FX Squeeze: Manufacturers Begin to Look Inward for Survival

The illiquidity in the Nigeria’s foreign exchange market is forcing operators in the Nigerian manufacturing sector to look inward for local raw materials to reduce costs and remain afloat, writes Dike Onwuamaeze

The Nigerian industrial sector is in dire financial straits. The sector is faced with challenging foreign exchange squeeze. This has constrained growing number of them to adjust their operations by looking inward for local supply of raw materials as the dearth of hard currencies needed to fund their inputs from abroad bite harder.

Last week, the Director of Finance, Unilever Nigeria Plc, Adesola Sotande-Peters, said during an investors conference call that the Unilever is constrained to source for dollars above the official market rate due to paucity of forex.

Sotande-Peters disclosed that the company bought dollars at between N440 and N450 during the first and second quarters of 2021 to import petrochemicals, which is a major raw material for its products.

Now, the Unilever has begun to increase the percentage of local raw materials in its production in order to be “forex neutral in the very near future,”The Managing Director of Unilever, Mr. Carl Cruz, said. “The company has also planned to transfer its tea business to a newly incorporated firm in October as part of its global strategy to maximise value for its shareholders. “We will realize cash from the transaction,” Sotande-Peters added.

The Unilever is not alone. BUA Cement, another major manufacturing concern in Nigeria, is also resetting its corporate strategies in order to cope with the raging FX squeeze. The Chief Executive Officer of the BUA Cement, Mr. Yusuf Binji, said during the conference call that the cement maker has resorted to the use of locally sourced coal and liquefied natural gas in favour of imported coal in order to withstand the stress in the foreign exchange market.

The Corporate Affairs Manager of BUA Cement, Mr. Otega, told THISDAY on Friday that the “BUA Cement’s switch to LNG at our Sokoto plant was a strategic decision done for efficiency gains and to reduce our foreign exposure on coal imports since LNG can be sourced locally.

“We started the conversion of the plant last year and it is now completed.The BUA Cement’s Sokoto plant now runs on locally sourced coal and LNG rather than the previous mix of local and foreign sourced coal and LPFO. LNG will also be used to power engines used in generating electricity and will replace LPFO and AGO.

“Additionally, the use of LNG will also reduce our carbon footprint and conserve the environment in line with our commitment to environmental sustainability and the Paris Accord of which Nigeria is a signatory, ”he said.
Surprise Package

The current foreign exchange crunch might not have come as a surprise to Nigerian manufacturers. The Manufacturers Association of Nigeria (MAN) warned in December 2020 that many of its members might be forced to close shop in 2021 if the federal government failed to take urgent steps to address the challenges militating against the growth of the manufacturing sector.

The President of MAN, Mr. Mansur Ahmed, expressed this concern when he spoke on the, “Effects of the COVID-19 on the Country’s Manufacturing Sector,” at the 2020 Workshop of the Commerce and Industry Correspondents Association of Nigeria (CICAN).

The president, who was represented at the occasion by the Director, Corporate Affairs of MAN, Mr. Ambrose Oruche, also said that the scarcity of FX is preventing members of the association from enjoy the full benefits of the Central Bank of Nigeria’s (CBN) N1 trillion intervention funds for the real sector.

Ahmed said: “I want to put on record our appreciation to the CBN for its interventions. But how far could those interventions go? Many that have been able to access the N1 trillion could not buy machines for their production because of foreign exchange scarcity and you know that most of our manufacturing depends on imported raw materials, spare parts and machineries.

“We are appealing to the CBN to prioritise allocation of foreign exchange as it did in 2016 and 2017 recession. Then, the CBN prioritised forex to the manufacturing sector and that created growth as production came back to life. Why not do the same now by prioritising the allocation of foreign exchange to the manufacturing sector to be able to import needed raw materials and machineries.

“I am saying that many of the manufacturing firms will not open their shops in January unless something drastic is done by the government to alleviate the severe challenges hindering the manufacturing sector.

“There is need for intentional actions from the government to create an enabling environment that will enable investors to set up plants in Nigeria to manufacture industrial raw materials in a commercial quantity that can compete with the rest of the world,” Ahmed said.

“It will be difficult for some manufacturers to comeback after the Christmas holiday. Why? The raw materials are being exhausted and the foreign exchange to replenish them and purchase spare parts and machineries are not available due to low inflow of foreign exchange into the economy.

MAN Perspective

The MAN in a recent statement titled: “MAN’s Perspective on the CBN New Policy on Forex Allocation to BDCs,” that was signed by its Director General, Mr. Segun Ajayi-Kadir, extensively discussed how the scarcity of foreign exchange and the continued depreciation of the Naira have become one of the greatest undoing of the country’s manufacturing sector.

Ajayi-Kadir observed that traditionally, foreign exchange rate played an important role in investment determination via its relationship with inflation and interest rates.

He noted that variability and large depreciation of the exchange rate would obstruct economic activities, particularly manufacturing production. These assertions could be supported by the fact that Nigerian manufacturing across sub-sectors is heavily dependent on imported raw materials and most of their machines and spare parts.

Therefore, a favourable exchange rate in the case of the appreciation of the Naira would no doubt present good development and improve manufacturing production. But this has not been the case. “The case,” as he stated it, “has been the consistent depreciation in the value of the Naira as observed in various foreign exchange crises.

“The foreign exchange crisis in which the Naira value depreciates among convertible currencies such as the US$, strangulates and reduces the size of manufacturing in the country. This is because the depreciation in Naira value causes manufacturing raw materials and machinery imports to be more expensive.”

Moreover, the high-cost of import bills for the productive inputs would also decrease manufacturing working capital and feeds into manufacturing commodities prices, thereby making the sector less competitive.

“As was well observed, COVID-19 majorly triggered the current foreign exchange crisis through low international commodity prices, particularly crude oil prices. The acute shortage of foreign exchange and the erosion in Naira parity has been nightmarish to manufacturers in the country.

“In the current survey (Q42020 MCCI) most CEO of manufacturing companies reported inability to adequately source foreign exchange for importation of productive raw materials and machineries that are not available locally,” Ajayi-Kadir said.

The director general of MAN stated that the directive of the CBN on the BDCs corroborated with its view and may help address the maladroit (sic) activities of operators in the BDC market.

“However, much of the efficiency and effectiveness of the new guidelines will be determined by how determined the CBN and commercial banks will be to ensure that FX gets to genuine users.

“For instance, with the new policy, manufacturers will depend solely on the interbank market for their foreign exchange needs. We hope the banks will provide a seamless process and timely execution of foreign exchange applications by manufacturers,” the association added.

Unified FX Market

The question is: what is the way out of the foreign exchange squeeze afflicting the country’s manufacturing sector? The answer, according to Ajayi-Kadir, is contained in the various submissions of the MAN on the need for the CBN to collapse various foreign exchange windows into a single official foreign window.

“We believe that a single foreign exchange window will eliminate the excesses of middlemen, save the value of the Naira and allow for available foreign exchange to be allocated productively using the official banking protocols,” he added.

MAN further argued that a major challenge with foreign exchange allocation to the BDC segment “is that the operators always lacked the ability and the will to continuously adhere to set guidelines. Most times their operations drift into round tripping and other financial incongruities that negate the overall objective of creating the BDC foreign exchange market.

“The end result was always the escalation of the premium of foreign exchange in BDC compared to the official window and further depreciation of the naira.”

Also, the OPS were optimistic that the new policy direction by the CBN might be beneficiary to the economy in the long run, saying no central bank in the world sells FX directly to the BDC except in Nigeria.

They, however, observed that channeling the supply of foreign exchange through the commercial banks without addressing its supply side might unintentionally trigger a boom in the black market for foreign exchange.

The Nigeria Employers’ Consultative Association ((NECA) told THISDAY that banning FX allocation directly to the BDCs and channeling same to the commercial banks without addressing the supply side of the market would not be enough.

The Director General of the NECA, Mr. Timothy Olawale, enjoined the CBN to, “develop strategies in addressing the exchange market by reviewing the fixed market regime and allow the market to find its balance, as fixed market regime is disincentive to inflow of foreign exchange and diaspora remittances.

“An exchange management posture that features multiple official rates, distorts the market, denies foreign exchange to critical productive sectors and facilitates illegal arbitrage.”

Speaking in the same vein, the Director General of the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture (NACCIMA), Mr. Ayo Olukanni, told THISDAY that the association understood the need for the CBN to take urgent measures to ensure the legitimate use of FX and prevent wholesale and illegal use, but, however, “sees this directive as a latest in the long list of actions by the CBN to ensure absolute control of the Nigerian foreign exchange market, in terms of who buys, who sells and for what purpose.

“But, given the bureaucratic nature of the process of obtaining ‘legitimate’ foreign exchange, the implication of this directive is likely to be a blossoming black market for foreign exchange with serious implications on businesses with time-sensitive needs for foreign exchange in terms of import of raw materials.”

An Economist and the immediate past Director General of the LCCI, Mr. Muda Yusuf, noted recently that the major shortcoming of the Nigerian manufacturing sector is its reliance on import.

According to Yusuf, the sector accounted for about three per cent of Nigeria’s foreign exchange earnings but constituted 30 per cent of the country’s import bill. “This demonstrates that the sector is not properly aligned with the vision of self-reliance being promoted by the current government. Local value addition is still very low. The most sustainable segment of the manufacturing sector is the food and beverage industries, and the cement industries where the local content is well over 60 per cent. This explains the competitive strength of these segments.”