22 June 2015, Lagos – Companies in the manufacturing sector of the economy that source foreign exchange to import raw materials and products have been hit hard by the devaluation of the naira and the suspension of Retail Dutch Auction System (RDAS) by the Central Bank of Nigeria (CBN).
At the interbank foreign exchange market, the exchange rate of the naira to a dollar is N196.9 while in the black market it hovers between N210 to N214 to a dollar. Similarly, British Pound Sterling exchanges between N303 to N304 to the Naira, while thed Euro exchanges for N222.
Investigations by Financial Vanguard, showed that the high exchange rate occasioned by the suspension of RDAS policy, has wiped smiles off the faces of operators in the sector since it was implemented by the apex bank in February to tighten control on the foreign exchange market, in a bid to protect the nation’s external reserves and save the Naira from further slide in value.
Dr. Frank Udemba Jacobs, President of Manufacturers Association of Nigeria, MAN, noted that the impact is enormous on all manufacturers, especially those that depend on imported raw materials. According to him, the Federal Government’s plan to create three million jobs annually will be a mirage if the current exchange rate is not addressed quickly.
He urged Federal Government through the CBN to create a special foreign exchange window for manufacturers. In addition, he requested the CBN to examine manufacturers’ forex demand trends to ascertain the actual need of each company for the importation of machines, spare parts and raw materials. He assured that MAN will validate beneficiaries to ensure that only bonafide manufacturers have access to such special foreign exchange window.
Also, Mr. Okey Akpa, the Chairman, Executive Committee of Pharmaceutical Manufacturers Group of MAN, disclosed that the negative effects of the CBN policy of RDAS have started to trickle down to the entire pharmaceutical industry. He said companies operating in the sector are spending so much on importation of pharmaceutical glass bottles and packaging materials that are not available locally.
He said this has led to further increase in the cost of production. According to the Chairman of United Allied Spare parts Dealers Association (UASPADA), Chief Bartholomew Achukwu, his members are also adversely affected. “Today the problem is dollar issue, all our businesses are collapsing. We are expecting President Muhammadu Buhari to address this issue as it is hampering growth in trade.
Going by his antecedent, we believe that the economy of Nigeria will soon be better than any other country around the world,” he said. Mrs. Olaitan Efughi, Chief Executive Officer , Annabel Boutique also lamented that operators in the sector are also feeling the negative effects of the foreign exchange transactions. “I buy my goods from Dubai and Hong Kong, and I sell mainly to retailers and others who buy for personal use.
But foreign exchange is a problem; most banks don’t sell BTA for people who go to Dubai for business, apart from that, there is a limit of the amount of money that the bank allows, you are not to spend more than $4000 per quarter, so basically, you have the money, but you can’t really buy much,” she stated.
Alhaji Remi Bello, President of the Lagos Chamber of Commerce and Industry, LCCI, also added that high exchange rates is a major challenge currently facing many real sector operators, especially the medium and large firms.
According to him, the chamber has reviewed the policy and observed that although it was targeted at providing support for the real sector of the economy because of their strategic importance to the development process, job creation and inclusive growth, yet the sector is the first natural victim of the closure, particularly the few that had access to this window.
He identified the immediate implications on the sector as follows: “It has resulted in the escalation of production cost for firms that had access to this forex window. Such firms will experience cost increases of up to 20 percent. This would impact on sales performance, profit margins and ultimately capacity utilisation of manufacturing companies in the country.
“Import duty and other port charges which are computed as a percentage of import costs have also correspondingly increased. This implies additional pressure on operating costs for erstwhile beneficiaries of the CBN RDAS forex window. Firms funding requirements in naira will increase to reflect the new exchange rate and this has implications for cost of funds.
“Many firms, especially manufacturers with high foreign exchange exposure have been thrown into loss positions as a consequence of the depreciation of the naira over the last couple of months and the eventual closure of the RDAS window. “Exchange rate induced losses could trigger a new wave of Non-Performing Loans in the banking system and this has implications for financial system stability.
However, given the record disparity between the CBN RDAS forex window; the interbank and the parallel market rates, it was clear that the RDAS Forex window was not sustainable. The CBN could obviously not meet the huge demand for forex under the RDAS window.
“In spite of repeated assurances, many genuine requests for forex for industrial raw materials and other vital inputs were denied by the CBN. Foreign financial obligations could also not be met by many firms as remittances were affected. This resulted in serious confidence issues among foreign creditors of Nigerian companies with some credit lines to Nigeria companies being put on hold.
“The huge premium of over 20 per cent was a major incentive for round tripping, corrupt practices in the management of the forex, speculative activities in the foreign exchange market and many other abuses. It was also a major source of uncertainty and volatility in the market. There were concerns about the lack of level playing field in the management of the RDAS window. In the light of all these, it is difficult to fault the decision of the CBN to close the RDAS window.”
Meanwhile, the LCCI has proposed measures to cushion the effect of the CBN policy on investors with high foreign exchange exposure. It said that CBN should urgently provide a refinancing facility as life-line for investors in the economy which have high foreign exchange exposure.
“The sustainability of this class of businesses is currently at risk. We recommend a minimum refinancing facility of N200 billion to be provided at single digit interest rate and a fifteen year tenure. All critical raw materials and other imported inputs of manufacturing firms should henceforth attract zero import duty. All machineries and equipment should attract zero import duty.
“Port charges should be waived for raw materials importation and machineries. All these are necessary to minimize dislocations in the economy and ensure the continued survival of the real sector,” the chamber stated.