent for period 1986-90,7.5percent in 1991-95 and 6.3percent in 1996-98.2005. CBN report on sectoral share in GDP recorded unimpressive growth in the industrial sector where manufacturing industry belongs. Agriculture 42percent, services 15percent, wholesale trade and retail trade 14percent building and construction 1percent and industry 28percent.
The substantial devaluation of the naira during 1986-88 led to escalation of costs of imported inputs. The restrictive monetary policies of 1986 and 1987 reduced credit to the productive sectorand seriously hampered growth in effective demand for finished products. The rising costs of imports and private generation of electricity and other vital infrastructures to sustain production processes resulted in high cost of production, increase in product prices, and consequent low-consumer demand. The sector becomes a high risk for lending to banks. Arising from these developments, the manufacturing sub-sector which was expected to achieve 15percent value added contribution to GDP, registered registered dismal percentage.
The table below shows banks sectoral allocation of credit to the economy:
Sector Allocation in %
Agriculture 2%
Solid minerals 9%
Exports 1%
Manufacturing 18%
Unclassified (others) 70%
Source: CBN 2005 Annual Report and Statement of Accounts.
Nigeria’s manufacturing sub-sector consists of wide range industrial activities which include large to medium and small scale manufacturing enterprises as well as cottage and hand-craft units in the informal sector, using simple technology.The ownership of Nigeria’s manufacturing sub sector is shared between the public and private sectors of the economy. The table below shows the structure of industrial establishments:
Table 1
NIGERIA: STRUCTURE OF INDUSTRIAL ESTABLISHMENT (1)
(Percentage)
Activity size composition ownership structure
Micro Medium Large sole
Proprietorship cooperative Partnership others
(2) (3) (4) (5)
i.. Agriculture, Forestry 43.4 53.8 2.8 - - - -
& Fishing
iiMining &Quaring 29.9 55.2 14.9 40.3 47.0 6.0 6.7
iii.Manufacturing 65.2 31.3 3.5 81.7 11.6 6.0 0.7
iv.Electricity,Gas & . 25.0 51.0 24.0 15.3 29.6 4.1 51.0
Water
v.Consumption 41.7 47.7 10.6 49.7 40.7 8.5 1.1
vi. Wholesale & Retail 75.9 23.0 1.1 75.1 16.3 7.3 1.3
vii.Transportation,
Storage&
Communication 46.9 46.9 6.2 36.1 44.7 9.9 9.3
viii.Financing, insurance
& Real Estate 50.9 45.0 4.1 37.0 47.9 11.6 3.5
ix Community,social&
Personal services 68.2 30.9 0.9 81.1 9.2 7.9 1.8
65.5 32.0 2.5 74.5 16.6 7.3 1.6
Summary of Table 1
(1)Establishments in operation in with more than 5 persons employed
(2)Micro-enterprises with 5-9 workers employed
(3)Medium-scale enterprises with 10-99 workers employed
(4)Large-scale enterprises with greater than 100 workers
(5)Others include government corporation and incorporated units
Adapted from CBN (2000)-The Changing structure of the Nigerian Economy and Implications for Development page 65.
The table shows that in relative sizes, the bulk of about 65.2percent are small scale and micro-industries while the medium and large scale industries represent 31.3 percent and 3.5percent of total manufacturing units respectively. The cottage and handicrafts enterprises engage largely in the production of wearing apparel, light processing of food stuffs and pottery making. The large scale capital intensive manufacturing enterprise include the publicly owned core industrial projects which produce basic inputs for the down-stream industries. The capital goods industries consisting of machinery and electrical equipment are few. The ownership of Nigeria’s manufacturing sub- sector is shared between the public and private sectors of the economy. In terms of number, the private sector owned manufacturing units are predominant, while aggregate public sector investments dominate in the capital intensive heavy industries.(UNDP,1993) as cited in CBN,(2000) analyzed that publicly owned heavy industries accounted for 66.7percent of total investments in intermediate and capital goods industries.
The present state of Nigerian manufacturing sector calls for a restructuring so that the capital intensive sector of the industry can be developed to tap into the potentials of the national economy.
Focus
The manufacturing sector which is expected to contribute an average of 15percent added contribution to the Gross Domestic Product (GDP), thus serving as the major source of growth registered dismal performance.Capacity utilization has fallen grammatically which is currently at 45percent average. These negative trends in the performance of manufacturing production indicate falling productivity .Its stunted growth constrained the capacity of the reform process to pull the economy out of recession. In addition, capacity utilization low rate makes it difficult for profitable operations. It is not encouraging when it is recognized that over 48% of the nation’s foreign exchange earning is allocated to a sub-sector that contributes only about 6percent of the GDP.
This paper is focused to address the following problems:
- Low Computer-integrated manufacturing system: This is a great obstacle constraining productivity in Nigeria as developments in technology and innovations are the primary forces propelling industrialization today. New processes and procedures of doing old things, and automation have revolutionized the manufacturing industry and multiplied productivity in the industrial nations. Industries in Nigeria cannot acquire modern machines to monitor and control operations; it is now possible to track products continuously as they move through the factory and to report on a real-time basis, such information regarding production.Low technology is responsible for the inability of local industry to produce capital goods such as raw materials, spare parts and machines, the bulk of which are imported.
- Low level of capacity utilization rate: The capacity utilization rate in the manufacturing sector of between 40 and 45 percent indicates gross underutilization of resources. This can be attributed to power outages which resulted into using alternative power generating system which attracts high cost, lack of funds to produce inputs, fallen demand for locally manufactured goods and industrial unrest.
- Classification of manufacturing industry as high risk area for bank lending: Lack of access to funds has limited the capability of companies to make investments in modern machines, information technology and human resources development, which are very crucial to reducing production costs, raising productivity, improve competitiveness, and expand operations. Low investment have discourage banks to invest very largely in this sector, owing partly to the mis-match between short-term nature of banks funds and the medium to long-term nature of funds needed by industries. Also because of the risky nature of this sector, banks intend to lend to low-risk ventures such as commerce which records high returns. Lending to the manufacturing sectors attracts a high rate of interest which is not profitable for the industry.
- High cost of production: Increasing high cost of production is being recorded by most business organizations in the sector due largely to poor performing infrastructural facilities, high bank interest rate, and high foreign exchange rate, low effective demand for goods, liquidity squeezes and fallen capacity utilization rates. Inflation has contributed in no small measure to high cost of production. It constitutes a disincentive to saving for future use and retards investment and growth.
- Concept of globalization: One of the greatest problems facing the Nigerian economy is the problem of capacity utilization. The problem became more pronounced recently by globalization and all that accompanied it. Globalization as referring to the global economy, the international division of labour,the new information technology revolution, and global capitalization. The manufacturing sector is at the verge of collapse with thousands of workers being thrown out of jobs. Nigerian has become a dumping ground for all kinds of foreign products. Under globalization, the products of the Nigerian manufacturing sector cannot compete with goods from the advanced countries of the world most especially Europe and America.
The broad objective of this study is to evaluate the need to give priority finance to the manufacturing sector which is the real productive sector of the economy, so as to overcome the various problems confronting the sector, and take its position as a major contributor to the Gross Domestic Product, and also produce for the economic needs of the nation.
The following other objectives will however be concentrated on to accomplish the task:
i.To assess the relationship between computer-integrated manufacture and productivity in a fully developed technological and innovative environment.
ii .Find out if full capacity utilization in a manufacturing industry can enhanced productivity increase and create availability of goods for meeting local needs and export.
iii .To evaluate the relationship between availability of finance from banks and investment in modern technology to meet market demand and gain competitive advantage.
iv. To assess if good fiscal and monetary policies will have positive impact on infrastructural development, low interest rate, low and stable foreign exchange and other performance indices that will reduce operating cost in the industry.
v. To examine the impact of globalization on the manufacturing sector in Nigeria with a view to get appropriate socio-economic reform measures that will enable Nigeria benefit maximally from the current globalization trend in the world economy.
The following research questions therefore become pertinent in view of the analyzed problems and objectives.
a. What impact does computer-integrated manufacturing system has on producing capital goods for consumption in the economy?
b. How will full capacity utilization affect full utilization of resources?
c .Will availability of borrowed funds from banks encourage investment in modern machines, information technology and human resources with a view to raising productivity, improve competitiveness and expand operations?
d. Will introduction of good fiscal monetary policies have positive impact on infrastructure, exchange rate, interest rate, and inflation that will reduce the high cost of production?
e. How can Nigeria benefit from socio-economic reform in the current globalization trend in the world economy?
Hypotheses
The following hypotheses stated in null formswere tested to show the accuracy of the discoveries of the research:
1. Computer-integrated manufacturing system has no impact on productivity and market penetration.
2. Full capacity utilization does not enhance full utilization of resources and productivity.
3.Availability of bank finance has no relationship with investment in modern machines, informationtechnology, human resources for productivity and competitive enhancement.
4.Sound fiscal and monetary policies do not have relationship with high cost of production.
5. Globalization of the world economy accrues no benefit to Nigerian manufacturing industry.
Literature Review
It becomes imperative for us to discuss the concept of manufacturing in Nigeria and challenges and prospects facing the sector before the raised questions are addressed. Relevant literature of some researchers are reviewed to give insight into the work.
Productivity in the Nigerian Manufacturing Industry:
Anyanwu,(2001:124-135) commented “Prolonged economic recession occasioned by the collapse of the world oil market from the early 1980 and the attendant sharp fall in foreign exchange earnings have adversely affected economic growth and development in Nigeria. Other problems of the economy include excessive dependence on imports for consumption and capital goods, dysfunctional social and economic infrastructure, unprecedented fall in capital utilization rate in industry and neglect of the agricultural sector among others” Most importantly, the researcher analyzed that putting the country back on the path of recovery and growth will require urgently rebuilding deteriorated infrastructure and making more goods and services available to the citizenry at affordable prices. Increasing productivity should be the focus because many other countries that have forced themselves in the same predicaments have resolved them through productivity enhancement schemes. He proposes further that given the importance of high productivity in boosting economic growth and the standards of the people, productivity measurement cannot but be of importance to both policy makers and researchers. Productivity measurement can be used to evaluate the efficient of an economy in relations to others.Anyanwu proposes high productivity in the Nigerian manufacturing industry as a necessary condition for the sectors’ recovery, achieving competitiveness ,boosting the Gross Domestic Product(GDP) and uplifting the standards of living of the people. Achieving high productivity will require a frontal attack on the problems confronting the sector which are low technological development, High cost of productivity, lack of access to finance. This paper is wellfocused to address the issues raised by this researcher.
Globalization and the manufacturing sector:
Aluko, Akinola and Fatokun,(2004:119-130)commented that one of the greatest problems of the Nigerian economy is the problem of capacity utilization in the manufacturing sector. This problem became more pronounced and aggravated by the structural adjustment programme and recently by globalization and all that accompanied it. In their study of the economy, their evaluation was characterized by the following indices: low capacity utilization which averaged 30 percent in the last decade, low and declining contribution to national output, which averaged 6percent, declining and negative real growth rates, low valued-added production due to high import dependence for inputs, accumulation of large inventories of unsold finished products, dominance of sub-standard goods, which cannot compete internationally. They further attributed the deplorable conditions of the manufacturing sector to a horde of factors like lack of an enabling environment, which included policy and polity instability, poor macro-economic environment, poor legal environment which could not guarantee property right and safety, and lack of good governance. others are poor and inadequate infrastructure, poor implementation of incentives to manufacturing, including export incentives, low access to investible funds due to underdeveloped long-term capital market that match industrial projects needs.