An industry in need of stitches

The fashion industry spans from wholesalers to large design houses and small shops. It provides employment for fashion designers as well as a range of support services (specialists, lawyers, accountants, social media directors and project managers. It is therefore one of the largest employers among the creative industries.

Over the years, the global fashion apparel industry has surged to a market size of US$1trn, representing almost two per cent of global GDP. Industry sources suggest that about 75 per cent of the world’s fashion market is concentrated in Europe, USA, China and Japan. China’s textile production accounts for 54 per cent of total production globally.

Meanwhile, the domestic textile and apparel industry in India is forecast by the India Brand Equity Foundation (IBEF) to hit turnover of US$223 billion by 2021, from its current estimate of US$108 billion. Increased penetration of organised retail and rising income levels are the expected drivers. Ready-to-wear (RTW) garments remain the largest contributor to total textile and apparel exports from India, the world’s second largest exporter of textiles and clothing.

Turkey’s fashion industry has grown quickly, and its textile and apparel segment now accounts for more than 10 per cent of national GDP. An interesting trend in the UK market is that 17 per cent of total online spending in 2014 was on clothing and footwear.

Given its huge domestic market, with a population size of at least 170 million, there is vast potential to be unlocked in Nigeria. However, there are several constraints. First to mention is the deterioration in textile milling capacity. Industry sources suggest that there are only about 30 operational textile mills, which are running at an average of 40 per cent installed capacity. This compares with 180 several years ago.

Second is the high cost of financing. Annual interest rates on loans for manufacturers are close to 30 per cent whereas in China rates of less than 6 per cent are sometimes available. According to the Nigeria Deposit Insurance Corporation, the allocation of credit to manufacturers by commercial banks was N1.6trn in 2014, equivalent to 13 per cent of the total.

In 2015 the Bank of Industry launched a N1 billion fashion fund. The maximum limit per obligor is N30m, repayable over three years at an interest rate of 9 per cent per annum. There are other funds which key players within the industry can tap into such as the CBN’s MSME fund and that of Nigeria Export-Import (NEXIM) Bank.

However, these funds combined are not sufficient to solve the issues surrounding access to credit. A third constraint, which is not specific to the textile, apparel and footwear segment, is Nigeria’s huge infrastructural deficit including its epileptic power supply. The 2016 budget, which was signed into law in May, projects capital expenditure of N1.8 trillion.

The Federal Ministry of Power, Works and Housing accounts for 23.5 per cent of the figure. Some optimism is in the air as we look towards the Buhari-led administration and what strides it is able to make in overhauling the country’s power sector. Improved power supply would make a disproportionate impact on manufacturing.

Fourthly, the current foreign exchange (fx) sourcing challenge is causing a strain in a sector with a high degree of import dependence. Importers can only meet a small part of their needs at the CBN rate; the balance is paid for at the parallel rate (black market), thereby resulting in a spike in the price of imported inputs such as sewing, buttonhole and weaving machines

The CBN’s circular of June 2015 banning 41 import items from access to fx at the CBN window includes textiles, woven fabrics and clothes. Imports of textile related items declined by 40 per cent to N25.2 billion in H2 2015 from the first half, according to data from the National Bureau of Statistics (NBS).

A fifth constraint to highlight is smuggling. A 2010 World Bank study estimated that imports worth US$5 billion are smuggled through Cotonou alone into Nigeria annually. Textile products account for 50 per cent of the value of the smuggled goods. The influx of cheaper fabrics from China and India has been highlighted as one of the reasons for underperformance in this industry.

Sixth, for the fashion value chain to thrive, Nigerians have to abandon the perception that locally-made products are somehow inferior to imported goods. They would be readier to make this step if the industry improved the quality of its finished gods.

The country’s economic downturn is necessarily encouraging local patronage. On the textile supply side, however, the cotton segment is in need of a leg up. Nigeria’s production is inadequate to meet demand in the local market. Industry sources estimate Nigeria’s cotton production at 240,000 metric tonnes (MT) seed cotton annually; this translates into 80,000 MT of cotton lint.

From a Nigerian farmer’s perspective, cotton compares poorly with other lower risk crops. In 2015 the Nigerian Investment Promotion Commission announced it would work closely with the national cotton, textile and garment policy committee to resuscitate the textiles industry. However, state governments have not implemented the policy in their respective states.

In April, the Nigerian Textile Manufacturers Association approved the introduction of genetically modified (GM) cotton into the country, arguing that it has high resistance to pests and is environmentally friendly. Farmers would enjoy increased yields due to reduced insect-pest damage. The association claims that no less than 500,000 Nigerians would be employed in the textile industry when GM cotton is finally launched into the market.

To stimulate activity within the fashion value chain, the government needs to pull its weight. Policies to encourage a more business-friendly environment for the private sector, both domestic and foreign, are required, not least for the made-in-Nigeria initiative. Already established industry players would then be open to scaling up. Ethiopia and Rwanda have both adopted a highly successful and distinctive model for industrial and economic development.

For instance, a shoe factory in Ethiopia, owned by the Huajian Group (a China based company), exported its first products only three months after making its final investment decision. Good local supplies of leather, the core input, were advantageous but the decisive factor was that the government met the investor’s requests swiftly and transparently.

The fashion business and other areas in the fashion value chain deserve a seat at the table of Nigeria’s economic future. The export opportunities are vast ranging from textiles to RTW garments and finished leather products; it is known to be a strong job generator in other economies and also provides a new lease of life for the acquisition of a broad range of fashion skills across the country.

Nigeria becoming self-reliant in its textile and fashion requirements and serving as the hub for West Africa is a medium to long term goal. However, to achieve this goal, neat needlework is now required.

• Egwim Macroeconomic and Fixed Income Analyst at FBN Capital Limited, the Investment Banking and Asset Management arm of FBN Holdings operating under the brand name FBN Quest.
Twitter handle: @EmpressOfEcons