In the last few months, the naira has been under pressure, putting manufacturers on edge over rising cost of raw materials, production, and declining profit. They are seeking the strengthening of the naira to boost the sector’s competitiveness. Assistant. Editors Chikodi Okereocha and Okwy Iroegbu-Chikezie report.
The outlook for the manufacturing sector does not inspire confidence. The sector appears stagnated, with firms groaning under high energy cost, rising interest rates, smuggling, under invoicing of imports and multiple taxation, among other challenges. This is why the sector today is said to contribute a meagre four per cent to the nation’s Gross Domestic Product (GDP).
Although, there have been interventions to reverse the trend, there are fears that the sector may be in for more troubles. This time, the continuous depreciation of the naira against major international currencies, particularly the US dollar, manufacturers and finance analysts say, is a pointer that the sector might not be out of the woods soon.
In the last couple of months, the naira hascome under severe pressure, with far reaching implications for the economy particularly the manufacturing sector. Already, manufacturers are agonising over rising cost of importing raw materials, production and narrowing profit margin, which are believed to be direct consequences of the depreciation of the naira against the dollar. And there are fears that the situation may get worse as the 2015 general elections draw near.
The president, Lagos Chamber of Commerce and Industry (LCCI), Alhaji Remi Bello, observed that the naira has come under severe pressure in the last couple of months due to what he termed, as wrong policies. He said though there are some measure of stability in the official market, the rate in the interbank market, Bureau de Change and parallel market depreciated between N165 and N172 per dollar, as against N160 to the dollar in January.
He identified capital flow reversals arising from developments in the global economy, especially the fiscal tapering in the US as one of the factors that may have influenced the pressure on the naira. Other factors, he said, include declining capacity to fund the foreign exchange market because of declining forex inflows and numerous fiscal leakages and oil theft, huge foreign exchange demand for the importation of petroleum products, and the escalation of speculative demand as a result of recent volatility in the foreign exchange market.
Bello said the trend is worrisome due to its implications on inflation, interest rates, and operating costs. He said the situation also poses the risk of round tripping in the foreign exchange market with its attendant distortions in the economy. He however, said that while members of the Organised Private Sector (OPS) appreciate the commitment of the Central Bank of Nigeria (CBN) to stabilize the exchange rate of the naira, they however, regret that the parallel market has strong signaling effects on the economy.
Indeed, as the exchange rate in the parallel market depreciates drastically, there’s heightened risk of inflationary pressures. For an economy such as Nigeria’s characterized by a large informal sector that source foreign exchange mainly from the parallel market, this is considered significant. There is also a risk of over-regulation in the market, which could create further distortions and breed corruption within the regulatory system. Besides, there is the challenge of excessive documentation and bureaucracy, which will slow down the tempo of economic activities and create transparency problems.
For the Director General of LCCI, Mr. Muda Yusuf, the blame for the continuous weakness of the naira should be put on the doorstep of the Monetary Policy Committee of the CBN. He said the CBN policy of sustaining and tightening monetary policy is inimical to the economy. He specifically frowned at the retention of Monetary Policy Rate (MPR) at 12 per cent including the Cash Reserve Requirement (CRR) on public sector deposits at 75 per cent. Others are the increase of the CRR on private sector deposit from 12 per cent to 50 per cent while the liquidity ratio was retained at 30 per cent. The review of the CRR on public sector deposits from 12 per cent to 50 per cent, for instance, has profound effects on the money market, the real economy as well as the stock market.
”The development may adversely affect the stock market. Typically, the gains of the money market are often the loss of stock market. As returns on investment in the money market improve, negative investors’ sentiments may be created in the stock market, leading to a migration to the money market, especially by short term investors. This may have a dampening effect on stock prices,” Yusuf argued, adding that “It is a scenario that would profit some players in the economy and penalize others.”
He however, said that the policy action represents a further tightening of liquidity in the economy in furtherance of CBN objectives of promoting price stability. A tight liquidity situation, according to experts, generally enhances the stability of naira exchange rate and the moderation of inflation. “Stability of the exchange rate whether borrowing or lending is good for planning,” says Alaba Olusemore, Managing Consultant, Nesbet Consulting, a Lagos-basedfinance/management consultancy. He told The Nation that since the rate should not be too low or too high, the challenge before the CBN therefore, is to strike the delicate balance to keep the economy running.
Olusemore however, noted that as long as manufacturers import the bulk of their raw materials from abroad, the recent plunge of the naira means trouble for them. He said because manufacturers depend on imports, they would necessarily increase prices of their products to reflect rising cost of inputs. He said the snag however, is that since those who buy the products are workers whose wages are not increasing, most manufacturers who could not cope might be forced to close shop or embark on massive job cuts or send a percentage of the work force into redundancy.
Experts say that depreciation in the value of any currency (in this case the Naira), which simply means that more quantities of the local currency is required to exchange for a unit of other international currencies such as the Dollar, the Pound sterling, the Euro, etc should lead to higher prices considering that higher import and production costs would be fed into the domestic economy, which are often borne by consumers. The high cost of production makes it difficult for manufacturing companies to record good profit, and this might force investors to shift emphasis from production to buying and selling. This in turn, might lead to unprecedented job losses in various sectors of the economy.
Apart from possible job losses, Yusuf says, “We would see a further increase in interest rates, which means an added pressure on the operating cost of investors in the economy. High interest rates will ultimately affect profit margins. The impact is not just on the real sector, but the broad spectrum of investors in the economy. We are therefore, likely to see interest rates moving to new thresholds of between 25 and 30 per cent. If other charges are added, the cost of fund could be in excess of 30 percent.”
He argued that the reality of the current economic and business climate is that unemployment crisis is escalating while profit margins especially in the real sector are declining because of productivity challenges. He also revealed that currently, consumer demand is weak while interest rates are prohibitive, which explains why the mortality rate of manufacturing concerns especially small business remains high.
Yusuf therefore, called for policy choices that would stimulate the economy, even at the risk of inflation, insisting that boosting economic activities more than anything else would increase output and invariably lead to job creation. Such call has become necessary in view of the fact that the naira is a factor cost as well as a measure of value. As a factor cost, the depreciation of the naira implies that it would cost more for operators to import goods and services.
As a store of value, a depreciating naira sometimes would result in flight to foreign exchange as a more assured store of value, leading to the so called ‘dollarisation’ of the economy, which increases the pressure on the foreign exchange market thereby worsening the exchange rate position.
For Economist and foremost industrialist, Henry Boyo, a depreciating naira portends woe and deepening poverty for Nigeria. “It is clear that depreciating naira portends woe and deepening poverty for our country, particularly with regard to industrial survival, employment, inflation and national debt,” he said, adding that the fundamental nucleus of his advocacy has been the paradox of a depreciating naira even when there is increasing expansion of dollar supply.
To stabilise the Naira, Boyo thinks that CBN should rethink its capture of crude oil export Dollar earnings and their substitution with Naira at rates, which are unilaterally determined by the apex bank. He argued the approach is not only a poison in the path of an appropriate naira value, but also a major stumbling block against revitalisation of the economy.
He insists that the Nigerian economy would be on recovery path once Dollar-derived revenue is allocated with the instrument of CBN registered certificates. “CBN’s monopoly of Naira and Dollar supply is unhealthy,” he argued, adding that “In its place, Dollar-derived revenue should be allocated with the instrument of CBN registered Dollar certificates (strictly not cash), so that constitutional beneficiaries can separately approach the money deposit banks to convert their certificates to Naira cash as and when required before spending.”
Other measures canvassed by experts to stabilise the naira and the economy include addressing the huge infrastructure deficit particularly the provision of power supply, water, transportation (roads and railways), etc. Olusemore insists that with a renewed commitment to the fight against corruption as well as tackling the challenge of power, which has not improved despite the reforms in the power sector, the Naira and the manufacturing sector would be on their way to recovery.
