The Nigerian foreign exchange market shortfalls place hard-hitting on the manufacturing industry that derives most of its raw materials and spare parts needed for operations from outside the country.
While other sectors of the economy are likewise affected by the dollar shortage, the Central Bank of Nigeria (CBN) appears to be losing its grip in defence of the naira against other foreign currencies, especially the dollar.
At a recent forum of the Regional Course on Exchange Rate Regimes and Policies, organised by the West African Institute for Financial and Economic Management (WAIFEM), the CBN’s Governor, Godwin Emefiele, admitted that the bank is faced with stabilising the naira against the dollar.
According to Emefiele, the thrust of exchange rate management by the apex bank to allow the market system to determine the exchange rate parity, devoid of the activities of speculators and rent-seekers, has not yielded the required results.
In the face of the geopolitical tensions, COVID-19 pandemic and commodity supply shock to name a few, the apex bank has remained stuck to its forex policy, currently operating a free-float exchange rate regime and intervening in the market at will.
Bismarck Rewane, chief executive officer of Financial Derivatives Company Limited, says the increased price of imported raw materials and higher operating expenses in diesel were hindering the operations of manufacturers in the country.
At the Alpha Morgan Capital Quarterly Presentation, Rewane, who spoke on ‘Economic Outlook in a Period of Political Squabbles and Investor Nervousness’, emphasised that foreign exchange rationing was impeding business activities.
According to him, forex supply to the real sectors has declined substantially; manufacturers now get about 0-5 per cent from the official window, down from approximately 20 per cent.
This has thereby increased the demand pressures at the parallel market, as the majority of the manufacturers now source for foreign exchange at the black market taunting CBN’s stoppage of forex to the Bureau de Change (BDC).
Naira has continued to seesaw, depreciating against the dollar. On Wednesday, it stood at the rate of N415.77/$1 at the Investors and Exporters window, N418.21 /$1 at the interbank rate and hovering between N614 and N618/$1 at the black market.
Every week, the record shows the CBN injects a total of $210 million into the forex market of which $100 million is allocated to Wholesale Secondary Market Intervention Sales (SMIS), $55 million to Small and Medium Scale Enterprises as well as $55 million sold for invisible.
In its weekly market report of last week, analysts at Cowry Asset Management expected some level of pressure of the naira against the dollar “due to anticipated pressure on foreign exchange amid electioneering activity coupled with weak petrodollar earnings.”
An economic indicator of the prevailing direction of economic trends in the manufacturing and service sectors, fell to 53.9 in May, from 55.8 in April, according to the latest Purchasing Managers’ Index (PMI), compiled by Stanbic IBTC Bank.
Although the headline PMI signalled a twenty-third successive monthly improvement in business conditions in Nigeria’s private sector, at 50 points or below, the PMI is neutral or negative.
“New orders rose sharply in May, albeit at a softer pace than in April. Firms raised their output levels, extending the current run of output growth to 18 months.
“All four of the monitored sub-sectors recorded marked expansions, led by the manufacturing sector,” the report indicated.
It further shows that the overall rate of growth was sharp but eased to an eight-month low amid elevated costs. “Nevertheless, companies were committed to raising their inventories as part of efforts to protect against future price hikes.”
Also, the report highlighted specifically that larger workforces and higher prices for fuel, raw materials, transportation and other inputs led to another substantial increase in overall input prices in May.
The Head of Equity Research West Africa at Stanbic IBTC, Muyiwa Oni, said the manufacturing sector for the first time since October 2021, posted its strongest growth as output expanded for 16 consecutive months in the sector, averaging at 60.9 in 2021 compared to 62.3 so far this year.
He, however, noted that “the manufacturing sector faces sharply rising diesel prices and insufficient FX supply. Average diesel prices rose 21 per cent month-on-month and 176 per cent year-on-year in April due to rocketing global energy prices.”
A closer look at the manufacturing sector’s contribution to Nigeria’s Gross Domestic Product (GDP) shows the nominal GDP growth of the sector in the first quarter of this year dropped to 11.72 per cent Y/Y from 32.10 per cent recorded in the corresponding period of 2021, representing a 20.38 per cent points decline.
Also, it was 13.80 per cent points lower than the preceding quarter’s figure of 25.52 per cent. On a Q/Q basis, the growth of the sector was negative at -2.96 per cent during the quarter.
The contribution of the manufacturing sector to nominal GDP in the first quarter of this year also declined to 15.06 per cent, lower than the 15.27 per cent recorded in the corresponding period of 2021 but higher than the fourth quarter of 2021 at 14.28 per cent.
The Director-General, Manufacturers Association of Nigeria (MAN), Segun Ajayi-Kadir, reportedly said that manufacturers were relying on the parallel market to get dollars.
According to the MAN DG, the forex scarcity and the high cost of diesel had greatly increased the cost of production.
The scarcity of forex is also unfortunate because it affects the manufacturing sector more than others, Ajayi-Kadir said, adding that the sector has a multiplier effect on the economy which ought to receive priority.
“Our members are given ridiculously low amounts in the face of huge demands,” he lamented.
“We need forex for materials and spare parts which are not locally available. We were encouraged when the CBN said it stopped allocation of Forex to BDCs to put more money in the banks but down the line, this has not happened. We got to the BDCs for more than 90 per cent of our needs. When you ask for $400,000, you are given $2,000. You ask for $1 million and you are given $50,000. This is ridiculous.”
While the dollar scarcity persists, economists have also warned that the rising cost of production due to the forex shortage would lead to inflation as businesses would be forced to hike the cost of goods.
Nigeria’s inflation rose to 17.71 per cent in May and is projected to worsen to 18.4 per cent in June, according to FDC’s outlook.
Efforts to get the CBN’s comment on what the bank is doing currently to generate enough foreign exchange towards boosting the economy and stabilising the naira proved abortive as its Director of Corporate Communications, Osita Nwanisobi, did not respond to the WhatsApp message sent to his phone line.
Nwanisobi in a report published by The PUNCH admitted the bank had received quite a lot of complaints about manufacturers not having adequate forex to import raw materials.
Local manufacturers are also burdened by the forex illiquidity. The President of the Association of Micro Entrepreneurs of Nigeria (AMEN), Prince Saviour Iche, in a chat with insideusiness.ng, decried the situation.
According to him, most of the raw materials used by local manufacturers are imported into the country, which raises the alarm that if importers do not get enough forex to import the raw materials, local manufacturers are automatically badly affected.
“The little raw materials they can import, they will add higher prices to it”, he said, lamenting that the CBN forex regime had led many of the local manufacturers to completely closed business.
He said, “Before the government closed the border, our customers from neighbouring African countries came to buy locally manufactured goods with dollars which they exchanged at the Nigerian market.
“But when the government closed the border, they started to develop the techniques and started producing goods in their own countries.”
The AMEN president believes local manufacturers have a role to play for CBN to ensure dollar liquidity.
He said, “Do not neglect the local manufacturers as these are the people that will help ensure enough foreign exchange if the export business increases as we are not selling what we produce but exporting them.”
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