‘Naira depreciation increases cost-input pressures, weakens production’
Notwithstanding the challenges of access to foreign exchange (forex) for importation of raw materials, local manufacturers have stated that a favourable exchange regime and a stronger currency, presents a good omen for improving manufacturing production.
According to the Manufacturers Association of Nigeria (MAN), the depreciation in value of the Naira reduces manufacturing production, as observed in the various foreign exchange crises, adding that high cost of import bill for the productive inputs decreases working capital and feeds into commodities prices, thereby making the sector less competitive.
The local producers explained that the forex crisis in which Naira value depreciates among convertible currencies such as the US dollar, strangulates and reduces the size of manufacturing in the country, while continued Naira value depreciation causes manufacturing raw-materials and machinery imports to be more expensive.
On Monday, the exchange rate at the parallel market closed at N480/$1, leaving a N100 differential between the official Central Bank of Nigeria (CBN) rate.
Dollar liquidity dried up in Africa’s biggest crude producer after oil prices plunged following the coronavirus pandemic. Crude exports account for about 90% of foreign exchange earnings in the West African nation. Authorities devalued the local unit twice last year to deal with the pressure even as the economy contracted in the third quarter.
To streamline forex supply and ensure there is enough to meet rising demand, the CBN moved to ensure strict monetary control of the forex market, threatening to expel exporters who refuse to remit foreign exchange proceeds in the NAFEX market. It also warned against paying diaspora remittances in naira.
The CBN at its January Monetary Policy communiqué cited forex pressures as partly responsible for the weak purchasing managers’ index.
“This weak performance was attributed to the resurgence of the pandemic, foreign exchange pressures, increased costs of production, a general increase in prices and decline in economic activities.”
MAN in its latest quarterly research, aggregate Manufacturers CEOs Confidence Index (MCCI), listed difficulties in accessing dollars to pay for imports as their biggest challenge.
Producers still find it “extremely difficult” to source foreign exchange for importation of raw materials and machinery even after the Central Bank started selling the greenback to bureau de change (BDC) operators and banks in the fourth quarter of last year in a bid to improve access.
Indeed, manufacturers asked the government to give them priority in the allocation of dollars and also offer the U.S. currency to firms at a “concessional” rate to ease their burden.
They also want the central bank to “fast-track” the move toward a single exchange rate to ensure transparency in the market.
Besides the dollar shortage, the producers listed high electricity and transportation costs as well as low consumer purchasing power are the other challenges impeding production.
At 42.06 points in Q4 2020, MAN noted that the general deterioration in the manufacturing indicators in the quarter under review was occasioned by the abrasive macroeconomic ambience, the ripple effects of the first lockdown that witnessed the closure of about eight sectoral groups for months, the persisting effect of COVID-19, and lingering backlashes of the End-SARS demonstration.
“It is therefore expedient that the Government gives significant attention to the experiential challenges identified by manufacturers and recommendations made in this report to fully restore manufacturing activities back to the path of sustained growth.
“The continuous relaxing of the COVID-19 lockdown and containment measures by the Government and the increasing return of business activities from the second quarter of 2020 till date gave hope for improved performance of the economy for the rest of the year 2020.
“Notwithstanding, the presence of the challenges thrown up by the pandemic, the confidence of manufacturers in the economy improved among manufacturers as indicated by the third quarter 2020 MCCI of 43.3 points over 40.2 points recorded in the second quarter.
“In 2021 therefore, it is imperative that the management of the macro-economy is approached more pragmatically and the development of the productive capacities of the nation enhanced intentionally.
“It is therefore, pertinent that economic managers of the country pay attention to the measures and recommendation contained in this report to address the identified challenges and points of low confidence with a view to restoring manufacturing to the path of meaningful growth in 2021,” MAN added.