The insistence of the Federal Government through the Central Bank of Nigeria (CBN) in maintaining open ended foreign exchange (FX) restrictions is beginning to have a major negative impact on the real economy with ongoing mass retrenchments and unavailability of some products.
Some players in the pharmaceutical industry told BusinessDay that there is already a shortage of essential medicines resulting from the inability of local manufacturers to access forex with which to procure raw materials or import finished drugs.
Manufacturers project that the current FX challenges could shut down a number of firms and also derail government’s diversification drive.
“Many manufacturing firms will simply close down,” Frank Udemba Jacobs, president, Manufacturers Association of Nigeria (MAN), told BusinessDay in reaction to the policy.
“We often say there is the need to diversify the economy. But how can you diversify when you have a policy that kills the manufacturing sector?” Jacobs asked.
The naira has been all but fixed at N197-N199 per dollar since early March last year, after the CBN restricted banks’ ability to buy foreign-exchange. In June, the apex bank stopped importers of about 40 items, including toothpicks and glass, from obtaining dollars.
Despite the demand side management moves by the CBN, Nigeria’s foreign exchange reserves still declined by 15.61 percent year-on-year to $29.13 billion by Dec. 29, 2015 from $34.52 billion a year ago.
Most economists say it is time the CBN begins to emphasise the supply side of the equation and acknowledge the damage being done to business from a potentially permanent fixed exchange rate regime.
“My big issue with the CBNs naira management policy is that they speak as if it is only about balance of trade. However, capital flows also matter and some of these policies and pronouncements have scared capital away from Nigeria,” said Ayo Teriba an economist and CEO of research firm, Economic Associates, in a TV interview monitored by BusinessDay.
“We need to tone down the trade end and encourage people to bring money into the country,” Teriba said.
The CBN has been unable to meet FX demand, with estimates of a backlog of between $2 billion – $5 billion, Renaissance Capitals banking analysts led by Adesoji Solanke said in a Dec 21 note to clients.
“Importers have been unable to pay their obligations, they have also struggled to keep afloat – among them import dependent manufacturers. The banks have therefore significantly slowed the issuance of new letters of credit (LCs), further hurting the general commerce and manufacturing sectors,” Solanke said.
Nigeria’s manufacturing sector is already mired in recession with three consecutive quarters of negative growth in Q1, Q2 and Q3 2015.
In the third quarter of 2015, the sector contracted by 1.75 percent (year-on-year) in real terms, from 16.00 percent growth recorded in third Quarter of 2014.
The declining oil price and the unwillingness of the CBN to devalue are also worsening the FX liquidity position of the banks.
Renaissance Capital’s Solanke estimates that banks under their coverage have at least $1.5 billion worth of debt repayments to make in 2016, (including $500 mn for GTBank, $419 mn for Zenith and $202 mn for FCMB) and it is becoming increasingly difficult for them to source FX to service obligations.
Muda Yusuf, director-general of the Lagos Chamber of Commerce and Industry (LCCI) said in a 2015 economic review, that the CBN’s forex restriction remains one of the costliest policies in Nigeria in recent years.
“Available data showed that Customs revenue contracted in 2015 relative to 2014. In the same vein, the private operators across several sectors (FMCGs, Steel, furniture, pharmaceuticals and manufacturing) lost about N1.46 trillion in stalled business activities resulting from paucity of forex over the last six months,” said Yusuf.
The latest FBN Quest’s Purchasing Managers Index, which aggregates the views of purchasing managers of manufacturing companies in Nigeria each month, foresees forex continuing to be a risk factor for the sector in the near term.
“Looking further ahead, we would expect manufacturing to remain under pressure, given its huge appetite for imported inputs and the current question marks over FX availability,” said FBN Capitals Gregory Kronsten and Chinwe Egwim.
In 2015, many manufacturing firms halted production while others took the path of retrenchment of workers due to the impact of the exchange control by the CBN.
Remi Bello, immediate past president of LCCI, forecasts that this development would put several investments at risk with implications for job losses, quality of loan assets in the banking system and the welfare of citizens.
“A painstaking gap analysis to determine the domestic capacity for production Vis a Vis the demand should have preceded the policy decision by the CBN,” Bello added, advocating that the policy should be put on hold pending a proper study of the demand and supply gaps in the various sectors affected by this policy.
PATRICK ATUANYA & ODINAKA ANUDU
