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Cashless Policy
Posted: Aug 3, 2016 at 4:41 pm   /   by   /   comments (0)

There is no doubt that the embargo placed on the barred 41 items from accessing foreign exchange by the Central Bank of Nigeria (CBN) has been detrimental to the manufacturing sector while the new foreign exchange policy announced by the bank with the aim of making access to foreign exchange easier for importation of raw materials has been of little help. Bamidele Ogunwusi reports;

Manufacturers have been consistent in the call for a review of the list of 41 items, which according to them include some critical inputs for the manufacturing process. The umbrella body of the manufacturers, the Manufacturers Association of Nigeria, MAN, said more factories had shut down and more have notified the association that they would be shutting down.

The Association claimed that despite the recent adoption of a flexible foreign exchange rate policy by the Central Bank of Nigeria (CBN), the challenges in the manufacturing sector have persisted and are getting worse.

Apparently heeding the cry of manufacturers to smoothen access to foreign currencies for import of raw materials, the CBN, on June 15, 2016, unveiled a new foreign exchange policy anchored on market determinism of the naira exchange rate.

According to the apex bank, the policy aims to improve real sector’s access to foreign currencies, which took a worse turn from August 23, 2015 when about 41 items including some basic raw materials were declared ineligible for foreign currency through the official window.

However, the first auction which took place on June 20, 2016, saw the naira trading at an average of N282 to the dollar from about N197 before then.

By the time the dust of that maiden transaction settled, the stakeholders had incurred over N300 billion arising from outstanding Letters of Credit obligations which the new flexible policy insists would now be settled using the new exchange rate of N282 to the dollar.

Today, stakeholders are crying blue murder, lamenting the flexible exchange rate has rather worsened their woes than ameliorate it.

Also, the Nigerian Economists Society (NES) stated that the flexible foreign exchange regime cannot survive in a non-productive economy as the country may slide into depression.

The society stressed that managed float policy is a better option given the Nigerian economy’s current local productive capacity and overdependence on crude oil as its major source of forex earning.

CBN’s intervention

Nigeria has had a fixed exchange rate system since August 2015 and although the naira has been twice devalued. The CBN at its last Monetary Policy Committee (MPC) in May, 2016, had adopted a flexible forex rate to manage the economy.

The apex bank said the decision of the Committee was based on the need to stabilise the exchange rate, which had witnessed sharp depreciation in the parallel market due to the shortfall in government’s revenue from crude oil sale and generation of foreign exchange into the country.

Meanwhile, the arguments in favour of foreign exchange controls, protecting those at the bottom from inflation, economic diversification and preventing a collapse in the naira have lost their strength.

A parallel market has opened up headline inflation to increase from 9.2 per cent in July 2015 to 15.5 per cent in June 2016 and finally diversification cannot happen in the short term, particularly while essential inputs cannot be obtained. Thus, the economy shrunk for the first time in many years in first quarter, 2016, which include manufacturing companies forced to shut down production lines dramatically since February this year. Real sector troubles have been mirrored in banking sector loan impairment, resulting to job losses.

Under the new system, the forex market will operate through a single autonomous interbank window and the exchange rate will be determined by market forces. But the central bank will periodically buy or sell forex to intervene if extreme fluctuations occur.

The bank has also decided to introduce primary dealers that will deal with the central bank directly for large trade sizes while these primary dealers will in turn deal with other authorized dealers.

The apex bank is also introducing the sales of futures to try to insulate investors from volatility in the exchange rate.

However, in spite of the optimism by the CBN and commendation it thus received from the country’s organised private sector (OPS), the manufacturers seem no longer comfortable with the turn of event, more so as they argued that flexible exchange rate regime cannot function well in an economy with multiple FX windows because of the existence of parallel market that would not permit equal exchange rate.

They argued also that the challenge of hoarding by banks which may source foreign exchange from the CBN and withhold it for speculative purposes will still be there, particularly as the new policy stipulates the CBN will not sell forex to BDCs but to banks.

In their view, banks may sell to any entity, and this means that they can sell to BDCS, wondering how the policy would cope with such collusion without the economy experiencing further exchange rate deterioration.

Companies have started to feel the impact of naira devaluation against the dollar (USD) resulting in unrealised exchange loss, for example Lafarge Wapco reported a loss after tax of N30 billion in its half year result for 2016 due to this, as more companies are likely to be affected.

The president of MAN, Dr. Frank Jacobs recently said, although the CBN deregulated the forex market with the aim of curbing the scarcity of forex, the scarcity has persisted.

He said, “The recent deregulation of the forex market may be seen as a partial solution to the forex challenge the country is facing; but in reality, the scarcity of forex has not abated.

“Consequently, manufacturing companies found it extremely difficult to source forex for the importation of essential raw materials and this has led to a number of closures of affected companies.

“In addition, discordant policy measures and pronouncements emanating from the various arms of government (Presidency, CBN, Finance ministry) did not help matters as manufacturers found it difficult to plan their production.”

On fiscal policy, Jacobs noted that the non-release of fiscal policy measures by the government within the period under review had created a vacuum.

He said: “The case of pharmaceuticals where raw materials and inputs attract higher duties than the finished products, and has been accepted for adjustment by the Tariff Technical Committee is an example.

“The absence of this adjustment is already affecting local pharmaceutical companies, which are unable to compete with imported pharmaceutical products and as such are forced to close shop or downsize.”

This was further corroborated by the vice president of MAN, Dr. Stella Okoli, who said the forex policy and the high interest rate payment have constrained Nigeria’s manufacturing industry in no small measure.

“Last year, we bought dollars at between N170 and N200 but now we buy at N350. You can see how this is affecting the manufacturing industry negatively,” she said.

She noted that although manufacturers could bid at N282 at the interbank rates, but they do not usually get what they bid for.

“We were told that if we had bidded at over N280, we would get all the money we wanted even if it is a billion dollars but those who bidded lower than N280 will have to wait till about three to four months to get the forex they need”, she said

Okoli said that the new challenge has forced more companies in the sector to close down, while those still in operations are sacking their staff, thereby advocating for new policies to make the local manufacturing industry competitive in the international community.

She stated, “Government must formulate policies that would engender the growth of manufacturing, and regulatory agencies must work together to ensure smoother exports.”

Also, the managing director of InvestData Limited, Mr. Ambrose Omordion said that 35 days after the Central Bank of Nigeria (CBN) abandoned its 16 month old currency peg of the naira  to the dollar, there is something not quite right with the new FX market.

He added that foreign investors are not buying the story just yet by bringing in their funds, saying “The major problem is that the dollar to naira is not trading like it should after a long period of a tight overvalued peg, like the CBN had.

He however said that investors feel the true level of the naira has not been reached and are yet to come back, saying “They suspect the CBN is not letting market forces determine the true FX rate.”

The group managing director of Vitafoam Nigeria Plc, Mr. Taiwo Adeniyi said manufacturing companies in the country are crying over their inability to access FOREX under the current flexible exchange policy, saying “Manufacturers in the country are facing difficulties in accessing forex under the new flexible exchange rate as scarcity still persists.”

All these challenges, operators in the sector maintained call for quick intervention of the CBN before things get out of hand.


Bamidele Ogunwusi