Defying the intensity of the afternoon sun, Kazeem Ariyo walked briskly out of the premises of his bakery with palpable anger. He had just been informed that one of his retail vendors rejected hundreds of loaves of bread supply because the retail price offered was not “profitable”.
Mr Ariyo, 45, is a baker operating from the Ajah axis of Lagos. In recent times, however, he has had tough times convincing his wholesale and retail vendors about the rising prices of baking materials.
“The biggest headache I have had is that our suppliers and vendors are rejecting our bread because the high cost of production is affecting prices and eating deep into their own meager profits too,” Mr Ariyo said.
“And foreign exchange scarcity is the biggest cause of this whole mess.”
Mr Ariyo explained that the increase in prices of flour and other baking materials affected prices of bread, with ripple effects on the profit margin of vendors and other people on the supply value chain.
In June 2015, the Central Bank of Nigeria released a list of 41 items classified as “not valid for foreign exchange”.
With huge deficit in local production amid forex scarcity, Mr Ariyo said manufacturers have had to source foreign exchange in the black market to enable them import raw materials, thus increasing the cost of production.
“A truck of flour sold at less than N6 million before now,” Mr Ariyo said. “But now, it is over N9 million. Our people source forex from the parallel market to import sugar, wheat and almost everything, at a very huge cost. This is not just sustainable.”
Like Mr Ariyo, many other manufacturers told PREMIUM TIMES that they have had tough times coping with Nigeria’s foreign exchange policies, devaluations, and shrinking disposable incomes that have had huge impacts on their operations and sustainability.
Nigeria’s Exchange Rate
Shortly after President Muhammadu Buhari was sworn into office in May 2015, the Nigerian government excluded importers of certain goods and services from accessing foreign exchange through the country’s forex markets. The move, the government said, was put in place in a bid to conserve the external reserves as well as encourage local production of those items.
In 2016, amid a global crash in oil prices, the nation slipped into recession following contractions in its gross domestic product. The recession period was characterised by a deep slump in the value of the Nigerian currency. Since oil proceeds contribute significantly to Nigeria’s forex earnings, forex scarcity heightened the pressure on manufacturers and other businesses.
Again in 2020, the nation slipped into yet another recession, amid global economic shutdown induced by the coronavirus pandemic. Nigeria’s economy contracted 1.92% in 2020, its second annual contraction after 2016. It grew 2.27% in 2019.
But the nation’s economy unexpectedly came out of the recession in the fourth quarter of 2020 as growth in agriculture and telecommunications offset a sharp drop in oil production and global demand.
Within these years, Nigeria’s exchange rate policy has been a subject of controversy, amid uncertainties in the price of forex and inadequate supply, which leads to blended rates for forex transactions.
Until recently when attempts were made at convergence of rates, Nigeria ran multiple exchange rates, especially in the wake of the oil crash of 2016.
There was the “official” rate, pegged by the CBN at N379/N380. There was equally the NAFEX, a market-determined rate for investors and exporters which hovers around N410. Then there is the “black market” rate, typically ignored by the government, which now moves around N500.
These conflicting rates have had negative impacts on the market, and the local currency.
In the last three years, for instance, the Nigerian currency has depreciated 33.61 per cent to N485/$ at the parallel market, according to data from Financial Derivatives
The reality is the same at the Investors & Exporters’ FX window, where the naira weakened by over 14.35% to trade at N412/$ from N360.3/$ at the end of 2017. Following the oil price crash of 2016, the I&E window was introduced to facilitate transactions for individuals and businesses that need dollars to repay loans, dividends, settle trade transactions and address capital repatriation concerns.
The performance of the manufacturing sector is closely tied to the exchange rate, says Chuks Obi, a computer accessories dealer at Computer Village Market in Ikeja, Lagos.
“Manufacturers rely on imported raw materials and a weak local currency will negatively impact import costs,” he explained, adding that his businesses have been affected by the devaluation exercises of the last few quarters.
Devalued currency, Depleting reserves
In 2020, the Nigerian currency was devalued twice, as a means of realising convergence across the numerous forex windows.
The first devaluation occurred on March 20 when the exchange rate went from N307 to about N360 on the Nafex market. The second occurred on August 6 when it went from N360 to N380 to the dollar.
In May, the Central Bank of Nigeria adopted the Nafex rate of N410 as the government’s official exchange rate for the naira, effectively devaluing the naira by 7.6 per cent from the previous official fixed rate of N379.
However, several weeks before the devaluation exercise was announced, Nigeria’s finance minister, Zainab Ahmed, and CBN governor, Godwin Emefiele, stirred confusion and controversies over the matter. While Mrs Ahmed initially told reporters that the government had adopted Nafex, the CBN governor debunked the claim.
Speaking at the end of the CBN’s Monetary Policy Committee’s meeting of March 2021, Mr Emefiele said Mrs Ahmed’s claim was false, adding that the apex bank maintained a ‘managed float’, which allows it to intervene in the market occasionally.
But barely two months afterwards, the CBN finally confirmed the migration to the Nafex rate.
Although the move was lauded in many quarters for its potential to harmonize the various windows, analysts said the initial CBN-Finance Ministry controversy was bad for the market.
“The uncertainty and confusion was needless and it affected my business decision,” said Mr Obiora, who added that it may have heightened the rate of imported inflation.
In March 2021, Nigeria’s imported inflation climbed 16.86 per cent.
Meanwhile, within the period of the sundry devaluation exercises and slump in foreign exchange earnings, Nigeria’s foreign reserves have recorded significant depletion.
At the height of the coronavirus pandemic, oil prices fell to as low as $18 per barrel, putting enormous pressure on the Nigerian currency, business owners and manufacturers of sundry products. But in the last quarter of 2020, oil prices built steam as coronavirus vaccine rollouts began in parts of the world.
Despite oil price rally, a PREMIUM TIMES’ analysis found that Nigeria’s foreign reserves fell by $1.2 billion in February. The reserves rose to $36.5 billion on January 25 and fell to $35.3 billion on February 22.
As of publication time in July, the reserves had slumped to $33.1 billion.
With depleting reserves, Mr Ariyo said there is pressure on the supply end of the foreign exchange markets, amid a backlog of demands. This has had devastating consequences on the manufacturing sector.
Data shows that the real GDP growth of the Nigerian manufacturing sector in the past five years has been quite poor, with only 0.8% growth recorded in 2019. Between 2015 and 2017, the sector recorded negative growths of -1.5%, -4.3%, and -0.2% respectively.
Mansur Ahmed, president of the Manufacturers Association of Nigeria (MAN), said the lack of adequate forex has hindered manufacturers from purchasing raw materials and entering financial deals with foreign companies because they rely on forex from Bureau De Change (BDC) operators which comes at a higher cost.
“The high cost import bill for the productive inputs decreases manufacturing working capital and feeds into manufacturing commodities prices, thereby making the sector less competitive,” he said.
Charles Umoren, an importer of car appliances, told PREMIUM TIMES in Lagos that manufacturers face other challenges in terms of obligations like security dues and multiple taxations in form of government permits.
“We spend so much on diesel and other operational costs,” he lamented.
“Now add all of these to the biggest of them all, forex scarcity, and you’d see why manufacturers Are struggling to stay afloat Nigeria.”
He disclosed further that forex sourced from the parallel market accounts for the largest chunk of manufacturers’ skyrocketed operating costs, which is transferred to the consumers in most cases.
As parts of measures to ease scarcity, boost forex earnings, and meet manufacturers’ demands, the CBN has embarked on several policy moves.
In March, as a means of boosting Diaspora remittances, the apex bank introduced the ‘Naira 4 Dollar Scheme’ for diaspora remittances, which offers recipients of diaspora remittances through CBN’s IMTOs to be paid N5 for every $1 received as remittance inflow.
The bank has equally called on exporters to repatriate proceeds, just as it has licensed 10 additional IMTOs for ease of forex transaction.
But analysts opined that all these have yielded little in terms of returns that could boost manufacturers’ efforts and enhance forex supply.
In June, the Stanbic IBTC Purchasing Managers’ Index moderated to 53.6, from 54.4 in May. Earlier, the First Bank of Nigeria’s PMI reading for March eased by 3.02% to 51.4 points from 53 points recorded in February. Analysts said this was mainly because of the difficulty manufacturers faced while sourcing forex to acquire raw materials.
In the midst of the melee, exchange rate policy ambiguities, forex rationing, and market shortages continue to disrupt the plans of investors and manufacturers, worsening the business environment.
Any way out?
The manufacturing sector contracted by 1.51% in the fourth quarter of 2020, amid concerns that the sector could move deeper into the negative territory if things remain unchecked.
As a way out of the forex scarcity conundrum, Mr Ahmed urged the CBN to focus on the supply end of the market.
“In year 2021, we urge the CBN to de-emphasise demand management policies and intensify efforts in improving the supply side of the foreign exchange market,” he said.
In one of its meetings with Nigerian authorities in February, the International Monetary Fund advocated for a market-driven and unified exchange rate system in Nigeria, adding that it encourages transparency in exchange rate determination for investors and manufacturers.
The Bretton Woods Institution stated that multiple rates, limited flexibility and forex shortages are economic challenges and disincentives to investors. The IMF further recommended a gradual and multi-step approach to establishing a clear and unified exchange rate regime.
Similarly, Financial Derivatives in its assessment also called for a market-determined exchange rate that is “important to boost output growth and drive industrialization especially with the commencement of the African Continental Free Trade Agreement (AfCFTA).”
The World Bank on its part called for harmonization of the windows and the various rates, as part of its conditions for resuming talk over a loan request by the Nigerian government.
Shortly after the government moved to the Nafex rate in May, the IMF said the policy was encouraging, adding that further reforms were needed to achieve a fully unified and market-clearing exchange rate that could help boost manufacturing and ease pressure on the local currency.
But despite all of the CBN’s interventions, manufacturers continue to grumble over forex-induced skyrocketed costs and sustainability challenge.
In May, the Association of Master Bakers and Caterers of Nigeria (AMBCN) increased prices of bread and biscuits by 30 percent to cushion the impact of rising cost of production. Mansur Umar, National President of the AMBCN, said increase in prices of flour and other baking materials necessitated the development.
As a means of instilling sanity in the system, the Central Bank of Nigeria on Tuesday announced the discontinuity of forex supplies to Bureau de Change Operators in the country. Mr Emefiele announced the end of forex sales and new licence approval after the Monetary Policy Committee, adding that the BDCs had defeated their purpose of existence by becoming wholesale and illegal forex dealers.
He also announced that commercial banks would be monitored to provide forex for the legitimate use of Nigerians.
Although the move was hailed in several quarters, analysts have submitted that the same issues would manifest even with the banks if the fundamental concern in the market isn’t addressed. They added that the policy is capable of stifling forex supply to manufacturers.
In his intervention, a former Director-General of the Lagos Chamber of Commerce and Industry, Muda Yusuf, noted that the CBN approach would continue to deepen distortions in the economy, perpetuate round tripping, fuel speculation, suppress forex supply and boost underground economy. He also called on the apex bank to give the market a chance and do away with a fixed exchange rate regime.
Mr Ariyo told PREMIUM TIMES that in the last four years, two of his business associates have moved into other businesses, while one has moved to a neighbouring country, due to Nigeria’s unpredictable foreign exchange environment.
He argued that a transparent forex regime would boost the growth of the manufacturing sector and prevent capital flight.
“An unpredictable business environment like ours encourages capital flight and loss of investment inflows,” he said.
“If we can fix our forex environment, it will help in strengthening our manufacturing sector and positioning the country for the gains of African Continental Free Trade Area (AfCFTA).”
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