Purchasing Power Parity Conversion Factor and Price Level Ratio as Determinants of Manufacturing Sector Capacity Utilization in Nigeria

This study examined the effect of purchasing power parity (PPP) conversion factor and price level ratio (PLR) on manufacturing sector capacity utilization in Nigeria from 1990 to 2023. The study employed an ex-post facto research design; secondary data were sourced from the Central Bank of Nigeria Statistical Bulletin and the World Bank Database. The dependent variable, capacity utilization, was proxied by average manufacturing utilization rate (AMCUR), while the independent variables were PPP conversion factor and PLR. Control variable included lending interest rate (LINTR). The Autoregressive Distributed Lag (ARDL) bounds test model was used to analyze the short-run and long-run relationships between the variables. Findings showed that the PPP conversion factor has a significant negative effect (coefficient = -0.3242, p = 0.0372), suggesting that rising domestic prices relative to foreign prices hinder manufacturing competitiveness. The PLR has a significant positive effect (coefficient = 68.5624, p = 0.0152), which may indicate that higher relative price levels (making Nigeria less affordable compared to international benchmarks) paradoxically enhance capacity utilization, potentially due to nominal output growth or data artifacts; however, this finding is counterintuitive and warrants further investigation. Control variables LINTR, was insignificant in the long run. The error correction term (-0.8899, p = 0.0000) confirms a stable long-run equilibrium, with 89% of deviations corrected per period. The model explains 66% of AMCUR variation (Adjusted R² = 0.66). Recommendations include stabilizing the exchange rate, strengthening the naira’s purchasing power, and controlling inflation to improve manufacturing capacity utilization.