THE EFFECT OF EXCHANGE RATE DEREGULATION ON CAPACITY UTILIZATION IN MANUFACTURING INDUSTRIES IN NIGERIA

THE EFFECT OF EXCHANGE RATE DEREGULATION ON CAPACITY UTILIZATION IN MANUFACTURING INDUSTRIES IN NIGERIA

(A case study of Anambra Motor Manufacturing Company, Enugu)

ABSTRACT

This research work explores the effect of exchange rate deregulation on capacity utilization in the Nigerian manufacturing industries in Anambra Motor Manufacturing Company, Enugu. The data used for this study were obtained through primary and secondary sources of data collection and various sources like the statement of accounts and annual report published by the Central Bank of Nigeria. The variable used are Average manufacturing capacity utilization rate Inflation rate Exchange rate Ratio of government capital expenditure to GDP Commercial bank loans and Anambra motor manufacturing company. The result shows that exchange rate, federal government capital expenditure to GDP, commercial bank loans and advances to Anambra motor manufacturing company has a positive effect on manufacturing capacity utilization. Recommendations include the adoption of economic policies that ensures price stability and at the same time achieve target objectives. Exchange rate deregulation policy promotes manufacturing capacity utilization and therefore fiscal policy measures involving increased government capital expenditure to Anambra motor manufacturing company and those which raise the aggregate demand in the economy are advocated.

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND OF THE STUDY

Industrial development, particularly the promotion of manufacturing sectors, has been the basic driving force for a relatively high economic growth of both developed and developing countries of the world. In viewing the contribution of the manufacturing sector to the growth of the gross domestic product of some selected countries (IMF 2001), pointed out that the long term growth rate of the manufacturing value added in china was 10.7% and it increased to 14.7% during the period of 1990-1998. The growth rate of India’s manufacturing sector remains constant.

Industrialization has not taken serious root in Africa and indicators of growth in manufacturing show a continent at a standstill. In the 1980’s, manufacturing sector’s contribution to GDP, accounted for 36.6% of the total for the whole of Africa. Nigeria’s manufacturing sector is faced with capacity underutilization and this has been a threat to the economic growth and development of the country. This sector has been agreed to determine the rate of import and export of the country and plays an important role or have a great influence on the gross domestic product (GDP) of the country.

There is much capacity availability in the country but these capacities are underutilized and this can be argued from the fact that the manufacturing sector has not been impressively doing fine since till date and this is as a result of lack of the following :

• Employment Rate: This connotes the fact that there is low level of human resource utilization in the country’s manufacturing sector. Human resources has been said to be one of the most essential factors in the manufacturing sector or any organization.
• Effective monetary policy: This is essential for the increase in output and growth of the sector, price stabilization (factor price and consumer price), full employment, sustainable balance of payment, exchange rate stability, to make use of most suitable interest rate despite the above mentioned role of effective monetary policy in the economy, and manufacturing sector in particular, it is lacking and unavailable in the country.
• Effective Fiscal Policy: A good fiscal policy plays an important role in the economic development of a country such role as: maintaining an economy at full employment so that the savings capacity of the economy is not e impaired and also raise marginal propensity to save by the community as far as above as the propensity as possible without discouraging workforce.
• Upgrading and Development of Natural Resources Endowment: These natural resources in economics is classified under the heading of “land “ as a factor of production, the gravity of these natural resources are high in Nigeria, yet there exists low productivity due to low or poor management of the resources leading to underutilization of these resources.

All these balls down to political instability as the main cause of the sector’s poor performance. The country has witnessed many and frequent change of government and leading to frequent change of policy measures for the manufacturing sector in Nigeria and most of which are unfavorable to the sector, the frequent change also gave rise to poor planning/ implementation and policy discontinuity hampering the growth of this sector. 

Taking Nigeria as a case study in Africa, we notice that after so many years of various policy initiations, indicate in terms of it’s contribution to GDP shows that the manufacturing sector performed below expectation. Available data shows that the manufacturing sector performed below expectation. Available data shows that the sector’s contribution in nominal value to GDP in 1982, was N128.6 million, and thereafter, there was a sharp decrease in 1983 to N94.8 million, and has remained relatively so till 1987 which recorded a sharp increase to N130.8 million. It maintained a continuous annual decline and stood at N135.4 million in 2000. In spite of this nominal increase, its contribution to GDP is falling. Its share in GDP was 8.3% in 1991. It has ever since then recorded a continuous fall in its share in GDP, (CBN 2000). One of the reasons for the low share of manufacturing sector in GDP is the prevalence of low capacity utilization. It is a known fact that manufacturing sector in the developing world and indeed Nigeria, is not as strong as those in advanced countries, the installed capacity are usually not fully utilized. It is therefore the concern of this research to find out the factors responsible for the low capacity utilization in Nigeria.  

1.2     STATEMENT OF THE PROBLEM

Players in the Nigerian industrial and manufacturing sector can be classified into four groups namely; multinational, national, regional and local. Apart from the multinational operators most of the other players have disappeared in the last two decades, due to unpredictable government policies, lack of basic raw materials, most of which are imported.

Today, the Nigerian Industrial and manufacturing sector accounts for less than 10% of Nigeria’s GDP with manufacturing capacity utilization remaining below 35% for the most part of the last decade. The history of industrial development and manufacturing in Nigerian is a classic illustration of how a nation could neglect a vital sector through policy inconsistencies and distractions attributable to the discovery of oil. The near total neglect of agriculture has denied many manufacturers and industries their primary source of raw materials. The absence of locally sourced inputs has resulted in low industrialization. Some of the constraints faced in this sector include;

High interest rates

Unpredictable government policies

Non implementation of existing policies

Lack of effective regulatory agencies

Infrastructural inadequacies

Dumping of cheap products

Unfair tariff regime

Low patronage

Globalization and liberalization pose challenges to the Nigerian industrial sector. The impact of these global trends will intensify competition, reduce protection, increase focus on product quality and increased expenditure on research and development. The prospects of manufacturing in Nigeria are bright, given the nations nascent democracy, a market size of over 120million people, rich mineral and other resources, size of the West African market as well as cheap and abundant labour. Developing Nigeria’s industrial sector requires the concerted efforts of government and the private sector to create an environment that would encourage investments, primarily by Nigerians as a firm basis for attracting and sustaining foreign investments in the sector. A fully developed industrial sector would provide a firm basis for sustainable economic growth and development.

This research work will be solely based on assessing the benefits of derived from determining the capacity utilization in the Nigerian manufacturing sector ranging 1980-2009. Here am going to carry out a critical research with the aim of discovering the rate of capacity utilization (high or low rate) in our manufacturing sector as well as its effects (positive or negative) on either the improvement or non-improvement in the manufacturing sector in Nigeria by providing reliable answers to the following questions;

• What are the trends in capacity utilization in the Nigerian manufacturing sector?
• Why and what are the causes for the low improvement in capacity utilization in Nigeria manufacturing sector?
• What are the major factors that determine capacity utilization in Nigeria manufacturing sector?

All the above questions are meant to cover the years between 1980 and 2009.                                                                                                                                    

1.3     OBJECTIVE OF THE STUDY

This research work is carried out to attain certain aims and objectives which will be necessary to solving the problem of low capacity utilization in Nigeria manufacturing sector and serve as a guide for and favorable to business men and women and the nation’s economy at large. The various objective of this study can be stated below as follow:

1. Identifying and critically analyzing the major factors that determine capacity utilization in Nigeria manufacturing sector.
2. To examine the trend in capacity utilization in Nigeria manufacturing sector.
3. This research work is aimed at suggesting measures which will improve the rate of capacity utilization in Nigeria manufacturing sector and consequently accelerate the growth of manufacturing output in the country.  

1.4     SIGNIFICANCE OF THE STUDY

The Nigerian manufacturing sector has been described as the major sector that contributes to the investment development of any economy whether developed and developing economy.

In Nigerian context, several research and studies have been conducted to investigate the determinants of capacity utilization in this sector (manufacturing), basically on its contributory role to economic growth and development.

Therefore the method and scope (sample size) used by this former authors need to be updated in other to close their historical gap. Thus I intend with this research work to bridge the gap by bringing the samples used to the nearest years and to also subject some of the variables used by this authors to co-integration test and unit root test to avoid spurious result.

This study is very important for development and growth in potential input and output in the manufacturing sector of the economy, it is very important for policy and project identification, preparing, appraisal, implementation and evaluation which will in turn aid and foster the rate of capacity utilization in the manufacturing sector of Nigeria.                                    

1.5     RESEARCH QUESTIONS

1. What are the major factors that determine capacity utilization in Nigeria manufacturing sector?
2. Is there any trend in capacity utilization in Nigeria manufacturing sector?
3. What measures should be taken to improve the rate of capacity utilization in Nigeria manufacturing sector and consequently accelerate the growth of manufacturing output in the country.  

1.6     RESEARCH HYPOTHESIS 

Since the major problem and reason for this research is identifying the major factors determining capacity utilization in Nigeria manufacturing sector, the hypothesis will be stated as follows:

H₀:    All determinants of capacity utilization in Nigeria manufacturing sector have significant impact on the capacity utilization growth in Nigeria manufacturing sector.

H₁:    The determinants of capacity utilization in Nigeria manufacturing sector have insignificant impact on the capacity utilization growth in Nigeria manufacturing sector.

1.7     SCOPE OF THE STUDY

The scope entails the period of analysis and the periods covered by this study is a period of 5 years and this is between 2010 and 2014.

1.8     LIMITATIONS OF THE STUDY

Some practical limitations are lack of adequate data,  information, difficulties encountered in collecting and arranging the data’s, this research work also had to contend with time and other resources constraint like finance, cost consideration also posed a serious problem.

1.9     DEFINITION OF RELEVANT TERMS

Exchange rate: The rate at which a unit of the currency of one country can be exchanged for a unit of the currency of another country.

Deregulation: To free something such as an organization or industry from regulation.

Capacity utilization rate: The percentage of total production capacity that a company, industry, or economy is using.

Manufacturing: to make something into a finished product using raw materials, especially on a large industrial scale.

Industry: organized economic activity connected with the production, manufacture, or construction of a particular product or range of products.