It is becoming like a déjà-vu for Nigerian businesses once more as they are trending towards a very unpalatable road similar to what they experienced in 2016 economic recession. This comes amid severe dollar shortage in the country’s financial sector as manufacturers struggle to remain afloat. With the crash in oil prices and its corresponding foreign-exchange shortage, most manufacturers can’t import raw materials to keep up with production which in turn negatively impacts their supply chains. With the devaluation in March of the local currency, Naira as a result of the crude oil price crash, foreign investors are beginning to cash in on the situation to repatriate their funds.
It could be recalled that members of the Manufacturers Association of Nigeria have complained over the past one month of inability to access hard currency as investment bank FBNQuest estimates there’s a $1 billion backlog of unmet dollar demand in Nigeria. The President of MAN, Mansur Ahmed was quoted as saying that everybody is struggling to remain afloat, noting that “certain sectors will suffer more than others, notably those companies that are heavily dependent on imports” such as pharmaceuticals, electrical-products and automobile businesses, he added. The naira currently trades at N 445 per dollar on the streets of Lagos, compared with the official rate of 386 per dollar. Twelve-month naira forwards were trading at about N 514 per dollar on Monday, suggesting investors see the currency falling to around that level in a year.
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There are reports that this is not only noticeable in Nigeria, other economies around the world especially those with big commodities export leanings have been caught short of dollars thanks to the coronavirus crisis. A small group has benefited from swap lines with the U.S. Federal Reserve designed to alleviate those pressures, which became particularly acute in March. Nigeria is not on the list, which does include countries such as Brazil and Mexico. As Nigerian manufacturers turn to domestic suppliers for raw materials, machinery and spare parts, the association appealed to the central bank to review rules hindering the ability of lenders to extend credit. This includes “policy contradictions” that require banks to lend 65% of their deposits — a measure aimed at stimulating credit — while parking 27.5% of their capital with regulators, which makes a “lesser quantum of money available for lending,” the group said in a statement.
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Manufacturers are also seeking lower interest rates and bigger loans, the size of which “has shrunken greatly” as increased borrowing by the government crowds out companies, MAN said. Nigeria’s monetary policy committee bucked the global trend of slashing borrowing costs to minimize the fallout of the coronavirus because of persistently high inflation, keeping its benchmark rate at 13.5% in March.
The central bank previously had multiple exchange rates that applied to exporters, investors, foreign-exchange bureaus and others. The system was an effort to control demand for dollars and help keep the naira steady — a lynchpin of President Muhammadu Buhari’s economic policy. The apex bank abandoned the policy on March 21 when it devalued the currency after oil prices more than halved, raising pressure on crude-dependent economies like Nigeria. The country is Africa’s largest producer of the commodity. The Governor of the Bank Godwin Emefiele had earlier this week said that the Central Bank said the bank has put in place an orderly process for investors looking to repatriate their funds, but they’ll need to wait. The country’s available foreign-exchange holdings will be devoted to strategic imports or to service obligations that are a priority, he said.
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In April, Nigeria had as part of its request for $3.4 billion of emergency funding to help the government deal with the fallout from the coronavirus pandemic, promised the International Monetary Fund that the central bank will seek a more flexible and unified naira. The central bank has said that 1 trillion naira ($2.6 billion) of its virus intervention fund will be used to support domestic manufacturing. The industry was the biggest borrower in the nine months through February, which the central bank has attributed to its policies that forced lenders to extend more debt to the private sector.
Kelechi Deca
Kelechi Deca has over two decades of media experience, he has traveled to over 77 countries reporting on multilateral development institutions, international business, trade, travels, culture, and diplomacy. He is also a petrol head with in-depth knowledge of automobiles and the auto industry