Abstract:

This paper estimates the response of manufacturing capacity utilization 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 vector autoregressive (VAR) analytical technique was adopted. The variance decomposition result 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 have significant negative contributions to variations in manufacturing capacity utilization. The study also presents evidence of causal impact of manufacturing capacity utilization on exchange rate and manufacturing capacity utilization on interest rate but not vice versa. However, it 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. The error correction mechanism (ECM) shows evidence of long-run convergence. Specifically, it shows that the system corrects short-run disequilibrium at a speed of approximately 6.5 per cent annually. It is strongly recommended that government should adopt economic stabilization policies to strengthen major economic fundamentals as a strategy for enhancing capacity utilization in the domestic manufacturing sub-sector.