Local sourcing cuts manufacturers’ FX demand by $1bn

Nigeria’s foreign exchange utilisation by the industrial sector has fallen by $1 billion in the first half of 2026, as manufacturers increasingly adopt backward integration and expand export activities, according to industry analysts.

Data from the Central Bank of Nigeria’s (CBN) Q2 bulletin on sectoral utilisation of foreign exchange show that industrial-sector utilisation declined by 21.2 percent to $3.72 billion in the six months to June 2026, from $4.72 billion in the corresponding period of 2025.

The decline contrasts with a sharp increase in foreign exchange utilisation for manufactured products, which more than doubled to $2.14 billion from $1.03 billion over the same period, representing an increase of $1.11 billion or 107.4 percent.

Ayokunle Olubunmi, head of Financial Institutions Ratings at Agusto & Co., attributed the decline in industrial-sector utilisation partly to manufacturers’ efforts to produce locally some of the inputs they previously imported.

According to him, some manufacturing companies are increasingly adopting backward integration, while others are expanding their export activities, allowing companies within the same group to supply one another and potentially reducing their demand for foreign exchange.

The shift could ease pressure on Nigeria’s external reserves and support employment as manufacturers increase domestic production, Olubunmi said.

The divergent movements across sectors, however, suggest that lower industrial-sector utilisation has not translated into a broad-based decline in foreign exchange demand across import-related categories.

The industrial sector remained the largest of the seven categories listed in the CBN table in the first half of 2026, followed by the oil sector at $2.15 billion and manufactured products at $2.14 billion.

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Oil-sector utilisation declines

Foreign exchange utilisation by the oil sector also fell by 18.7 percent to $2.15 billion in the first half of 2026, from $2.64 billion a year earlier.

The $494.47 million reduction followed a sharp increase in reported utilisation in 2025, when the category rose from $816.65 million in the first half of 2024 to $2.64 billion in the corresponding period of 2025.

Despite the latest decline, the oil sector remained one of the largest categories of foreign exchange utilisation during the period.

Developments in domestic refining could also influence future foreign exchange demand. The expansion of the Dangote Refinery, whose capacity is expected to increase from 650,000 barrels per day to 1.4 million barrels per day, alongside higher crude oil production, could boost refined petroleum exports and help cushion foreign exchange pressures.

Nigeria recorded approximately $6.13 billion in refined petroleum export earnings in 2025, according to the CBN balance of payments data cited in the sectoral analysis.

Transport and other sectors record increases

The transport sector recorded a 41.3 percent increase in foreign exchange utilisation to $523.75 million in the first half of 2026, from $370.55 million in the same period of 2025.

The $153.20 million increase was the largest percentage gain among the seven categories, excluding manufactured products, whose utilisation rose by more than 100 percent.

Ismail Abiodun Taiwo, senior research associate at Anchoria Capital Group, identified vehicle imports, including engines, tyres and electric vehicles, as possible contributors to transport-sector foreign exchange demand.

He also pointed to growing demand for vehicle brands such as Jetour, BYD and Geely.

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Food-product utilisation rose by 11.4 percent to $1.19 billion from $1.07 billion, while agricultural-sector utilisation increased by 18.9 percent to $106.64 million from $89.71 million.

Mineral-sector utilisation also rose by 25.3 percent to $143.45 million from $114.47 million.

Tariff policy presents a mixed outlook

The changes in sectoral foreign exchange utilisation come against the backdrop of Nigeria’s 2026 tariff policy, which combines reductions in tariffs on several categories with higher protection for manufactured products.

An analysis drawing on the Federal Government’s 2026 tariff policy document and FMDA figures shows a net tariff reduction of 569 percentage points for the industrial sector, alongside reductions of 228 percentage points for food products and 120 percentage points for transport.

The analysis also recorded tariff reductions of 59 percentage points for minerals, 46 percentage points for agriculture and 15 percentage points for the oil sector.

In contrast, manufactured products recorded a net tariff increase of 30 percentage points, reflecting the policy objective of discouraging imports of finished goods and promoting domestic production.

However, the effectiveness of the approach could be constrained by Nigeria’s dependence on imported goods and weak substitution between imported and locally produced products.

Consequently, changes in tariffs may alter the composition of imports without necessarily reducing total import demand significantly.

The rise in manufactured-products foreign exchange utilisation, despite the higher tariff protection reported for the category, underscores the need to assess whether domestic producers can meet demand at competitive prices.

Overall, the decline in industrial-sector utilisation points to a possible shift in manufacturers’ sourcing and production strategies. Whether this translates into sustained reductions in foreign exchange demand will depend partly on the pace of domestic production, the expansion of exports and the ability of local industries to substitute for imported goods.

Tunde Abidoye, head of research at Quest Merchant Bank, said import substitution, particularly through the Dangote Refinery, could influence Nigeria’s import dynamics by reducing the country’s reliance on imported refined petroleum products.

He said the refinery’s operations could make import substitution more effective over time, potentially affecting the volume and composition of imports.

Abidoye also identified disruptions to global supply chains arising from conflicts in the Middle East and other regions as another factor that could have affected import patterns.

According to him, disruptions to imports from affected regions could complicate import substitution efforts and influence the availability of certain products.

“These are the two factors I believe may have contributed to the development, import substitution, particularly the impact of the refinery, and possible disruptions to imports from the Middle East and other regions due to ongoing conflicts,” he said.

However, he noted that further analysis and verifiable data would be needed to establish the extent to which these factors had contributed to the observed changes in dollar demand.