‘Accumulation of raw material inventories fuelled by forex scarcity’

By Femi Adekoya
 With the Central Bank of Nigeria (CBN) deploying several measures to curb abuses in the foreign exchange (forex) market and unify the rates amid scarcity, operators in the real sector have described the
move as fuelling stockpiling of raw materials.
According to the operators, there is high degree of uncertainty which fuels speculation; there is the component of demand driven by accumulation of inventories of raw materials caused by the current opacity in the market, and also a high component of forex demand driven by the arbitrage opportunities, which differential rates offer.
They noted that the disposition of the CBN to suppress market forces in the foreign exchange arena is a major issue, as an attempt to subdue the market in a free enterprise economy is like swimming against the tide and therefore not sustainable.
Indeed, Nigeria’s Purchasing Managers’ Index (PMI) remained in contractionary territory for the fourth consecutive month, as weak consumer spending, the low-level of business activities, rising cases of banditry especially in the Northern region, and the high cost of procurement due to the weaker currency and forex illiquidity, continue to dampen the country’s macroeconomic environment.
According to the CBN, manufacturing PMI for the month of August rose to 48.5 points, against 44.9 points in July, while the non-Manufacturing PMI rose to 44.7 points from July’s 43.3 points.
While the broader recovery across the subsectors indicates the dissipation of the initial impact of the pandemic as well as the continued relaxation of the social distancing measures looking positive for local manufacturers, poor access to forex remains a challenge.
Local demand for dollars by manufacturers has risen over $1.16 billion on the back of outstanding obligations, even as producers seek to manage to sustain operations.
The CBN had been rationing dollar sales due to dwindling oil receipts, even as foreign capital inflows into Nigeria fell by $4.46 billion to $1.29 billion in the second quarter (Q2) of this year from the $5.85 billion figure of the preceding quarter, according to the National Bureau of Statistics (NBS).
With the virus already aggravating their dire situation, the Manufacturers Association of Nigeria (MAN), and other private sector operators described the CBN directive to dealers to stop opening Form M for payments routed through a buying company or any other third party, as one that could kill ailing firms.
MAN President, Mansur Ahmed, argued that a phased approach should be adopted to enable firms have sufficient time to re-organise and build sustainable relationships with suppliers.
“Given the prevailing extremely stressful operating environment our fragile manufacturing sector is contending with, the implementation of this new directive is like hammering the last nail into the coffin of many of our ailing members,” he said.
To address the challenges, the LCCI stated: “while the Chamber appreciates the efforts of the CBN in curbing abuses in the foreign exchange market, this policy measure would create more problems than it would solve.”
According to the LCCI Director-General, Dr. Muda Yusuf, the new policy on payment should be urgently reviewed to avoid further disruptions to businesses, adding that already most foreign exchange transactions have been frozen on account of this circular.
“What this means is that the supply chain of over 80 per cent of the business community has once again been disrupted and dislocated. This is like substituting the global supply chain problem with a domestic supply chain disruption,” Yusuf said.
The LCCI also observed that the proposal on price verification would amount to another layer of bureaucracy, especially when the Nigeria Customs Service (NCS), has a full-fledged department of valuation that is charged with the responsibility of determining the value of imports.
“It is a paradox that the NCS is busy hounding the private sector for under-invoicing and under-pricing, while the CBN is accusing businesses of over-invoicing and overpricing. This is yet another quandary for the business community,” Yusuf decried.
He noted that it would be impractical to expect all importers of raw materials, equipment, and other inputs to buy directly from the ultimate producer, manufacturer or supplier, especially in an economy driven by Small and Medium Enterprises (SMEs), as being demanded by the CBN’s circular.
The Chamber argued that the SMEs would be the first set of casualties of this policy, because they lack the capacity to place high volume of orders that the main manufacturers would respond to, adding that many of the SMEs currently enjoy suppliers’ credit from the agents from whom they buy, which they would not get from the original product manufacturers.
“Some enjoy up to six months bills for collection on raw materials imports. We urge the CBN to please review this new policy on payments for imports to save the already ailing and distressed Nigerian economy from complete collapse. Many businesses are yet to recover from the devastating shocks of the COVID-19. Some have in fact collapsed, while others are struggling to regain momentum. This policy negates the current laudable efforts by the government (and even the CBN itself) to ensure business continuity, sustainability, and recovery. It is also in conflict with the letters and spirit of the Economic Sustainability Plan of the federal government,” the LCCI explained.
The Chamber also ascribed the goings on in the forex market to the symptoms of policy shortcomings in the management of the domestic market.
It added that subduing the market forces in forex allocation in a free enterprise economy would be unsustainable, and create distortions, transparency problems and corruption that drive transactions underground.
“It also obstructs the inflow of forex, either from foreign investors or remittances that can stabilise the foreign exchange market while a market driven foreign exchange policy will incentivise the repatriation of export proceeds.
“It is unfair and unjust to compel exporters to offer their proceeds at N380 to the dollar when the open market is around N470 to the dollar. This disparity would naturally create compliance issues. It also contradicts the craving of government to promote export development. Exporters deserve unfettered access to their export proceeds,” Yusuf said.