By ADEBAYO OBAJEMU
The economy is facing its worse challenge in decades, which is threatening to shut down the Small and Medium Enterprises, SMEs, sector over the continuing fall in value of the naira against major international currencies. In most economies, the SMEs sector is the driver of employment, and contributes significantly to the Gross Domestic Product, GDP.
However, the sector is also the most vulnerable to economic challenges such as the declining value of the Naira, as they lack the financial capacity to weather such difficult storms. With the massive devaluation of the naira, most of them are already facing collapse and likely shut down of operations, which would aggravate the already unemployment situation in the country at 33 percent in June.
“In fact, with the way the Naira is on a free fall it will take a miracle for small businesses not to go under”, Dr. Olufemi Omoyele director of Entrepreneurship at Redeemers University told this newspaper.
In spite of all this, the apex bank last week said it will not reverse its decision to ban the sales of foreign exchange to Bureaux De Change (BDCs) after the move apparently pushed the naira into an unprecedented fall.
Naira on Friday plunged to N574 against the dollar, from about N520 it sold two weeks ago at the parallel market. The currency has fluctuated at the official market with an average of N411.The fall at the black market followed the stoppage of forex sales to registered money changers who the CBN has accused of fraud and round-tripping. There are over 5000 BDCs in the country.
The fall has fueled price instability as many businesses, including small and medium enterprises, rely on the black market for dollar access, even though the CBN has said banks have been asked to meet all legitimate requests, but inadequate supply and bureaucratic process in banks push SMEs and others to the parallel market.
Addressing journalists two Fridays ago after the central bank announced that it was holding the monetary policy rate at 11.5 per cent, the governor, Godwin Emefiele, said CBN took too long to move against the BDCs.
“The only exchange rate market is the Investors and Exporters window, which is the market that we expect everybody that wants to buy or sell dollars should use,” said Mr. Emefiele.
“I am sorry to say, I do not recognise any other market. We’ve asked ourselves at the CBN, why did we have to wait so long?
“CBN remained the only central bank in the world to dip its hands into our commonwealth and pack dollars to BDCs all in an effort to stabilise the exchange rate.
“For me, it’s a wrong decision. It has stopped for good. The Bank of England, or U.S. Federal Reserves do not sell dollars to BDCs even though they exist.
“It beats my imagination that it tended to support illegality of people who are involved in graft and corruption,” he said.
Mr. Emefiele said banks have been given instructions to meet every legitimate demand for foreign exchange, and that the CBN will be ready to support even requests that are above the allowed limit, provided they are lawful.
For the monetary policy, the bank held all paramters as follows: policy rate at 11.5 per cent, with the asymmetric corridor of +100/-700 basis points around the MPR, Cash Reserve Ratio (CRR) at 27.5 percent as well as the Liquidity Ratio at 30 percent.
As criticisms of Emefiele’s action intensified last week, the North-South Economists’ Forum (NSEF), a band of development economists, exonerated the Central Bank of Nigeria (CBN) Governor, Godwin Emefiele, from the continued depreciation of the naira at the foreign exchange market (forex).
The group, in a statement by its chairman and secretary, Mallam Ahmed Abdulkadir and Dr. Chima Eboh, linked the fate of the naira to low receipts from the sale of crude oil and the non-export status of the Nigerian economy.
They noted that Nigeria has witnessed two recessions, the first, between 2015-2017, which was due to the crash in the global price of crude oil, and the second, between 2019 and 2020(induced by the COVID-19 pandemic), and insisted that none of these two major incidents could be traced to the CBN.
According to NSEF: “Nigeria earns a huge chunk of her foreign exchange from the sale of crude oil but much of that is spent on the importation of refined petroleum products and other basic amenities, most of which could have been produced in the country.
“How is it the fault of any CBN Governor or the CBN itself that the country cannot refine her crude for local consumption, at least? Is CBN in charge of the refineries? Does CBN sell our crude oil? Is it the fault of CBN that Nigerians import rice, cereals, toothpick, tomato paste, beans, wheat and other basic products and agriculture produce, all of which can easily be produced in the country?
“Recall that in 2018, Nigeria spent N13.1 trillion ($36.5 billion) on imports; in 2019, the figure climbed to N16.95 trillion ($47 billion). A chunky $28.7 billion was spent on Invisibles; that is money spent on business travels, financial services, and medical tourism, among others.
“No nation on earth operates like this – living off exotic products at the expense of its primary sector. None of these can be linked to CBN. When people fly to America, Asia and Europe just for medical check-ups, when public office holders make overseas trips their pastime and spend huge sums of forex on each of these trips, we should not blame CBN.
“Nigeria’s foreign trade is in deficit and has always been. And this will continue for as long as Nigerians continue to prefer imported goods and services, neglect the manufacturing sector, and continue to engage in sharp practices, even with the little forex available.”
It said: “Some economists and financial experts have argued for a realistic re-pricing of the naira. We strongly believe that this is not a sustainable cure as long as the country continues to finance importation of refined petroleum products from the forex she earns from crude oil.”
Noting that a huge chunk of forex is expended on the importation of petrol and other refined petroleum products, NSEF said it is not the duty of Emefiele or CBN to redress this anomaly of spending huge forex to import petroleum products that could easily have been produced at home if the refineries were functional.
“Those who are calling for the head of Emefiele should look elsewhere. But we know that this recent resurgence in attacks on the CBN Governor was because Emefiele has taken the bold stance of suspending the sale of forex to Bureau de Change (BDC) operators, most of who have consistently violated the terms and rules of engagement.
“We make bold to say that even if Emefiele is replaced by the best Central Banker in the world, without addressing issues of local refining of crude oil, local production and manufacturing, hoarding of forex by politicians and other public office holders, and the general corruption in the system, the naira will continue to struggle in the forex market,” NSEF said.
Professor Muhammad Ahmed, an economist told BusinessHallmark that there is no way small businesses can survive under a weakened Naira.The recently deceased Dr. Obadiah Mailafia wrote:”that Nigerian economy has witnessed inflation is a function of the depreciation of the naira. Over the past decade, high inflation has been a persistent phenomenon in our economy. In 2021, headline inflation stands at nearly 18 percent.
“Inflation is not only a tax on the poor; it discourages savings and investments, while ultimately undermining welfare and growth prospects. It has negative effects on small businesses. It also renders the currency weak against those of competitors.
“Second, the current account balance — the total number of international trade transactions (imports, exports and debts) is crucial. A positive account bolsters the exchange rate, while a negative one weakens it. At year’s end 2021, the ratio of our current account balance to GDP is projected to be -2.70 percent. When a country has to spend its dwindling foreign exchange in settling payments for its imports, it could lead to currency depreciation.
“Thirdly, debt. Nigeria’s current debt stands at a staggering N33 trillion ($87 billion), amounting to 35% of GDP. This year alone, we are projected to spend more than 90% of government revenues on debt-servicing. High debts will further weaken the naira.
“Fourth, the terms of trade. This refers to the ratio of export prices to import prices. If the prices of our exports are rising faster than those of our imports, it enhances our currency value. Unfortunately for us, the reverse is the case. Global oil prices have been heading south, while prices of advanced-country industrial manufactures have been heading north.
“Fifth, economic recession. Nigeria has seen two major recessions in five years. The 2015-2017 recession was triggered by the fall in global oil prices, while that of 2019—2020 was attributable to the novel coronavirus crisis. Recession undermines public finances while dampening overall business confidence and further crippling the naira.
For many small businesses and individuals, the naira’s fall has been a heavy burden on their operations and personal lives. Latifaat Balowu, a business woman based in Balogun market in central Lagos, said the prices of goods rose immediately the devaluation was announced. She said many business owners now find it difficult to replenish their stocks as prices have surged.
The naira depreciation makes her operating capital insufficient, while the rise in the price of goods makes it difficult for her to get buyers.
“We are fighting two evils: rising inflation and low purchasing power for the people. Many of my friends have already closed shops to prevent more losses,” she said.
Ikechukwu Nnamani, president of the Association of Telecoms Companies of Nigeria in a recent interview, stated that the naira’s devaluation and foreign exchange scarcity have had a devastating impact on the telecoms industry, as most of the equipment used in the sector is purchased in foreign currency.
He said that with the difficulty in accessing dollars, operators sometimes buy them from the parallel market, when the need to purchase the equipment is urgent.
Investigations have shown that since the naira devaluation was announced, many online phone stores, food vendors and fast moving consumer goods outlets have increased their prices. A tuber of yam that sold for N1,500 ($3.63) previously now costs $6.06, with the same degree of price increase seen for rice and onions.
Importers that source raw materials from other countries, and students going to university abroad have all seen the negative impact of the naira devaluation.
Oyebanji Adekunle, a Nigerian student studying at the University of Quebec, Canada told this medium that he is shopping for a cheaper alternative after he used more naira to buy dollars for his tuition fees abroad. Talking about his experience, he said: “Inflation was at 18.12% in April, the exchange rate is largely unstable, and monetary policy has provided inconsistent guidance to the financial community, in particular, and the country in general.”
Omoyele said currency devaluation is a deliberate reduction in the value of a country’s currency when compared to a benchmark currency. “We all know that Nigeria is heavily dependent on imports and a lot of Nigerians require the Dollar to import goods and raw materials. Currency devaluation is mostly done in countries with fixed Exchange Rate and Nigeria is one of such countries. So, the CBN action has affected businesses.