Manufacturers recalibrate, hopeful of unified FX rate impact

As Nigerian manufacturers and businesses head for the I & E window for foreign exchange, age-long problems that have threatened its possibility over time, lurk in the shadows if not properly addressed. Stakeholders say they are hopeful a unified rate will address FX demands once and for all, a major hurdle they face, TOBI AWODIPE writes

During his inaugural speech on May 29, President Bola Tinubu said he would work towards a unified exchange rate. Two weeks after this announcement, the Central Bank of Nigeria (CBN) announced the unification of all segments of the foreign exchange (FX) market.

The development means that all forex windows are now collapsed and floated on the Investors’ and Exporters’ (I&E) window, such that any business that needs forex need not approach the CBN anymore but the I & E window.

Several stakeholders in the finance and manufacturing sector have hailed this move, saying the liberalisation of the forex market would unlock huge potential for investment, berth jobs, improve capital flows and positively impact investors’ confidence going forward.

Director General, Manufacturers Association of Nigeria (MAN), Segun Ajayi-Kadir, said the decision to allow the naira trade freely is something that was expected as they have been clamouring for it.

He said this would reduce the gap between the official rate and parallel market, which to him, has been inimical to manufacturing and productivity. “Yes, it has its pros and cons but this would help us plan better, anticipate what would be needed to import raw materials and machines not locally available.”

“With the official rate, most manufacturers couldn’t access FX and had to rely on the parallel market. Hopefully, this unification creates efficiency in the market, improves capital inflow and market penetration as well as improves participation in the export market.”

However, on cons, he said it would make imports more expensive and costs will be transferred to the final consumers. Raw materials would be more expensive also as they are dependent on forex, forcing up the cost of goods and services, especially on the banned items.

This is coming on the heels of the CBN reiterating that the status quo remains on the 43 non-eligible items banned from the forex market introduced under the suspended CBN governor, Godwin Emefiele.

The items are not permitted to be funded from the I & E window, as contained in a document published by the apex bank, explaining the new operational changes to the FX Market.

The bank said the government would continue with import substitution as they seek to keep protecting the local market and local manufacturers. Some of the banned items include rice, cement, margarine, palm oil products and vegetable oils, meat and processed meat products, vegetable and processed vegetable products, poultry chicken/eggs/turkey, sardines, cold rolled steel and galvanised sheets, roofing sheets, textiles, clothes, soap and cosmetics, tomato paste, tiles and ceramic and so on.

Ajayi-Kadir said MAN is trying to promote local sourcing of machines and raw materials even in the face of erratic power supply, forex scarcity, high borrowing costs and poor infrastructure.

“We are trying to reduce the dependency on imports but not everything can be got here. Credit facilities for manufacturers need to be expanded, interest rates need to come down to encourage SMEs. Most goods and services are already currently priced at the parallel market rate, so hopefully, the increase shouldn’t be too steep.”

He said past governments have made many promises to manufacturers in the past but most were not realised.

“We need fiscal and monetary measures that would allow us to take advantage of this new policy. Low hanging fruits that the government can implement are so many. Multiple taxation is killing so many businesses, harmful fiscal policies like excise duties, which were recently hiked, green tax without any form of regulation or guidelines, among others is strangling many manufacturers.

“Government needs to be more coordinated and appoint the right people that can follow through with the right policies. Lack of coordination between the monetary and fiscal policy made us wonder if it was a deliberate attempt to give with one hand and take it back with the other. The situation at our ports is unbelievable; people have created an industry around the gridlock, frustrating businesses and making it impossible for one to get goods delivered on time.

“The cost of importing a 40ft container from Singapore to Apapa is the same as taking that same container to Agbara, which is just 27 kilometres and will still take weeks to get there. Government needs to sit with us so we map out ways to deal with these issues. The challenges with this sector are many and we must make deliberate attempts to ameliorate them. Government has said they want to step up local production amidst this unification of rates but this must be followed up with concrete action,” he said.

In a recent interview speaking on the economic impact of a free-floating exchange rate, CEO, Financial Derivatives Company Limited, Bismarck Rewane said the move is a good one but the economy has many foundational problems and dealing with them frontally would be a huge adjustment process.

He added that creating policies is just one step but the real work was seeing the policy through successfully.

“The hard work is just beginning and we need to realise that institutional reform is more important than any policy change. Weakness of our institutions is what led the former CBN governor to do what he did and we must note that personnel changes don’t solve much but strong institutional reforms are what make it impossible for impunity to take place.

“When investors see we are really serious, they will bring money into the I & E window gradually, we don’t even need to advertise to them at that point. The average Nigerian is paying more for bad economic policies; make the right policy announcements and the right personnel changes needed to drive said vision and then carry out institutional reforms, which should outlast any government and watch what happens.”

He said if Nigeria focuses on the things where she boasts comparative advantage, the country would be better for it as the revenues gotten from there will significantly make up for whatever the country imports.

“There’s more we can do where we have a comparative advantage rather than being a jack of all trades. By increasing petrol price, FAAC allocation will significantly increase but how will this impact on the people and production of goods? What are the people getting in return?

People are poorer, spending power is worsening and the government must deliver welfare to the people. Government must put in place massive programs that impact output and automatically, inflation would taper down. There is a lot that can be done when we focus on our exports. If the economy is growing, there are so many ways to support Small and Medium Enterprises (SMEs) other than intervention programmes that tend to be abused and manipulated.”

Director, Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, lauded the move by the CBN, adding that it is not a devaluation policy, but a pricing mechanism that reflects the demand and supply fundamentals in the FX market.

“It is a framework, which allows for flexible rate adjustments as and when necessary.  It is a model that is predictable, equitable, transparent and sustainable, a policy regime that would reduce uncertainty and inspire investors confidence. It would minimise discretion and arbitrage in the forex allocation mechanism. Rate unification does not imply that rates will be exactly the same in all segments of the market; the objective is to ensure that the differentials are very minimal, possibly between 5-10 percent.”

He said a unified exchange rate regime will enhance liquidity in the forex market, reduce uncertainty, encourage transparency, minimise discretion in the allocation of forex and reduce corruption vulnerabilities as well as reduce opportunities for round tripping and other sharp practices.

He said it would also increase disclosures with respect to export proceeds and compliance with non-oil export declarations, especially the non-oil export documentation (NXP), boost government revenue, restore the use of naira cards for limited international transactions, facilitate the mopping up of naira liquidity in the economy which would impact positively on inflation outlook and deepen the autonomous foreign exchange market through the liberalisation of inflows from export proceeds, diaspora remittances, multinational oil companies, diplomatic missions and so on.

He revealed that the erstwhile foreign exchange policy regime on the other hand was a fixed exchange rate regime, which created a widening gap between the official, other multiple windows and parallel market exchange rates and created room for forex round-tripping to flourish.

He added that it also caused the collapse of liquidity in the FX market resulting in acute forex scarcity, fueled demand for forex because of the incredible rent opportunities created by the huge parallel market premium, created a major disincentive for forex inflows into the economy, thus suppressing forex supply.

He said it also caused mounting trade debts, increased factory closure as many manufacturers couldn’t access forex for raw materials, created credibility problems with suppliers, increased inflationary pressures and caused a sharp drop in capital inflows.

He said the unification would normalise the forex policy regime and adjust rates to reflect the fundamentals of demand and supply.

“It would be dynamic; and the naira will appreciate or depreciate depending on the fundamentals. In the short term, we expect a depreciation of the currency in the official window because of the huge demand backlog. But as the market conditions normalise and move towards equilibrium, the rate would moderate. We also expect it to boost inflows and strengthen the supply side amidst elevated investors’ confidence. The component of forex demand driven by arbitrage, rent seekers, speculators and other economic parasites would also fizzle out, thus restoring stability to the forex market.”

He concluded by saying that the CBN should position itself for periodic intervention in the forex market, as and when necessary, to stabilise the exchange rate and prevent volatility. “This should happen not by fixing the rate, but by boosting supply to the extent that the reserves can support,” he said.