1. NAME: JOLAYEMI OLAWALE SHERIF
MATRIC NO: 0927EC050
RESEARCHTOPIC: THE PERFORMANCE OF
MANUFACTURING SECTOR AND UTILISATION
CAPACITY IN NIGERIA
COURSE TITTLE: RESEARCH METHODS IN
ECONOMICS
LEVEL: 300LEVEL
DEPARMENT: ECONOMIC DEPARTMENT
LECTURER IN CHARGE: MR. OLALEKAN SALIU
1

2. THE PERFORMANCE OF MANUFACTURING SECTOR AND UTILIZATION
CAPACITY IN NIGERIA
Abstract
The study attempted to evaluates the performance of the manufacturing sector capacity
utilisation in Nigeria. The objectives of the study are to assess the capacity utilisation of
manufacturing sector in Nigeria and identify factors which influence capacity utilisation. The
secondary data used for the study cover 1985 – 2009.the sources for this data are statistical
bulletin. Annual report and statement account of account from federal office of statistics and
Central Bank of Nigeria. The data were analyzed using Ordinary least square method (OLSM) of
multiple regression models. The major factors that influences the level of capacity utilization are
inflation rate, exchange rate, interest rate, loan and advances, per capital income, electricity etc.
based on the finding that government should concentrate on macro economics stability that
relative low are of inflation. Government should give relief to manufacturer and improve
infrastructure to restore the glory of the nations manufacturing sector, and government should
adopt trade restriction on imported goods that are locally produced. The result showed that the
coefficient of determination R2 explains about 62 percent of the total variation in the capacity
utilization.
Introduction
Capacity utilization refers to the extent to which an enterprise or a nation actually uses its
installed productive capacity. thus it refer to the relationship between actual output produced and
potential output that could be produced with installed equipment, if the capacity was fully used,
one of the most used definitions of capacity utilization rate is that, the ratio of actual output to
the potential output. But the potential output can be defined at least two different ways. One is
the engineering or technical approach according to which potential output represents the
maximum amount of output that can be produced in the short-run with the existent stock of
capital (Nelson, 1989, p.273).
Johanson, (1968) defined capacity utilization as the ratio between the actual output of firms to
the maximum that could be produced per unit of time with existing plant and equipment. The
economics approach, on the other hand, defines the potential output as being the optimum level
of output from the economic point of view.
Before independence, agricultural production dominated Nigerian economy and accounted for
the major share of its foreign earnings. Early efforts in the manufacturing sector were oriented
towards the adoption of an import substitution strategy in which light industry and assembly
related manufacturing ventures were embarked upon by the former trading companies.
2

3. However, since the late 1960s, the Nigerian economy has been based mainly on the petroleum
industry. In the 1970s a series of increases in the international oil price generated substantial
windfall revenues for the government. It soon became apparent that these oil price shocks were,
at best, a mixed blessing. Like many other African countries, Nigeria early independence years
had seen an industrial strategy that relied heavily on import substitution.
According to the 2010 annual report of the Manufacturers Association of Nigeria, (MAN)
presented during the 39th Annual General Meeting of the association, the Nigerian
manufacturing sector only contributed 4.1 percent to the 2010 GDP, compared to 4.21 in 2009.
The decline also manifested in the capacity utilisation of industries in the country. According to
the report, average manufacturing capacity utilisation dropped from 47 percent in 2009 to 45 per
cent in 2010. Production output declined from N183.8 billion in the first half of 2009 to N165.7
billion in the same period of 2010. Investment profile in the first half of 2010 had a sharp decline
from N1 trillion in the first half of 2009 to N360 billion in the corresponding period of 2010.
Employment figures in the first half of 2010 dropped from 998,086 in January – June 2009 to
996,395 in the corresponding period of 2010. Business unplanned inventory increased from
N5.15 billion in the first half of 2009 to N11.4 billion in the same period of 2010.
The reason for their poor performance of the sector was as a result of the harsh economic
environment. Some of the challenges that led to the harsh economic environment are: acute state
of infrastructure deficiency, especially energy, general insecurity and perceived threat to political
and economic stability, smuggling and dumping of cheap and substandard goods which usually
suffocate local manufactured products, high cost of funds and inadequacy of long-term loan
windows to support long-gestation investments; multiple taxation which is threatening the
survival and growth of business in the country, weak demand as a result of low purchasing
power, among others.(MAN)
Failure of the sector since independence has been quite remarkable. Successful governments
over the years, realizing the potentials of the sector have put in place policies and established
institution to aid the development of the sector. In 1986 structural adjustment programme (SAP)
was initiated to stimulate domestic production, SAP brought with it escalation in exchange rate
resulting in high cost of raw materials and spare parts. The SAP programme ended up being a
failure. The harsh economic situation triggered a chain reaction, such as high cost of production,
scarcity of raw materials and spare parts and huge inventory of unsold goods due to low
purchasing power. All these factors impacted negatively on capacity utilization.
(Banjoko 2002).
Current governmental programmed aimed at reversing the economic trend are National
economic empowerment and development (NEEDS) and vision 2020, which according to the
proponents will put Nigeria among the first twenty (20) developed economies by the year 2020.
It is against this background that it becomes imperative to access the effects of power supply and
some macroeconomic variables on capacity utilization of the Nigerian manufacturing industry.
3

4. OBJECTIVE OF THE STUDY
The aim of this paper is to appraise the performance of manufacturing sector and capacity
utilization in Nigeria between 1985-2009. Therefore the specific objectives of this paper are as
follows:
to assess the capacity utilization in manufacturing sector in Nigeria and indentify the
factors which influence capacity utilization
Identify lingering problems of the manufacturing sector
LITERATURE REVIEW
A lot of research have been carried out which identified several variables influencing capacity
utilization. Mojekwu and iwuji (2011, p.157-163) identified that power supply had positive and
significant impact on capacity utilization while inflation rate and interest rate had negative
impact on capacity utilization.
Eniola (2009) reported that Exchange rate, Inflation rate, Imports Federal capital expenditure,
foreign direct investment (FDI) and Real loans and advances accounted for 50 percent variation
in capacity utilization. Out of the six variables only inflation rate had a negative impact on
capacity utilization while the other five had positive impact. The finding also revealed that there
was a very strong positive and significant relationship between imported manufactures and
capacity utilization, showing that Nigeria is highly important dependent. From the study 1percent
change in imported manufactures resulted in 18.33 percent increase in capacity utilization,
indicating that Nigeria is highly important dependent.
According to Oladokun (1979), the proportion of labour employed in manufacturing has slowed
down greatly. This may be due to the under-utilization of capacity. In the manufacturing
industry, the capacity utilization in 1980 was 70.1 and by 2000, it was below 35%.
Awujola (2004) suggested that high productivity in the Nigerian manufacturing industry is
necessary conditions for the sector's recovery, achieving competitiveness, boosting GDP and
uplifting the standards of living of the people, require to attacks the problems of low level of
technology, low level of capacity utilization rate, low investments, high cost of production,
inflation and poor infrastructure. The capacity utilization and productivity remain very low
compared with other African manufacturing firms. In most Africa countries, performance in this
sector has been poor (UNIDO, 2002, p.6).
Omobowale (2010) revealed a number of problems confronting these local industries were
recorded. These include erratic power supply, cost of raw materials, level of automation, noise
pollution, occupational hazards, instability in government policies, marketability and a general
bias for machines fabricated locally.
Kayode (1987), made us to believe that the industrial sector and in particular, the manufacturing
sub-sector is the heart of any economy. He went further to confirm that faulty or poor industrial
development policies have long been recognized as major factors that adversely affect the well-
being and socioeconomic improvement of the people in developing countries. He argued that
such policies are the major contributing factors to low value added and low economic growth.
4

5. Obasi (2000), showed that the manufacturing sector is typically the most dynamic component of
the industrial sector and the degree of manufacturing is a measure of the extent to which the
other components of the industrial sector.
Söderbom and Francis (2002) the most frequently cited number-one problem for the firms is
physical infrastructure, followed by access to credit, insufficient demand, cost of imported raw
materials and lack of skilled labour.
Uzaoga (1981) also threw more light on the low performance of the manufacturing sector in
Nigeria. He made us to believe that Nigeria being a colony of Britain had to specialize on the
production of raw materials while Britain serves as the main supplier of manufactured goods.
According to him, this unfortunate pattern of investment promoted the theory based on a static
scheme of comparative advantage whereby diverting the Nigerian economy into activities that
offered little opportunity for technical progress. The few industries established depended on
foreign inputs. All these distortions according to him affected the performance of the industrial
sector in terms of its contribution to the gross domestic product, employment generation,
capacity utilization; export and value added which are indices for measuring the performance of
the manufacturing sub-sector.
FACTOR THAT CONSTITUTE TO POOR PERFORMANCES OF MANUFACTURING
SECTOR IN NIGERIA
The Manufacturing sector is also crucial for employment generation, wealth creation and raising
the quality of life of Nigerians. However, the sector remains weak due to some of challenges
including the poor state of the nation’s infrastructure which imposes high cost of production,
Weak technological support and low levels of innovation which lead to production of low quality
products.
Low Level of Technology: This is perhaps the greatest obstacle constraining productivity in
Nigeria as developments in technology and innovations are the primary forces propelling
industrialization today. Due to frequent breakdown reduction the capacity utilization rates, Low
technology is responsible for the inability of local industry to produce capital goods such as raw
materials, spare parts and machinery.
Poor Performing Infrastructure: Poor performance of infrastructural facilities, characterized
by frequent disruption in electric power and water supplies and high cost of transportation
systems, is a major constraint on productivity. As firms have to invest huge capital to provide
alternative infrastructural facilities to run their businesses, enterprises are forced to carry high
cost structure which reduces efficiency and results in loss of competitiveness for their products
Policy instability: Investment in manufacturing requires long range planning; consequently
stable and consistent macroeconomic policies are a pre-requisite for high performance in the
sector. However the increasing policy inconsistency resulting in instability in the macro-
economic environment, affects the corporate planning adversely.
5

6. Low Investments: Lack of funds has made it difficult for firms to make Investments in modern
machines, information technology and human resources development which are critical in
reducing production costs, raising productivity and improving competitiveness. Due to financial
constraints, industries in Nigeria are unable to acquire modern technologies. Consequently, the
equipment frequently breakdown and this reduces capacity utilization rates.
High Cost of Production: Since the introduction of SAP, high and increasing cost of production
has been recorded by most business organizations as a major constraint on their operations (CBN
Business Surveys). Increased cost, traced largely to poor performing infrastructural facilities,
high interest and exchange rates, has resulted into increased unit price of manufactures, low
effective demand for goods, liquidity squeeze and fallen capacity utilization rates.
Inflation: which can be described as persistent increase in the general price level constitutes a
disincentive to saving for future use and thereby retards investments and growth. It also
encourages speculative activities and diverts resources from productive ventures.
Lack of funding: Funding challenges have made it difficult for manufacturing firms to invest in
modern machines, Information Technology and human resources development, which are critical
to reducing production costs, raising productivity. High interest rates and the reluctance on the
part of financial institutions to comply with laid down lending guidelines tend to frustrate
corporate investment and fail to ensure protection and growth of local industries.
The chart below shows the sectoral contributions to the GDP:
Nigeria’s GDP by sector 2008 (per cent
NAME OF SECTOR PERCENTAGE
CONTRIBUTE TO GDP
Whole sale, Hotel and Restaurant 18%
Crude petroleum and Natural Gas 41%
Building and construction 2%
Manufacturing 4%
Agriculture 18%
Other service 17%
Sources: Central Bank of Nigeria Bulletin 2009
percentage whole sales, Hotel
and Restaurants
Crude petroleum
and Natural gas
Building and
construction
Manufacturing
Agricultural
other services
6

7. The contribution of the industrial sector to the GDP in Nigeria is further compared with those of
selected countries to further emphasize the poor performance of the sector.
Nigeria’s manufacturing as percentage of GDP and those of Selected Countries
2004-2007.
Period Brazil China Egypt India Malaysia Nigeria Singapore Canada USA
2004 23 41 18 16 30 3.68 27 18 13
2005 23 42 17 16 29 3.79 27 18 13
2006 23 41 17 16 29 3.91 27 18 13
2007 23 43 17 16 29 4.03 27 18 13
Source National Bureau of Statistics 2009
In terms of capacity utilization, the capacity utilization in the manufacturing sector that was 73.3
per cent in 1984 fell to 54.3per cent by 2009.
Methodology
Secondary data were collected to determine capacity utilization in the Nigerian manufacturing
sector. Secondary data were collected form Central Bank of Nigeria publication, journals,
articles etc.
The paper employed ordinary least square method (OLS) of multiple regression analysis. This is
to establish the relationship between the capacity utilization as dependent variable and variables
that affect capacity utilization in the manufacturing sector, namely inflation rate, exchange rate,
interest rate, loan and advance, per capital to real GDP and electricity generation as independent
variables.
Models specification
The model used to explain manufacturing capacity utilization in Nigeria is seen below: this
model was borrowed from the literature reviewed and modified
Y = b0 + b1x1 + b2x2 + b3x4 + b5x5 + b6x6 + µ1
Where: Y = capacity utilization
Bo = intercept
X1 = inflation
X2 = exchange rate
7

8. X3 = interest rate
X4 = loan and advance
X5 = per capital at GDP
X6 = electricity generation
µ1 = error term
Discussion and interpretation of the results
Results of the regression model
Y = 41.9 – 0.04X1 + 0.10X2 – 0.09X3 + 7.48X4 + 9.54X5 – 0.01X6
R2 = 0.62
F = 4.82
Where X1 = inflation
X2 = exchange rate
X3 = interest rate
X4 = per capital at GDP
X5 = electricity generation
X6 = electricity generation
Y = capacity utilization
From the estimation equation, the R2 which is the coefficient of determination explains 62 per
cent of the total variation on the capacity utilization in the manufacturing sector as reflected in
the above results meaning that the regression line give a good fit to the observed data.
On the coefficients of the variables, X1 (inflation rate) is statistically significant and it has an
inverse relationship with the capacity utilization in the manufacturing sector. This means that
high inflation reduced, capacity utilization also increase while, increase in inflation rate lead to
low capacity utilization.
On the other hand, X2 (exchange rate) has a direct or positive relationship with capacity
utilization in manufacturing sector, this means that deregulation of the exchange rate policy of
the government really favoured the manufacturers to have favoured capacity utilization in this
8

9. sector, availability of foreign exchange to manufacturing sector improves capacity utilization
hence; shortage of foreign exchange reduced capacity utilization in this sector.
The coefficient of interest rate X3 showed a negative relationship. This means that if interest rate
is reduced, productivity will increase, as many manufacturers we like to borrow and therefore
capacity utilization will also increase. On the other hand, if the interest rate is increase,
productivity will reduce and capacity utilization in manufacturing sector will also reduce because
the manufacturers are discouraged to borrow.
The coefficient of loan and advances X4 the relationship between capacity utilization and this
variable is positive, meaning that there is positive correlation between variable. If the
commercial bank makes the loan available at minimum interest rate has a positive impact in the
capacity utilization of the manufacturing sector that will increase their productivity
The coefficient of per capital X5 showed direct relationship with capacity utilization (positively
related). The implication is that, as real income increased, demand also increases. There will be
effective demand. The implication is that as purchasing power increased, standard of living
increased.
Finally, the relationship between capacity utilization and electricity generation indicated direct
relationship. The negative sign show that as power generation X6 reduced, manufacturer
productivity also reduced. Therefore low power generation reduced capacity utilization.
This result is in line with Awojola (2004), Mojekwu and Iwuji (2011) which show that, one of
the constraints of capacity utilization of the manufacturing sector is poor performance of
infrastructure such as road, transport, water, electricity etc.
CONCLUSION AND RECOMMENDATION
The sector remains weak due to some of challenges including the poor state of the nation’s
infrastructure which imposes high cost of production, Weak technological support and low levels
of innovation which lead to production of low quality products, lack of funding .To ensure
sustained growth in the manufacturing sector.
Recommendation and suggested as follows:
Government should give relief to manufacturer and improve infrastructure to restore the glory of
the manufacturing sector.
The manufacture sector must free from multiple taxes and levies in order to encourage
production
Aggregate demand of individuals should be raised to eliminate insufficient demand by increasing
the purchasing power of the individuals in Nigeria
Therefore, all the above problems need to be addressed urgently to put the economy back on the
path of growth.
9

10. References:
Abayomi, A. (2010) “An appraisal of performance of the manufacturing sector and capacity
utilization in Nigeria”
Department of banking and fiancé university of Abuja Vol.2 p 96-105
Adenekan, S. (2010). “Low Capacity Utilisation, Bane of the Nigerian Manufacturing Sector”
[Online] Available: http://www.punchng.com/Articl.aspx?theartic=Art201001072339196.
(April 8, 2010)
Ajayi, D. D., “Recent trends and patterns in Nigeria’s industrial Development”
Development of social science Research in Africa, Vol. XXXII, N. 2 p139- 155
Loto, M. A.(2012) “Global economic downward and the manufacturing sector performance in
the Nigeria economy”
Emerging Trends in Economics and Management Sciences journal vol. 3 p38 -45
Malik, M; & Teal, F; and Baptist, S. (2006), “The Performance of Nigerian Manufacturing
Firms: Report on the Nigerian Manufacturing Enterprise Survey 2001”
UK: Centre for the Study of African Economies University of Oxford.
Mojekwu, J. N. and Iwuji, I. I. (2011),“factors affecting capacity utilization Decision in Nigeria”
Canadian centre of science and Education. Vol. 5, p157-163
Soderbom, M; & teal, F. (2002). “The Performance of Nigerian Manufacturing Firms: Report on
the Nigerian Manufacturing Enterprise Survey 2001”
UK: Centre for the Study of African Economies University of Oxford.
10

11. Appendix
CAPACITY UTILIZATION INDICATOR
Y X1 X2 X3 X4 X5 X6
Year Capacity Inflation Exchange Interest loan and Real GDP Electricity
utilization Rate Rate Rate advances Generation
leading % megawatts
1985 38.3 5.5 0.89 11.75 3232.2 253013.3 2038.4
1986 38.8 5.4 2.02 12 4475.2 257784.4 1331.8
1987 40.4 10.2 4.01 19.2 4961.2 255997 1393.2
1988 42.4 38 4.53 17.6 6078 275409.6 1404.2
1989 43.8 40.9 7.39 24.6 6671.7 295090.8 1518.8
1990 40.3 7.5 8.03 27.7 7883.7 472648.7 1656
1991 42 13 9.9 20.8 10911.3 328644.5 1656
1992 38.1 44.5 17.29 31.2 15403.9 337288.6 1847
1993 37.1 57.2 22.05 36.09 23110.6 342540.5 1874.8
1994 30.4 57 21.88 21 34823.2 345228.5 2013.6
1995 29.2 72.8 21.88 20.79 58090.7 352648.6 1981.4
1996 32.4 29.3 21.88 20.86 72238.1 367218.1 2025
1997 30.4 8.5 21.88 23.32 82823.1 377839.8 2012.8
1998 32.4 10 21.88 21.34 96732.7 388468.1 1881.8
1999 34.6 6.6 92.69 27.19 115759.9 393107.2 1906.4
2000 36.1 6.9 102.1 21.55 141294.8 412332 1944.4
2001 42.7 18.9 111.94 21.34 206889 431783.1 2278.1
2002 54.9 12.9 120.97 29.7 233474.7 451785.6 2250.2
2003 56.5 14 129.35 22.47 294309.6 495007.1 2397.8
2004 55.7 15 133.5 20.62 332113.7 527576 2762.3
2005 54.8 17.9 132.14 19.47 352038.3 561931.4 2687.1
2006 53.3 8.2 128.65 18.7 445792.6 595821.6 2650.2
2007 53.3 5.4 125.83 18.36 487576 634251.1 2789.1
2008 53.8 11.6 118.56 18.74 932799.5 672202.6 2845.9
2009 54.3 12.4 148.9 22.9 993457 716949.7 2900.3
SOURCES: CENTRAL BANK OF NIGERIA STATISTICAL BULLETIN 2010
11