Economic crisis looms as naira policy hits manufacturers, jobs

Nigeria’s Federal Government, the country’s economic management team and policy makers must wake up to their responsibilities and begin to formulate policy responses to the looming economic crisis exacerbated by the Federal Government’s foreign exchange policy, with the sense of urgency that is required, stakeholders say.

A recession can’t be ruled out this year in Nigeria, Morgan Stanley said in a report released this week.

Nigerian stocks have fallen 16 percent since the end of December, the most in sub-Saharan Africa.

Shoreline Group, the third-biggest Nigerian oil and gas producer, plans to cut 35 percent of its nearly 2,000 staff.

Vincent Nwanne of the Lagos Chamber of Commerce says 80,000 manufacturing jobs are at risk as a result of the dollar shortage and CBN FX policies.

The acute scarcity of foreign exchange, especially the US dollar, continued on Thursday, with the naira closing at near N400 against the dollar on the parallel market.

Forex dealers linked the persistent fall of the naira to panic buying of dollars by importers, individuals and businessmen. With yesterday’s closure, the naira has lost 20.0 percent of its value on the parallel market in the last 10 days.

Frank Udemba Jacobs, president, Manufacturers Association of Nigeria (MAN), said what is happening is that many individuals and organisations are hoarding dollars because the government has not taken the right decision.

“People keep their dollars until the government takes the right decision. If an exporter who brings in dollar is paid the official rate (N197-N199/$), he may not give it to you because he will like to sell at a parallel market where he is given N400/$. If the market had been allowed to determine the rate long ago, we would not have got to this rate,” Jacobs said.

“If the dollar reaches N500, it will be difficult to reverse this policy. This is why we have always said that forex should be made available to the real sector, even with a condition that manufacturers must employ a certain number of people,” he added.

Jacobs said the information he gets from many manufacturers in the country shows that there will be a lot of closures in March, owing to the foreign exchange situation.

According to the Lagos Chamber of Commerce and Industry, difficulties with sourcing fx in the country have affected exporters, particularly for transport, logistics and the settlement of debt obligations. Furthermore, shipping companies, which play a vital role in the non-oil export process, are burdened with their own fx challenges.

The latest monthly Economic Report from the CBN puts non-oil exports provisionally at $244m in November, indicating a decline of 25 percent from the preceding month and a 75 percent decrease on a year on year basis.

“Non-oil exports in November remained very low, at approximately 1% of GDP. The agriculture and manufacturing sectors, which underpinned non-oil exports in November, grew by 2.6% y/y and contracted by -1.8% in Q3 2015 respectively,” FBN Quest analysts led by Gregory Kronsten, said in a Feb. 18 note to investors.

Manufacturers say the fall in the dollar to naira exchange rate will further raise the cost of raw materials and machinery, which are mainly imported from abroad. According to manufacturers, N400/$ is bad news for the real sector as it will further deepen the woes faced by manufacturers, while sourcing inputs. They say the best monetary policy is to allow the market forces to determine the rate.

Bassey Edem, president, Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), said the gap between the parallel and official markets is so wide that it does not support international trade.

Edem said the CBN should develop a strategy that will encourage manufacturers of exportable products so that they can bring in forex.

Muda Yusuf, director-general, Lagos Chamber of Commerce and Industry (LCCI), said the chamber has always stressed that the CBN should allow the market to determine the rate.

“Whether you call it devaluation or whatever, what I am saying is that the market should be allowed to be determined by the market forces,” Yusuf told BusinessDay earlier in an interview.

“The components banned are imported by industries. You see, if you are in production, it is possible that 20 percent of your input will be imported and 80 percent sourced locally.  If you don’t have the 20 percent, you cannot complete the production process.

“What the exchange control has done is to disrupt a lot of business operations, because even if your foreign input is ten percent, you cannot produce if you don’t have it.  Even if you have to export, you may have to re-export. That is, you can import, add value and then export. This is why one of the biggest problems any country can have is not to have liquidity in its FX market,” he stated. 

Offshore investors who hitherto scrambled for naira assets may have started seeing their investments as rather worthless papers, as the local currency weakens further in the parallel market against the greenback.

“The CBN is resisting the idea of allowing the naira float and find its true value. The rumour about the restriction of payments on education and healthcare has led to a steep depreciation of the naira. The uncertainty in the forex market is fast feeding into the currency risk premium and thus making the naira turn into a banana republic currency”, said Financial Derivatives analysts.

Before now, market analysts foresaw an interest rate increase in developed economies triggering capital flow reversals from emerging economies such as Nigeria. The local currency and stock markets have been hit hard by the record exit of foreign investors as persistent fall in crude oil, Nigeria’s main export, triggers fall in government revenues.

Currently, Africa’s biggest economy by GDP size, is worse-off in investment risks with declining oil price, heightening currency pressures due to strengthening dollar and weakening naira. At the equities market, listed Nigerian stocks have lost about N1.4trillion this year, a development stockbrokers linked to the rapid decline of the naira value as some foreign investors continued booking profit and selling down their holdings in naira assets.

Analysts said dollar liquidity dipped in the market as a result of FX pre-funding. “Right now at the FX market, everybody wants to buy and nobody wants to sell,” said Lekan Olabisi, an FX dealer at GTB Bank plc.   

Charlie Robertson, Global Chief Economist at Moscow-based Renaissance Capital said “An eyeball comparison shows that Nigeria’s currency is overvalued at 200/$.We are not saying that Nigeria’s currency should be N618/$. What we are saying is that Nigeria’s currency was as weak as N618/$ in 1995 if we take inflation into account,” he said in his ‘thoughts from a Renaissance man’.

Total foreign transactions at the nation’s bourse decreased by 33.39 percent from N1.538trillion recorded at the end of 2014 to N1.025trillion at the end of 2015, while total domestic transactions decreased by 22.53percent from N1.136trillion recorded at the end of 2014 to N880.56 billion recorded at the end of 2015.

“We are a market economy and we should let the market determine the price for our currency. We have the opportunity to do it now. The CBN should get out of the business of selling dollars and focus its attention on price stability and controlling inflation, which are its core functions”, said Victor Ogiemwonyi, CEO, Partnership Investment Company Plc.

“The problem of our foreign exchange situation is lack of sufficient supply. The CBN does not print dollars and the only commodity we sell to earn Foreign Exchange is oil and it is currently trading for a third of its old price, and we do not have the required foreign exchange reserves to hedge against the current situation.

“The only way to increase supply is to let the market determine the appropriate price that will attract dollars to the market. That is basic economics of demand and supply. A high demand will move prices up and increase supply and ultimately will settle at a price where demand will meet supply,” Ogiemwonyi stated.

The naira is expected to continue to fall on the parallel market as dollar scarcity persists, while the central bank’s dollar ratio rule at its official interbank market will also put pressure on the currency.

PATRICK ATUANYA, IHEANYI NWACHUKWU & ODINAKA ANUDU