Economy
Forex crisis dampens growth prospects
BY EMEKA EJERE
Amidst concerted efforts by the Central Bank of Nigeria (CBN) to achieve stability in the foreign exchange market, the country is witnessing an acute shortage of dollar that has worsened a harsh business environment, leaving many businesses groaning, findings have shown.
This is even as the federal government is aiming at achieving 4.2 percent gross domestic product (GDP) growth through the implementation of 2022 Budget.
The budget, as proposed by President Muhammadu Buhari, and presented to the National Assembly on Thursday, October 7, contained N16.39 trillion expenditure plan which is 25 percent higher than the 2021 budget estimate.
The proposal was based on the following assumptions: Oil price benchmark of $57 per barrel; oil production of 1.88 million barrels per day; exchange rate of N410.15 per dollar; GDP growth rate of 4.2 percent and inflation rate of 13 per cent.
The CBN had in July stopped selling forex to Bureau De Change operators on the grounds that they defeated their purpose of existence through illegally dealing in wholesale trading of forex beyond the statutory benchmark.
The apex bank directed businessmen and others to source forex from commercial banks. But since then, naira has been on a free fall while accessing forex has been difficult for firms.
Naira fell further by 1.68 percent against the U.S dollar at the official market on Thursday, after reaching a record low on Wednesday. The local currency exchanged hands with the greenback at N422.07 per $1 on Thursday, the lowest rate ever recorded at the official window, according to data published on FMDQ securities exchange window where forex is officially traded.
This indicates a N6.97 or 2.00 per cent devaluation from N415.30 to a dollar rate it exchanged in the previous session on Wednesday. Naira performance on Thursday became effective as forex turnover remained unchanged from $306.77 million recorded in the previous session on Wednesday.
At the black market in Abuja, dealers exchanged naira at N570.00 to a dollar on Thursday, while in Uyo, dealers exchanged the currency at N 565.00, and sold at N568.00 to a dollar on Thursday, our checks revealed.
No Forex to Buy Inputs
With a weakened currency that traded at the weekend at N570 to the green back, as well as the effect of inflation on household incomes, local producers are worried about their inability to access foreign exchange for raw materials and needed machinery.
Already, some of them with parent companies abroad are putting pressure on the supply chain while equally dealing with a weakened currency and pass-on effect on consumers.
The Director-General of Manufacturers Association of Nigeria (MAN), Mr. Segun Ajayi-Kadir, said the general concern among manufacturers was the difficulty and ‘most often inability, to access the forex they need to purchase machines, spares and critical raw materials that are not locally available’.
He noted that manufacturers’ funds in Nigeria would be tied down at the point of making requests and if commercial banks finally released the regularly meagre forex, it would be inadequate to procure the inputs which distorts the production process and rocks their bottom line.
He said, “This abysmal allocation to the manufacturers is quite disappointing and unhelpful. It threatens the relapse of the recent gains in terms of the growth numbers in the economy.
“While appreciating the current situation of government in terms of paucity of forex, the strategic allocation of the limited forex stock is key, whilst we also pursue domestic activities that will generate forex in a sustainable manner.
“It is important for the CBN to go beyond the recent zero allocation of forex to BDCs and intentionally prioritize allocation to the productive sector, in particular, the manufacturing sector.
“This is because of the multiplier effect it induces on the other sectors of the economy, the value addition, job creation, tax income for government and quite importantly, increased local production and positive effect it has on the disposable income of the average citizen.”
According to data seen by Business Hallmark, manufacturers in the chemical, food and pharmaceutical sectors are the worst hit by the demand challenge.
While a request of about $1.45 billion from various firms has been put forward to the apex bank in the first quarter of the year, an additional $300 million demand was submitted in the second quarter; thus, pushing outstanding demand to at least $1.75 billion.
A similar trend last year had forced many local producers to resort to the parallel market, in a move that triggered inflation and affected demand for locally produced goods.
But with the new forex policy in place, apex bank has been urged to allow BDCs receive diaspora remittances as is done in other economies of the world. The estimated annual remittance by Nigerians in the diaspora is $34 billion and a large part of it never makes it into the country.
Financial experts have, therefore, advised the CBN to institute a framework that will allow BDCs, which have automated their operations, to receive these funds into the economy to boost dollar reserves and save the naira.
Nigeria is one of the few countries that attract funds from migrant workers. Others are Pakistan, Canada, USA, Australia and Vietnam. Nigeria is on the side of those that have many migrant workers in other parts of the world and therefore earn foreign currencies they want to remit home, but there is a huge problem that limits the funds from getting home.
Beyond the rising demand for foreign exchange, the second quarter report of manufacturing activities showed that while production and distribution expenses are contracting, capacity utilisation, production and sales are still sluggish, attributable to the erosion of firms’ budget and households’ income by the persistently high inflationary pressure on the economy.
“Demands for forex by manufacturers have not been completely met by the banks leading to them source dollars from the parallel market”, said the Director-General of the Lagos Chamber of Commerce and Industry, Dr. Chinyere Almona.
“However, since the CBN’s decision to not extend forex to the BDC’s directly, the rates have been increasing, affecting the bottom line of manufacturers.
“We advise that critical raw materials that cannot be sourced locally should be supported by special forex intervention till when the country can build enough capacity to produce them locally.”
The Vice-President, Prof. Yemi Osinbajo, while speaking at the Mid-Term Ministerial Performance Review Retreat on Monday (October 11), urged the CBN to have a “rethink” of its foreign exchange management policy.
He said naira was artificially strong and that its exchange rate should reflect its actual market value to encourage foreign investment. This has since provoked further debate.
“As for the exchange rate, I think we need to move our rates to [be] as reflective of the market as possible. This, in my own respective view, is the only way to improve supply,” Osinbajo said.
Many saw it as Osinbajo calling for devaluation of the naira. But a frontline economist and founder of the Centre for the Promotion of Private Enterprise, Dr.Muda Yusuf, during a monitored Star FM Early Rush show, said it was inappropriate to say that the VP was calling for the devaluation of the Naira.
He explained that the VP implied that the currency should be market-reflective, adding that a fixed exchange rate was a major disincentive to inflows and creates enormous pressure of demand for forex.
“What we are experiencing in the forex market is largely consequences of the CBN fixed exchange rate policy regime and administrative allocation of forex’, Yusuf said.
“The NAFEX window is a subsidised window and managing a subsidy regime is typically a herculean task. Suppressing the market is like swimming against the tide.
“The way out of the forex conundrum is for the CBN to allow the market to function. It is also imperative for the apex bank to de-emphasise demand management and focus on strategies to stimulate forex inflows.
