The CBN, in a bid to decisively end speculative attacks on the currency, moved all forex demand to the interbank market in order to avoid duplicity of exchange rates, which opened up opportunities for arbitrage. The CBN believed that such arbitrage window was a significant cause of speculative attacks on the currency.
This move meant that foreign exchange for importers will have to be determined by demand and supply conditions, albeit, with periodic interventions by the CBN to avoid it spiraling out of control.
Nigeria’s predicament of being a mono-commodity export economy in a volatile global commodity environment makes the forex supply a bit of a problem.
The victims of this move are many, but the manufacturing sector, and specifically the FMCG firms are gearing up to be the biggest losers.
Prior to the latest development, the CBN still met dollar demand for raw materials, PMS and kerosene imports at the official rate to keep inflation on check. Raw material and PMS dollar demand account for between 10 percent and 15 percent of total dollar demand.
“There is a need for us to give support to importers of raw materials that will add value, create employment and improve productivity in the economy”, Godwin Emefiele, Governor of the CBN said in a statement to stakeholders.
Read also: Brand Nigeria: Subject nobody talks about but activities impacting it
The rationale for maintaining an official rate for specific segments while ceding the larger chunk of forex demand to market forces was to protect the economy from an exchange rate engendered inflation by protecting the key value adding segments (like raw material imports), as well as energy input, from the high cost of forex.
But with this strategy now dropped, concerns for the competitiveness of manufacturing industries amid the ‘devaluation’ have surfaced.
The Nigerian manufacturing sector is dominated by the food, beverages and tobacco segment (constituting 62.42 percent of total manufacturing), according to latest official figures by the NBS.
In terms of input costs, “Generator fuel is the highest, and has been steadily rising in all years of observations” says the NBS in its latest manufacturing sector report.
Generator fuel stands at 23.43 percent of all intermediate inputs in the manufacturing sector.
Official import data showed that Motor spirit (gasoline) recorded the largest import value by product, accounting for N315.7billion or 16.0% of the total imports for the Second Quarter of 2014
Also, Nigeria still imports a huge chunk of its feeding requirements, with Common Wheat coming in as the second largest import item after petrol with N85.8 billion or 4.3% of total imports.
What this means is that the sector is hugely exposed to the negative impact of the devaluation.
Manufacturers have come out to say that the currency move is capable of destroying the sector that is currently reeling under different other challenges.
Already, the big listed FMCG firms are bucking under the weight. Analysts have lowered their assumptions for FMCG industry growth, their pricing outlook and profit margins.
“Consumer firms [are] facing high cost burdens and lower revenues”, said the Financial Derivatives Company in its February note.
Milling giant, Flour Mills of Nigeria (FMN) has been among the most hit.
“The company is the most vulnerable in our universe of consumer companies to volatility in the naira, largely owing to its low operating leverage and the size of its imports”, Esili Eigbe Lagos-based head of West African research at Exotix Partners, a frontier markets investment bank said.
“The impact of a weaker naira was expected… given FMN’s significant exposure to imported raw materials, particularly wheat”.
The size of FMN’s imported inputs constitutes 72 percent of its cost of goods sold versus an industry average of 45 percent, according to Exotix.
The brewery subsector is also expected to take a big hit.
“Given the further devaluation in the naira… and the lack of pricing power by companies, we believe 2015 will be difficult for the industry”, said Omair Ansari, Consumer Goods and Retail analyst at Renaissance Capital.
“We lower our 4.9 percent [brewery] industry volume growth numbers to 2.3 percent”, Rencap said.
According to Rencap, leading brewer, Nigerian Breweries could have its Cost of Goods Sold spike by 10 percent. They also expect the prices of its output to rise by about 2.3 percent.
Already, its FY14 top line came in at around 8 percent lower than forecasted estimates on a very weak 2014 fourth quarter result.
Attendant to this move by the CBN, we could see an uptick in inflation, caused by surges in production costs, which in turn will be caused by spikes in energy costs
Declining margins and bottom line might be the norm going forward, especially as consumers are becoming price-weary.
EDOZIE IFEBI
Join BusinessDay whatsapp Channel, to stay up to date
Open In Whatsapp
