Again, Nigeria’s Manufacturing Index Expands in June

 • CBN mulls measures for banks’ balance sheet repair to spur lending

By Obinna Chima  

The Manufacturing Purchasing Managers’ Index (PMI) increased to 52.9 index points in June 2017, showing expansion in the manufacturing sector for the third consecutive month.

The Central Bank of Nigeria (CBN) revealed this in its PMI report for June 2017, obtained yesterday.

The PMI is an indicator of the economic health of the manufacturing sector, and is based on five major indicators: new orders, inventory levels, production, supplier deliveries, and the employment environment.

A composite PMI above 50 points indicates that the manufacturing/non-manufacturing economy is generally expanding, 50 points indicates no change and below 50 points indicates that it is generally declining

The latest PMI report showed that 12 of the 16 sub-sectors reported growth in the review month in the following order: computer & electronic products; paper products; plastics & rubber products; primary metal; transportation equipment; petroleum & coal products; appliances & components; textile, apparel, leather & footwear; furniture & related products; electrical equipment; food, beverage & tobacco products; and fabricated metal products.

On the other hand, four other sub-sectors declined in the order: non-metallic mineral products; cement; chemical & pharmaceutical products, and printing & related support activities.

Just in the same manner, the production level index for the manufacturing sector grew for the fourth consecutive month in June 2017. The index at 58.2 points indicated an increase in production but at a slower rate, compared to the previous month.

Fourteen manufacturing sub-sectors recorded increases in production levels during the review month in the following order: computer & electronic products; plastics & rubber products; transportation equipment; primary metal; appliances & components; paper products; textile, apparel, leather & footwear; electrical equipment; petroleum & coal products; fabricated metal products; furniture & related products; food, beverage & tobacco products; cement; and printing & related support activities.

Non-metallic mineral products and chemical & pharmaceutical products sub-sectors recorded declines in production.

Also, at 51.0 points, the new orders index grew for the third consecutive month. Under this, eight sub-sectors reported growths in new orders in the following order: paper products; primary metal; plastics & rubber products; computer & electronic products; petroleum & coal products; furniture & related products; textile, apparel, leather & footwear; and food, beverage & tobacco products.

The fabricated metal products and transportation equipment sub-sectors remained unchanged, while the non-metallic mineral products; cement; chemical & pharmaceutical products; appliances & components; printing & related support activities; and electrical equipment sub-sectors recorded declines.

The supplier delivery time index for the manufacturing sector at 50.3 points in June 2017 also rose from its contractionary level in the previous month.

Seven sub-sectors recorded improvement in suppliers’ delivery time in the following order: computer & electronic products; electrical equipment; furniture & related products; cement; primary metal; food, beverage & tobacco products; and chemical & pharmaceutical products.

The non-metallic mineral products; textile, apparel, leather & footwear and transportation equipment remained the same, while six sub-sectors recorded delayed supplier delivery time in the following order: plastics & rubber products; appliances & components; petroleum & coal products; fabricated metal products; printing & related support activities and paper products.

 The employment level index in June 2017 stood at 51.1 points, indicating growth in employment levels for the second consecutive month.

Of the 16 sub-sectors, 10 recorded growth in employment in the following order: computer & electronic products; plastics & rubber products; transportation equipment; appliances & components; paper products; petroleum & coal products; primary metal; fabricated metal products; textile, apparel, leather & footwear; and food, beverage & tobacco products.

Six sub-sectors recorded contractions in employment in the following order: cement; non-metallic mineral products; electrical equipment; furniture & related products; printing & related support activities; and chemical & pharmaceutical products.

Meanwhile, CBN’s Deputy Governor, Corporate Services, Alhaji Suleiman Barau, has stressed the need to provide the necessary support that could improve the balance sheets of Nigerian banks, in order to help them resume credit delivery to critical sectors of the economy.

This formed part of Barau’s contribution at the last CBN’s Monetary Policy Committee (MPC) meeting, a copy of which was posted on the central bank’s website at the weekend.

He pointed out that net domestic credit on an annualised basis grew by a mere 4.2 per cent at the end of the first quarter, significantly lower that the target of 32 per cent.

This low level of growth in credit, obviously, cannot drive the anticipated recovery process, Barau said, adding that the abysmal performance was largely due to the strains on the banking sector from the imbalances in the macroeconomic environment.

“The central bank, under its developmental mandate, has put in place a number of credit initiatives to support the recovery process but it needs to be borne in mind that the task of channeling financial resources to the private sector lies primarily with the commercial banks,” the CBN deputy governor said.

According to Barau, the banking sector has been highly challenged by the adverse developments in both the financial and real sectors of the economy.

He noted that the contraction in real Gross Domestic Product (GDP) contributed substantially to the elevated non-performing loans (NPLs) in the industry, which invariably elicited cutbacks in the level of credit exposure by the banks since the latter half of 2016.

Banks’ non-performing loans rose to 11.7 per cent in 2016, up from 5.3 per cent the previous year.

“From the financial sector development, the depreciation of the domestic currency has reduced the value of banking assets in real terms.

“Recent statistics showed that total banking assets denominated in U.S. dollars reduced by 27.4 per cent in 2016, compared to the level in 2015 on account of currency depreciation of about 55 per cent during the period.

“The reduction in assets in real term, coupled with the elevated NPLs would, therefore, weighed on the capacity of the banks to support the recovery process,” he added.

In his contribution, the Deputy Governor, Operations, CBN, Mr. Adebayo Adelabu, pointed out that there was the issue of rising economic nationalism and waning support for global trade in advanced economies. This, Adelabu said, was further complicated by heightened uncertainty in the euro area.

He argued that it was becoming clearer that inward looking economic strategies could become the preferred global framework as the rebalancing model was gaining momentum in China, while the U.S., under the new dispensation, was shifting towards protectionism.

The point here is that net exports may still be driving the growth process but the prospect over the long term appears diminished, Adelabu added.

“For Nigeria, the balance of payment account witnessed considerable challenges from mid-2014 to the end of first half of 2016. The improvement in the latter half of 2016 resulted mainly from a drastic reduction in imports, which initially was due to foreign exchange constraints but later due to the substitution of some imported items with domestically produced ones.

“Viewed within this prism, emerging economies such as Nigeria should start re-examining their economic model to avoid being caught napping. It is commendable that the country has recorded significant milestones in rice production such that it has taken over imported rice within a space of two years.

“This initiative should be sustained by extending the success story on rice to other critical products like refined petroleum products. Put succinctly, there is a compelling need to strengthen structural policies, particularly in the area of encouraging the consumption of homemade goods in line with the thrust of economic recovery and growth plan,” he said.

Deputy Governor, Financial System Stability, CBN, Dr. Okwu Joseph Nnanna was cautiously optimistic that further inve stments in critical sectors through the implementation of the Economic Recovery and Growth Plan would shore up economic activity and reduce unemployment.

According to Nnanna, it was apparent that the flexible exchange rate policy supported by improved crude oil export receipts was yielding relative stability in the foreign exchange market.

“Despite the distortions in the foreign exchange market caused by multiple rates, a near-term convergence in the rates and gradual normalisation is being achieved.

“Noticeably too, from the sharp depreciation of the exchange rate to near N500/US$ towards the end of 2016, it appreciated by about 28.94 per cent to N380/US$ (BDC segment of the market) as of May 19, 2017.

“At that level, the rate shows some degree of undervaluation, compared with the relative purchasing power parity exchange rate estimate of about N350/US$. In my opinion, the current exchange rate policy regime including all the access windows to foreign exchange should be retained.

“Despite the rebound in global growth, the outlook remains uncertain. Uncertainty surrounds the stability of commodity prices and effects of monetary normalisation in the United States.

“I anticipate the pass-through impact on domestic economic conditions to remain benign as the economy has self-corrected the distortions from recent portfolio capital reversals,” he said.

He stressed the need for reforms to be expedited in areas such as the building of fiscal buffers, just as he urged the authorities to cautiously execute its planned fiscal deficit in the 2017 budget, in order not to spike inflation and significantly crowd-out private sector credit.

Nnanna further noted that effective reforms would trigger inflation deceleration and a low-interest rate regime.