NAIRA SLUMP WORSENS MANUFACTURERS’ WOES, AS FX SHORTAGE PERSISTS

The continuous fall in the value of the Naira against the Dollar has worsened the challenges faced by manufacturers in Nigeria as production activities and other related operations take the hit.

As at Wednesday, one Dollar equalled N410 according to the Central Bank of Nigeria (CBN), while at the parallel rate, it was N528/$1 leaving a difference of N118. The unfavourable exchange rate has increased production cost significantly, causing production to drag, as over 40 percent of raw materials, machines and other inputs are sourced using foreign exchange (FX).

In addition to this, prices of raw materials have increased following a supply cut from China after the outbreak of the Coronavirus pandemic, thus leaving manufacturers stranded. While they are forced to look inwards, the challenges linger as many of the raw materials are not available locally or are of low quality, as a result they are unable to meet local and export demand. The FX challenge is further aggravated as manufacturers cannot access it from banks despite the operation of multiple exchange windows, leaving them at the mercy of black market operators who offer it at expensive rates as high as 20 percent.

In the Manufacturers CEOs Confidence Index (MCCI) for the fourth quarter of 2020, 82 percent of business managers complained about the inability to adequately source FX for importation of raw materials and machinery that are not available locally. The business managers also mentioned that the rate at which FX is sourced and accessed has not improved as they have to wait for 30-90 days to get two to 10 percent of their Dollar needs from the market.

Hence it seems the Dollar management activities of the central bank such as the restriction of form M, restriction of bureau de change operators is yet to make the anticipated impact.

Tajudeen Ibrahim, Senior Vice President and the Head of Research & Strategy at Chapel Hill Denham said the cost of production has increased significantly following challenges with FX. “Locally raw materials are not readily available due to various issues particularly insecurity in regions where agricultural raw materials are sourced, globally the Naira devaluation is affecting the FX activities of these firms,” he explained. He added that the cost pressure on the manufacturers has intensified and they are unable to pass the cost to consumers, hence the strained profit growth.

Dollar supply challenges in Nigeria come from its dependency on the foreign earnings from crude oil, which has continued to account for over 90 percent of its export and more than 50 percent of its revenue. The fall in oil prices significantly affects the country’s FX availability which lacks necessary shock absorbers to mitigate its impact. Analysts believe that to surmount its FX challenges, Nigeria must diversify its FX supply streams and adopt a single window with a generally suitable exchange rate.

Read more at: https://businessday.ng/news/article/naira-slump-worsens-manufacturers-woes-as-fx-shortage-persists/

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