Nigeria’s FX reforms pose challenges for businesses as Naira depreciates
Businesses in Nigeria, regardless of their size, are currently facing challenges due to the foreign exchange reforms implemented by President Bola Tinubu.
These reforms have led to a significant depreciation of the naira, making it more difficult for businesses to source inputs and equipment that require dollars.
On June 14, Nigeria floated its naira currency in an attempt to unify its various foreign exchange rates. However, instead of achieving this goal, the reform has only widened the gap between the rates.
Since the depreciation, the naira has lost 61.4 per cent of its value against the dollar. At the I and E window, the naira exchanged for N747.87 per dollar on Monday, compared to N463.38 on June 13th, 2023.
Similarly, at the parallel market, the naira depreciated by 20.1 per cent to N917 on Monday from N762 in June.
The scarcity of naira has further exacerbated the challenges faced by businesses, as the cost of production has doubled.
This comes at a time when consumer demand is low due to inflationary pressures and financial constraints.
“The situation in the industry is worse now than before as the cost of industrial inputs has gone up. So many industries are unable to afford or buy their raw materials again,” National Vice President of the Nigerian Association of Small-Scale Industrialists, Segun Kuti-George said.
Deputy President of the Lagos Chamber of Commerce and Industry, Gabriel Idahosa said manufacturers are struggling as it has gotten more difficult for them due to reduced production capacity and further decline in the demand for their products.
“On the supply or production side, their cost of raw materials has gone up dramatically more than 20-25 per cent general inflation rate. And on the other hand, consumer buying power has gone down because of inflation,” he added.
According to Idahosa, a lot of manufacturers are seeing larger warehouses of finished unsold goods because they cannot sell as much as they used to sell before.
The high cost of sourcing FX has also led to a surge in the cost of energy as manufacturers in the textile industry complained that they spent about N21 million in July, up 90.1 per cent from N11 million, on gas.
“Our members are complaining seriously that they may have to downsize or close down because of the cost of gas, which is priced according to dollars,” Director-General of the Nigerian Textile Manufacturers Association, Hamma Kwajaffa said.
“When the dollar was officially around N400-450, the price of gas was cheaper. But now that it is close to N800, it is a big challenge for us, especially when we just converted to gas as a result of the high cost of diesel,” he added.
A recent survey by the Manufacturers Association of Nigeria (MAN) shows that manufacturing activities continue to suffer due to the persisting scarcity of forex and further depreciation of the naira.
“Only 14.7 per cent of manufacturers enumerated claimed that the rate at which forex was sourced improved in the second quarter of 2023; 66 percent disagreed while 19.3 per cent were not sure if forex sourcing had improved in the quarter under review,” MAN said.
It said the lingering forex scarcity and continuous depreciation of the naira have left manufacturers bleeding and limited their capacity utilisation since the importation of non-locally produced critical input has become a nightmare.
“Despite the recent reform to unify all forex windows, the exorbitant premium that persists between the official and parallel exchange rates has further stalled manufacturing operations,” the association added.
The dollar scarcity and the implementation of a 7.5 per cent value added tax on diesel imports pushed its pump price by about 20 percent to as high as N870 per litre last month.
Manufacturers spend 40 per cent of their total production cost on generating energy for their businesses, according to MAN.
Data from the association also show that on average, manufacturers spent at least N144.5 billion on sourcing alternative energy (gas and diesel) in 2022, up from N77.22 billion in 2021.
“The shock on manufacturers has been very pronounced. Some of the reforms even though they are desirable, the benefits are yet to manifest at that level. The benefits have only manifested in revenue generation to the government,” Chief Executive Officer of the Centre for Promotion of Private Enterprises, Muda Yusuf said.
He added that the impact on businesses, investors’ confidence, purchasing power and cost of production, has been negative. “But we should begin to see the benefits of the reforms in the medium term.”
Last two weeks, MAN recommended the Central Bank of Nigeria (CBN) to manage the floating exchange rate system within an acceptable lower and upper bound, pending the actualization of a net-exporting economy.
LCCI in July urged the CBN to remove the foreign exchange restrictions for importing 43 products in their list.
Apart from the FX reform, the removal of the petrol subsidy in May which tripled petrol price to N617 from N184 has affected millions of small businesses in the country.
“This is the worst period in history for businesses. Things have gone from bad to worse. The economy is not improving, poverty has worsened and unemployment is increasing,” National President of the Association of Small Business Owners of Nigeria, Femi Egbesola said.
“Manufacturers particularly are either closing shops or relocating to other countries, so it has been very bad. The government promised to hit the ground running immediately they get into power but that has not been the case,” he added.
Inflation in the country reached a nearly 18-year high of 24.08 per cent in July, up from 22.41 per cent the previous month, due to the increasing cost of energy and foreign exchange, as reported by the National Bureau of Statistics.
The latest Purchasing Managers’ Index (PMI) data from Stanbic IBTC Bank indicates that higher prices have led to a decline in business activities for the third consecutive month, with a reading of 50.2 in August, the lowest in five months compared to 51.7 in July.
