Manufacturers are forced to take huge credit from suppliers as the liquidity challenges in the foreign exchange market constrain their ability to pay on cash.
Analysts say if the chunks of the payables are dollar denominated, then the entity is exposed to foreign exchange loss that could impact negatively on the bottom line (profit).
The recoveries of cash from trade debtors or receivables are very slow due to the coronavirus pandemic that damped consumption and disrupted supply chain.
“If there is scarcity, you cannot pay your suppliers, you cannot service your offshore debt, and that creates credibility problems. It is a major crisis,” said Muda Yusuf, head Lagos Chamber of Commerce and Industry (LCCI).
The largest listed manufacturers collectively owe creditors or suppliers of raw materials N1.65 trillion as at September 2020, which represents a 290 percent increase from 2019’s N1.28 trillion.
A break per sector shows the largest listed consumer goods firms saw combined trade and other payables spike by 27.97 percent to N704.55 billion in September 2020 from N550.43 billion the previous year.
The industrial goods firms collectively incurred trade and account payable N583.03 billion as at September 2020, as against N424.58 billion the previous year.
Gbolahan Ologunro, equity research analyst at CSL Stock Broker Limited, said in the short term such payables could help the working capital of companies pending when the economy recovers.
“If the recovery is prolonged, there will be a lot of cash down in inventory. It means demand is not available and they will be unable to turn inventory to cash. If that happens, then they will have to adopt stricter credit policy on customers in order to maintain working capital,” said Ologunro.
Abiola Gbemisola, consumer goods analysts at Chapel Hill Denham Limited, said manufacturers are now forced to accelerate credit purchases from suppliers because of a new central bank’s rules that barred companies or any third parties from accessing its SMIS foreign exchange window.
Recently, the apex bank instructed that “Authorized Dealers are hereby directed to desist from opening of Form M whose payment are routed through a buying company/agent or any other third parties” effectively eliminating third parties or middlemen from transacting in forex deals in its official SMIS window.
Thus the company in Nigeria seeking to purchase an item will have to pay directly to the original equipment manufacturers or suppliers of raw materials and not through the local agent, which is a third party in the transaction.
Manufacturers are having difficulty sourcing US dollars amid severe currency crunch as over 40 percent of dollar needs are unmet, constraining producers from operating at full capacity.
The inventory of unsold manufactured goods stood at an all-time high of N402.42 billion, no thanks to weak consumer spending and difficult business environment.
The economy is contracting, Naira is depreciating, inflation is spiking, foreign reserves are falling, foreign investors are fleeing, and food prices and unemployment are soaring.
Domestic production remained hindered by high cost of power as manufacturers have expended 38 percent of their production cost on energy in 2019, according to the Manufacturers Association of Nigeria (MAN).
GDP may contract 4.3 percent this year, according to the International Monetary Fund on October 13.
