•Local manufacturers’ investment up 8%

•Capital inflow largely loans, bonds driven – MAN, LCCI

•Rise in local investment due to naira devaluation – MAN

By Yinka Kolawole

Total inflow of foreign investments into the Nigeria’s manufacturing sector increased by 88.17 percent year-on-year (YoY) to $861.16 million in the first half of 2023 (H1’23) from $457.66 million in the corresponding period of 2022 (H1’22).

This also indicates 75.47 percent higher than the $490.76 million recorded in the second half of 2022, H2’22, according to some details of the National Bureau of Statistics (NBS) Nigeria Capital Importation for the second quarter of 2023, Q2’23.

Meanwhile, the Manufacturers Association of Nigeria (MAN) also reported an increase of 8.1 percent in local manufacturers’ investment in the sector, in naira value, to N192.89 billion in H1’23 from N178.39 billion H1’22.

However, MAN attributed the increase mostly to the depreciation of the naira in the Q2’23.

Financial Vanguard  findings in the NBS data revealed that the Production/Manufacturing sector attracted the highest inflow of investments, with 39.82 percent of the $2.163 billion total capital importation into the country in H1’23. This was followed by the Banking sector which attracted $499.14 million investments representing 23.07 percent; and IT Services that attracted $216.08 million or 9.99 percent. 

    

By contrast, in H1’22, foreign investments into the manufacturing sector ranked second with 14.73 percent of the $3.108 billion total investment, topped by the Banking sector with $1.465 billion investment representing 47.14 percent, while the Financing sector came third attracting $396.68 million or 12.76 percent.

Also, in H2’22, the manufacturing sector, again, came second in capital importation with 22.1 percent of the total $2.22 billion recorded. The Banking sector also attracted the most investments with $624.4 million or 28.12 percent, while the Financing sector came third with investments of $394.49 million or 17.77 percent of the total investments.

MAN, in its H1’23 Economic Review, stated that local manufacturers’ investment in the sector in naira value increased to N192.89 billion in H1’23 from N178.39 billion recorded in the corresponding half of 2022; thus, indicating an increase of N14.50 billion or 8.1 percent over the period.  

The report said the investment further increased by N47.3 billion or 32.50 percent when compared with N145.59 billion recorded in the second half of the year.

However, MAN had to explain the increase, saying: “The increase in investment in naira value was driven by the currency devaluation which saw naira depreciate to N901/$ or 65 percent  depreciation at the Investor and Export Window from N462/$ before the devaluation policy of the CBN was announced.  

“Hence, the increase recorded does not indicate physical investment by manufacturers but rather nominal which resulted from the devaluation of currency that has made the manufacturers pay more for plants and machinery imports.”  

Types of investment inflow

Industry experts however, opined that the seeming increase in capital inflow may be misleading, noting that the rise is mostly attributable to the growing use of trade finance facilities such as loans and bonds, especially by large multinationals, to fund their operations in the country.

Capital importation refers to the inflow of money into Nigeria’s economy from other economies for the purpose of investment, trade, or business operations, and is divided into three main investment types: Foreign Direct Investment (FDI), Portfolio Investment (PI) and Other Investments, each comprising various sub-categories.  

Further details of the NBS report revealed that capital importation in H1’23 from Other Investment ranked top with $1.27 billion which is 58.86 percent of the total capital importation in the period, followed by Portfolio Investment with $756.13 million (34.96 percent) and Foreign Direct Investment with $133.63 million (6.18 percent)  

The report further shows that loans, a sub category under ‘Other Investment’, accounted for $1.21 billion, representing 55.73 percent of the total capital importation in H1’23. 

Inflows largely in form of trade facilities

Commenting on the development, Director General, MAN, Mr. Segun Ajayi-Kadir, stated: “The fact is that manufacturers are facing difficulties in obtaining forex in the domestic market. To address this challenge, some larger multinational companies operating in the sector are turning to trade finance. These companies engage in international trade and secure trade finance facilities from foreign banks. These facilities typically include letters of credit, trade finance loans, and export financing, which are used to facilitate cross-border transactions.

“Therefore, the reported increase in capital importation in the production sector may be primarily attributed to the growing use of these trade finance facilities. Companies are seeking these funds either to repay existing loans or to finance the purchase of imported raw materials for production due to the shortage of forex in the domestic market and the associated challenges with foreign exchange in the quarter.

“I am not certain that NBS effectively distinguished between these different types of transactions, which could have given more clarity and served as a guide for appropriate government intervention.

“While the data might suggest an improvement in capital importation into the sector, in reality, the production/manufacturing sector continues to face numerous challenges that deter investment and hinder the expansion of the sector.

“In the current economic climate that is characterized by macroeconomic instability and uncertainty, one is a bit surprised that we are said to be attracting new investments of that magnitude, and into the manufacturing sector for that matter.

“This is not to take away the undeniable fact that there is huge potential from sustaining existing investments and attracting new inflows if the binding constraints militating against the performance of the sector are ameliorated. Operators in the manufacturing sector should be able to secure credit facilities in the domestic market at rates that allow them to be competitive and make profit.”

Also commenting, Director General, Lagos Chamber of Commerce and Industry (LCCI), Dr. Chinyere Almona, noted that capital inflow into the manufacturing sector during the period was largely loans and bonds, adding however that the inflow is expected to impact the manufacturing sector.

Her words: “The capital imported into the manufacturing sector in the first half of the year is largely in the form of loans and bonds, reflecting the challenges facing the manufacturing sector and the need to meet short-term obligations and slowing business activities. For example, Dangote Group and Tolaram raised N300 billion bonds, $38 million, respectively.

“The significant increase reflects a low base of capital imported in the previous year and investors’ reaction to the two critical reforms, fuel subsidy removal and exchange rate harmonization, in the first month of the new administration.

“The inflow in H1 2023 is expected to impact the manufacturing sector, particularly firms mitigating against current challenges, meeting short-term obligations, and falling consumer demand.

“Despite the harsh operating environment, the sector continues to demonstrate a degree of resilience and grew by 1.61 percent and 2.20 percent in Q1 and Q2 2023 respectively.”