Respite for manufacturers, FPIs as CBN resumes clearing of $2bn demand backlog

There seems to be some respite for manufacturers and Foreign Portfolio Investors (FPIs) as the Central Bank of Nigeria (CBN) has resumed clearing of the alleged $2 billion demand backlog in the Foreign Exchange (FX) market.

Foreign currency dealers said there has been convergence around the Investors and Exporters (IE) FX rate, even though Nigeria currently operates at least seven exchange rates for various transactions including government, banks and manufacturers.

Experts say the strong link between exchange rate pressures and the manufacturing sector cannot be overstated at this time, because most manufacturers rely heavily on imported raw materials.

The result of a weaker currency has been a surge in import costs with imported inflation climbing as high as 16.86 per cent in March 2021.

A market-determined exchange rate is important to boost output growth and drive industrialization especially with the commencement of the African Continental Free Trade Agreement (AfCFTA).

Nigeria’s exchange rate policy has been a subject of controversy. The price of forex is the major problem followed by the availability of adequate forex supply, which leads to a blended rate for forex transactions.

Analysts at Financial Derivatives Company Limited said there are limited hedging opportunities, like the 12-month non-deliverable forward (NDF)  market rate which is trading at N456.96/$, indicating that the market expects the naira to depreciate.

According to FDC, in April, the average daily turnover of FX fell by 13.4 per cent to $57.7million from $66.63 million in March. Furthermore, dollar sales by the CBN with a 60-day delivery means the effective cost is higher as most manufacturers are forced to source for forex from the parallel market, leading to a more expensive and blended rate around N460/$. About 10 per cent of their forex is gotten from official sources, while 90 per cent from the parallel market.

The FBN purchasing managers’ index reading for March eased by 3.02per cent to 51.4 points from 53 points recorded in February.

This, according to the analysts, was mainly because of the difficulty manufacturers faced while sourcing for forex to acquire raw materials.

“To address the issue of dollar scarcity, the CBN has embarked on several initiatives including encouraging exporters to repatriate proceeds, licensing of 10 additional IMTOs and the naira4dollar promo.

“However, exchange rate policy ambiguities and forex market shortages continue to linger, worsening the business environment for manufacturers. Even though, the CBN has made moves toward naira convergence at the I&E window,” the FDC analysts stated in a note to clients.

In the last three years, the currency depreciated by 33.61per cent to N485/$ at the parallel market. This was also the case at the I& E window, where the naira weakened by over 14.35 per cent to currently trade at N412/$ from N360.3/$ at the end of 2017.

The window was introduced in 2017 after the oil price crash (2016) to facilitate transactions for individuals and businesses that need dollars to repay loans, dividends, settle trade transactions and repatriate capital.

In all, currency volatility in recent times is a deja vu of the oil price crash in 2016.

The International Monetary Fund (IMF) through its article IV review has strongly advocated for a market-driven and unified exchange rate system in Nigeria because it encourages transparency in exchange rate determination for investors (domestic and international) and manufacturers. The multilateral lender stated that multiple rates, limited flexibility and forex shortages are economic challenges and disincentives to investors.

The IMF further recommended a gradual and multi-step approach to establishing a clear and unified exchange rate regime. The near-term focus should be on allowing greater flexibility and removing the payments backlog, FDC noted.

“A tough business environment will continue to encourage capital flight and loss of the much-needed investment inflows.

“The manufacturing sector is a huge player in the government’s plan to diversify its revenue base and fasten the pace of industrialization. The world is fast transitioning away from oil, so this should be a wake up call for the government to hasten its steps towards boosting the activities of other sectors that have the potential to drive economic growth.

“More noteworthy is that if these forex challenges persist, alongside the rising insecurity levels and already weak macroeconomic environment, Nigeria could lose its chance of being a hub as the AfCFTA progresses,” FDC observed in a note to investors.

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