October 22, (THEWILL) – If there are winners and losers in the recent policy reversal which restored the 43 import items formerly restricted from the official foreign exchange (forex) window, it is the manufacturing sector.
In a twist of events, the Central Bank of Nigeria (CBN) on October 15, 2023 announced the readmission of the 43 import items to the official forex window after eight years of exclusion; the CBN had insisted that no reversal should be contemplated.
The apex bank in a notice dated October 12, 2023, signed by its Director, Corporate Communications, Dr AbdulMumin Isah, said, “importers of all the 43 items previously restricted by the 2015 circular, TED/FEM/FPC/GEN/01/010 and its addendums, are now allowed to purchase foreign exchange in the Nigerian Foreign Exchange Market.”
Some of the affected items include rice, cement, margarine, palm kernel, palm oil products, vegetable oils, meat and processed meat products, vegetables and processed vegetable products, poultry, tomatoes/tomato paste, soap and cosmetics, and clothes.
The apex bank’s action was received with mixed feelings because it had earlier in June 2023 restated that the 43 non-eligible items remained banned from forex
By this development, the manufacturing firms which have been operating in an atmosphere of choking macroeconomic headwinds, are set for a more challenging experience.
First, the policy will crowd out real manufacturers from the forex market and make forex difficult to access thereby worsening their already challenging situation.
Secondly, it will increase the cost of sourcing forex to meet their needs. In view of the devaluation of the naira, manufacturing firms will need more naira to buy dollars in the forex market amid raging inflation and high interest rate.
Again, the firms that had commenced domestic production of the items will have their projects hampered. Some operators who spoke to THEWILL said they had already commenced local production of the items. They lamented that the new policy will also impact severely on the small and medium enterprises (SME) who are engaged in the production value chain.
For real, the manufacturing firms came off two national economic recessions in six years between 2015 and 2021. They also faced the excruciating pains of the federal government’s disastrous naira redesign project, the obnoxious 15-month border closure, spiraling inflation, and the government’s debt-driven macroeconomic policies. The unprecedented high energy cost amidst deplorable infrastructure and ravaging insecurity has not abated. The firms have been grumbling and protesting.
Manufacturers reacts
The Manufacturers Association of Nigeria (MAN) has cautioned the government to urgently reverse the decision in order to save the nation from the looming job crisis, insecurity and outright collapse of the nation’s economy.
Featuring in a national television programme, the Vice Chairman of Basic Metal, Iron and Steel Products sector of MAN, Mr. Lekan Adewoye, totally condemned the new policy of the CBN stressing that the policy reversal could lead to the collapse of many companies soonest
“For items that can be produced in Nigeria, such manufacturers ought to be encouraged. This directive will further kill the manufacturing industry that is already struggling to survive,” Adewoye said.
When contacted, the Managing Director/CEO of Erisco Foods Limited, manufacturers of tomato pastes and allied products, Chief Eric Udofia, lamented what he called the partial implementation of forex rules by policymakers.
In a note to THEWILL, Chief Udofia condemned the new policy and argued that the CBN ought to have found a way of identifying the genuine manufacturers and supporting them in their business.
“I hope that the federal government would find a way to obtain the data of genuine manufacturers in Nigeria with a view to supporting them to expand as that is the only way to lift Nigeria out of the prevailing economic troubles which have lingered for a long time,” Udofia said.
Uche Uwaleke, Professor of Capital Market at Nasarawa State University, Keffi, opined that the immediate impact of the policy reversal will be to reduce the premium between the official and the parallel market.
“But it will have negative implications for import substitution and local manufacturing efforts. The decision to readmit the 43 items is ill-timed in view of the current forex shortage. The official exchange rate will further rise to meet the parallel market rate,” Prof. Uwaleke said in a note to THEWILL.
However, the Director/CEO, Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, on the other hand, hailed the policy reversal which he noted to have contributed to the distortions in the forex market.
“We welcome the decision of the CBN to discontinue with the forex exclusion policy on the 43 items. It is a move in the right direction. It is part of the policy normalisation process. The exclusion of the 43 items was one of the several drivers of distortions in the forex market,” Dr Yusuf told THEWILL in a note.
Case of palm oil
To meet expanding local demand, Nigeria will spend up to $100 million on the importation of palm oil, one of the 43 items, in 2023, going by available data from the National Bureau of Statistics (NBS). The figure is based on the value of the imported commodity in the past two years at an average cost of N25 billion in six months, or N50 billion per year.
In its quarterly ‘Foreign Trade in Statistics’ reports, the NBS showed that (crude) palm oil, which falls under the imported agricultural products, originated from the Asian countries of Malaysia, Indonesia, Singapore, China, India and West Africa Cote d’Ivoire. Before now, importers sourced their forex from the parallel market.
Deeper challenges
As anticipated, the volatile forex market has become more challenging as the naira faced a rollercoaster ride in the financial markets recently – plunging to a record low of N848.12 per dollar on the Nigerian Autonomous Foreign Exchange Market (NAFEM), formerly I&E window, on the October 12 announcement of the policy reversal. The naira touched the deepest level of N1,170 per dollar at the parallel market on Thursday, October 20.
The scenario reflects the harrowing experience of the manufacturing sector since the first six months of the year arising from the devaluation of the naira on June 14, culminating in huge losses.
The 2023 interim half-year financial ststements of Nigeria’s manufacturing companies revealed they are battling for breath as they struggled to lift margins. Their profit and revenue haul were severely impacted, while the key six cost indices revealed an average 92 percent increase.
The key cost areas include Tax Expenses, Cost of Sales, Administrative Cost, Sales/Marketing, Distribution, Raw Materials/Inventory and Employee Expenses.
The firms are now confronted with a difficult environment that is not likely to improve any time soon. With growing evidence of worsening economic uncertainties the firms groan under the choke of thistles from multidimensional challenges.
These include multiple taxes, high operating costs, rising inflation, low consumer demand, decrepit infrastructure, volatile exchange market, forex scarcity, policy summersault and insecurity among others. The most outstanding impact came from the devaluation of the naira.
The half-year financial statements of these firms proved they are working a tight rope, and literally trudging the valley of shadow of death. It is obvious that some of them might shut down or drastically downsize soon.
Findings from 10 sampled manufacturing firms, mainly in the consumer goods group, showed they reported a total of N517.1 billion in non-recovery net foreign exchange losses in the first half of the year (HY 2023), occasioned by the devaluation of the naira.
The development impacted severely on the balance sheets of the firms as they had to source extra funds in local currency to meet their dollar-denominated obligations.
The huge forex losses impacted severely on the firms’ earnings and drained their bottom lines as inflation continued to rise. This resulted in a total pre-tax loss of N695.03 billion in HY 2023 against pre-tax profit of N637.61 in the corresponding period of 2022 for 10 selected companies.
Departing firms
The forex challenge has affected several Nigerian businesses which rely on imports. Many of them have been cut off by their foreign suppliers who are rejecting letters of credit (LCs) and refusing to deliver goods without payment as foreign currency shortages worsen in Africa’s biggest economy.
Indeed, some consumer goods firms have opted out of the Nigerian Exchange (NGX) and close shop in Nigeria. These include GlaxoSmithKline (GSK) Plc and PZ Cusson Plc with combined market capitalisation of N143 billion which will be wiped from the NGX equities capitalisation following the firms’ delisting from the stock market.
GSK, had in August, 2023 announced plans to cease operations in Nigeria without stating reasons for its decision. Economy experts have, however, linked the company’s decision to scarcity of forex and the forex losses incurred by most companies following the devaluation of the Naira.
In a statement made available to the media, owners of an indigenous biscuits manufacturing company in Nigeria, Mayor Biscuits Company Limited (MABISCO) announced recently that they had shut down the company and would be selling the multi-million dollar biscuits plant in Lagos. Sources close to MABISCO disclosed that the firm had been finding it difficult to source raw materials for its products.
“The companies have limitations in sourcing local raw materials, they have challenges sourcing forex for import, they cannot repatriate their assets due to dollar shortage, and they have to pay taxes, employee remunerations and other commitments. Is that not walking the shadow of the valley of death?” queried Marcel Okeke, an Economist and Sustainability expert.
The development is not good news for the SMEs which operate in the value chain to feed the consumer goods firms whose commitment to the backward integration scheme is not in doubt.
About the Author
Sam Diala is a Bloomberg Certified Financial Journalist with over a decade of experience in reporting Business and Economy. He is Business Editor at THEWILL Newspaper, and believes that work, not wishes, creates wealth.
