THE INFLUENCE OF FINANCE AND MACROECONOMIC VARIABLES ON MANUFACTURING CAPACITY UTILIZATION IN NIGERIA

This paper estimates the response of manufacturing capacity utilization in Nigeria to changes in key macroeconomic indicators in Nigeria using annual data on exchange rate, interest rate, inflation rate, external debt, terms of trade and trade openness over the period 1975 – 2012. The variance decomposition analytical technique was adopted. The study presents the following results: (i) Both the Engle and Granger (1987) and Johansen (1991) co-integration tests show evidence of co-integration between the endogenous and exogenous variables. However, the error correction mechanism (ECM) shows that the model has a low speed of adjustment to short-run disequilibrium, of approximately 6.5 per cent; (ii) The forecast error variance decomposition analysis shows that variations in manufacturing capacity utilization in Nigeria are largely driven by its own shocks. The study further shows that exchange rate, interest rate and terms of trade contribute significantly but negatively to variations in manufacturing capacity utilization. Though it shows evidence of negative contributions from inflation rate, external debt and trade openness, they do not significantly influence movements in manufacturing capacity utilization in Nigeria; (iii) The study also presents evidence of causal impact of manufacturing capacity utilization on exchange rate and manufacturing capacity utilization on interest rate and not vice versa but did not produce evidence of causality between manufacturing capacity utilization and the other exogenous variables namely, inflation rate, external debt, terms of trade and trade openness. It is strongly recommended that government should adopt drastic measures to stabilize the flow of foreign exchange as well as enthrone and sustain low interest rate regime. Government should also emphasize local content in domestic manufacturin