Forex demand hits $1.16b as naira slides

• Manufacturers lose credit lines as costs escalate • Parallel market faces pressure on CBN interventions

With the Central Bank of Nigeria (CBN) adjusting foreign exchange rates in search of uniform framework, local demand has hit $1.16 billion on the back of outstanding obligations.

Local manufacturers have also warned that many factories may shut down if obligations of over one year to foreign suppliers are not met. Some of the producers lamented that locally sourced materials were being indexed and priced at the same rates for which they would have been imported, thus stalling backward integration agenda.

Data from manufacturers’ union showed steady decline in backward integration activities since 2017 until H2 2019 due to local pricing and availability of raw materials.

Already, the CBN, few days ago, altered the official exchange rate at which it sells the naira to the dollar on its website to N379/$1 from the N361 per dollar that the website had reflected since March 20, this year.

The CBN had, on July 3, adjusted the naira rate from N360/$1 to N380/$1 at the Secondary Market Intervention Sales (SMIS). Similarly, on July 7, the regulator adjusted the exchange rate at the Investors and Exporters’ (I&E) window, also known as NAFEX, according to data on FMDQ website, by 5.54 percent to N381 per dollar from N361/$, sparking speculations that it was set to officially unify the exchange rates.

However, it left the exchange rate unchanged at N361/$1 on its website. In the wake of acute forex scarcity, occasioned by low oil prices, the naira has come under pressure on the parallel market and the I&E window where it trades for about N475 per dollar and N386 per dollar respectively.

The CBN initially sought to stem the decline of foreign exchange by suspending dollar auctions in March and has continued to severely ration supply, while Bureaux De Change (BDCs) have also not accessed official dollar sales from the apex bank since March.

According to the Manufacturers Association of Nigeria (MAN), while the move is gratifying, the apex bank should urgently put measure in place to minimize intensity of the pain by considering outstanding obligations of manufacturers from the second quarter 2019 till date.

The Guardian gathered that forex demand across 14 sub-sectors/groups of MAN may have risen beyond the initial $1.16 billion request made during the first half of 2020.

Local manufacturers believe that the outstanding obligations given at N345 to a dollar prior to unification should be given the privilege to be settled at between N330 and N360 per dollar to enable banks to redeem these obligations to foreign suppliers of manufacturers.

If not done, MAN said many factories might close and CBN stimulus packages to the manufacturing sector would suffer setback, just as cash flow crunch would become worse.

MAN, in its position on the matter, noted that it was important to recognise existence of unavoidable pains that naturally come with transition from multiple exchange regime to the domain of single exchange rate, particularly the burden of dollar denominated loans and offsetting existing credit commitments to foreign suppliers of raw materials.

To address the concerns, the local producers urged the CBN to develop appropriate implementation strategy that would engender successful transition from the current multiple windows to a single efficient one; and to ensure that the strategy pursues two fundamental objectives.

The first objective, according to MAN, is to limit the short-term pains until efficiency gains materialise by responding swiftly with an inward-oriented rescue guideline while the second should seek to boost the pace at which such efficiency gains materialise.

MAN also urged the apex bank to submit all instruments of exchange rate determination gradually to the unseen forces of demand and supply as a matter of necessity and completely avoid the temptation of interference, so as to fully harvest all benefits that foreign exchange unification offers.

The LCCI had raised concerns that the liquidity crisis in the foreign exchange market was becoming increasingly unbearable as many businesses faced challenges with importation of raw materials, equipment, spare parts and other inputs.

Director-General, Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf said the development had created new dimensions to supply chain problems, which many manufacturers had suffered in the peak of the lockdown.

Yusuf said the forex crisis had put enormous pressure on the parallel market, resulting in sharp exchange rate depreciation in that segment of the market.

“Across all sectors, we are experiencing cost escalation, loss of credit lines enjoyed from foreign creditors, forex remittance challenges and many more. We need an urgent response from the CBN to calm the situation and restore confidence in our foreign exchange management framework,” he said.

According to the LCCI D-G, the dollar shortage is hitting most of its 2,000 members hard.

The CBN Governor Godwin Emefiele had, at the onset of the COVID-19 pandemic in March, asked correspondent banks and creditors to local lenders not to panic over Letters of Credit and other obligations extended to businesses during the economic crisis.

The bank also identified a few key local pharmaceutical companies to be granted naira and forex funding facilities to support procurement of raw materials and equipment required to increase local drug production in the country.