Local manufacturers are likely to incur higher cost of production following the federal government’s move to adapt a flexible and unified exchange rate which will be determined by the forces of demand and supply.
This move was contained in a letter of intent signed by the Minister of Finance and CBN governor while requesting a $3.4 billion funding from the International Monetary Fund (IMF). The Nigerian government pledged to adopt currency flexibility and acknowledged that this would help protect dwindling international reserves and avert economic distortions.
The IMF has approved the request as an emergency financial assistance for Nigeria under its rapid financing instrument to support the Nigerian government in fighting the pandemic.
“We are committed to maintaining this more unified and flexible exchange-rate regime, which will operate in a market-determined manner and be allowed to respond to shocks, with the Central Bank of Nigeria only intervening to ‘smooth large FX fluctuations’,” the government stated in a letter contained in the IMF’s staff appraisal of the financing request on April 21st 2020.
The Economic Advisory Committee (EAC) of President Muhammadu Buhari asked the I&E window, which currently trades at N387.30/$1, be adopted as the only exchange rate in Nigeria. While this might present a good opportunity for foreign investors to flood the market and for the government revenue to grow, local manufacturers will be left to bear the brunt as many of them source their raw materials with the use of forex.
This will further increase the cost of production of these companies and will affect their productivity and prices, thereby reducing chances of being competitive. Furthermore, the cut in global supply chain as well as the ongoing border closure will alter the availability of the necessary raw materials used by the manufacturers.
For a sector that is already bedevilled by infrastructural challenges, epileptic power supply, and weak demand, analysts expect that going forward the sector will experience contractions and reduced contribution to the country’s GDP as these companies incurring higher cost would be unable to pass it to the consumers.
The Lagos Chamber of Commerce and Industry In a statement signed by Muda Yusuf, director general, stated that “Many manufacturers and service providers in the country are already experiencing acute shortage of raw materials and intermediate inputs. This has implications for capacity utilization, employment generation [and retention] and adequacy of products’ supply to the domestic market. There is also an implication for inflation.”
The FX could be available, but at a cost to import-dependent manufacturers.
Gbemi Faminu
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