Industrialization is the fastest route to job creation and lasting income generation. This was the experience in East Asia in the 1990s and, more recently, China. It remains the majority view, and successive Nigerian governments have bought into it.
Today’s note offers a snapshot of the condition and direction of domestic manufacturing. The sector’s recent performance (2.4% growth y/y in Q4 2018) has been underwhelming although it can plead the weakness of demand due to factors not of its making.
- The operating environment is poor. Power supplies and the railway system are grossly inadequate. In its critique of the FGN’s 2019 budget proposals, the Manufacturers Association of Nigeria (MAN), while commending the allocations for specific projects including the Lagos-Kano line, notes that full industrialization anywhere requires a robust railway network.
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The deterioration of Nigeria’s track record for FDI has to be linked to such weaknesses. The completion of Coca-Cola’s acquisition of the Chi Group last month is surely a case of a huge multinational with deep pockets taking a long-term Pan-African view. More telling probablyarethe talk of “streamlining” in Nigeria by PZ Cussons, the trimming of its local operations by Procter & Gamble, and the sale by Unilever of its margarine business.
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We would add the stalling by the Huajian Group on its plans to set up a shoe plant in Aba. The company has built the largest shoe factory in Africa near AddisAbaba,and is exporting to the US. Aba’s products are in demand but mostly made by hand. The leather is generally importedbecauseNigeria’s own tanneries process skins for export. Most shoemakers in Aba are in the informal economy.
- The cost and availability of credit are additional constraints, which we covered in yesterday’s Good Morning Nigeria. MAN data show that manufacturers including SMEs paid an average interest rate of 23.1% in H2 2017.
- The loans of deposit money banks (DMBs) to manufacturing amounted to N2.15trn at end-September 2018, a decline of 5.2% on the year-earlier period. The trend of state-owned banks is different. Loans and advances by the Bank of Industry, the largest of this group, increased by 24.2% y/y to N710bn at end-June 2018. The Development Bank of Nigeria is a recent addition to the group, and there is now talk of an Entrepreneur Bank.
- In our view the best contribution from government lies in rebuilding the infrastructure, creating an enabling environment for business and adding to the pool of loanable funds when help from the DMBs has not been forthcoming. Progress has been uneven on all three fronts.