The Central Bank of Nigeria (CBN) has overtime, pledged to meet all genuine foreign exchange (forex) demands of individuals and manufacturers. But that promise has collapsed in the face of rising forex scarcity and ongoing rationalisation of available forex for qualified users, especially manufacturers. Findings showed that banks now peg maximum forex approval per Letter of Credit (LC) at N50 million ($158,000). Manufacturers now source extra dollar for raw materials imports from the parallel market, with dire consequence on product costs and sustainability of their operations. That this is happening at a time more productive activities are needed to steer the economy out of recession and cut job losses across different segments of the economy is worrisome, writes COLLINS NWEZE.
It was Monday morning on April 24. As usual, the managing director of a Tier-1 bank was going through several files/requests on his table that needed urgent approval.
The first on the list was a Letter of Credit (LC) of $200,000 from a leading Fast Moving Consumer Goods (FMCG) manufacturing company meant for the importation of production raw materials.
The LC is a letter from a bank to another bank (especially one in a different country) guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.
On seeing the LC, the bank chief took a deep breath, picked up the intercom and called the Head of Treasury to justify the request at this period of ‘severe dollar scarcity’.
Expectedly, the request was promptly adjusted to N50 million ($158,000), before it was approved. In the face of severe dollar scarcity and need to ensure even distribution of available funds to critical segments of the economy, including manufacturers, lenders now peg maximum value of LC for approval at $158,000.
The practice, which was confirmed by several bank customers affected by policy shift, is affecting the production volumes of major manufacturers and hurting turnover of major businesses.
A source within the bank said any LC above $158,000 has to be approved by the managing director and such approval will depend on the forex availability within the period.
“Customers can actually do LCs above $158,000, but have to source the excess from autonomous sources. The bank pegged it at that amount to ensure that the scarce dollar goes round. We know it is hurting businesses of our major customers, but we are only complying with directives from above,” the source told the reporter.
Speaking further, the source explained that even where the LC customer is drawing from a facility account, the credit can only cover $158,000.
“Anything outside this limit has to be approved by the managing director no matter how important the customer is,” the source said.
Speaking also on the trend, Managing Director, Tempo Paper & Packaging Limited, Seun Obasanjo, said he opened three LCs before he was able to access $250,000 needed to import raw materials for his company.
The company based in Otta, Ogun State, produces Adstar type polypropylene, agro-allied and shopping bags needed for the production requirements of cements and other products.
“The money came in three tranches- $100,000; $100,000 and $50,000 for the required amount to be achieved. I believe the investor /exporter window opened by the CBN will increase dollar liquidity and help banks to meet their obligations better,” he said in a telephone chat with the reporter.
Obasanjo said the banks have a big role to play in supporting the manufacturers, while the government should strive to fix the fundamental problems currently facing the economy, which include over dependence on crude oil, too much import and small export.
He said every major manufacturer has felt pains of forex scarcity, adding that he bought dollar at N520/$ before the CBN interventions helped to stablise the local currency at current level. “For those of us employing people, we have no option than to stay in business no matter how much the naira exchanges against the dollar. People that need dollar to pay school fees, and perhaps medical bills may decide to wait until a favourable exchange rate is achieved, but manufacturers have to maintain their customer base, and remain in business. For us, commerce has to go on,” he said.
He said the CBN has done well in stablising the exchange rate, but believed that more stills needs to be done. “The CBN is doing its best based on the volume of dollar at its disposal, but more still needs to be done,” he said.
A manufacturer, who does not want his name in print, claims the policy is affecting his operations, and also clarifies what is going on. “The CBN has, in trying to manage the available dollar for imports and ensure that it goes round all genuine manufacturers and prevent a situation whereby a few people get allocations, and a majority of others do not get, pegged each invoice to be financed for import at $158,000. Before now, only very few people were getting forex, in short it was a matter of ‘who you know’ and that was perhaps why they adopted this new strategy,” he said.
Continuing, she said the apex bank preferred to make the dollar spread round more importers rather than giving $1 million or $2 million to few people and majority of others get nothing.
“They want the little available dollar to go round everybody. But the big question is: ‘For big manufacturing companies, what will $158,000 do for them? That will lead to retrenchment and underutilisation of production capacity,” he said.
Sounding optimistic, he hoped that in the future, if the availability of dollars improves, the CBN may review that plan but for now, that is the situation.
The Lagos Chamber of Commerce and Industry (LCCI) called on the CBN to review its forex policy and give manufacturers better opportunity to thrive. Its Director-General, Muda Yusuf, picked holes in the rationing of forex by banks, saying it would cut production volumes and discourage investments in the economy.
He said: “The recovery of the Nigerian economy will be driven largely by investors’ confidence. The good news is that some progress has been made in the last couple of weeks to shore up this confidence. The banks should therefore avoid any actions that could reverse this progress or undermine the growing confidence level.”
Yusuf said reports of rationing by banks could give wrong signals to the players in the economy, trigger another round of uncertainties and activate new momentum of speculative activities in the forex market. “What the economy needs is a forex market framework that ensures that all legitimate demands for forex are met. There are indications that the CBN has commenced the creation of this framework with the easing of restrictions in the export and investors windows,” he said.
The Investors’ and Exporters’ FX Window, which started on April 24, is the CBN’s latest attempt to lure back investors who fled in the past two years, exacerbating a crisis that caused the economy to shrink in 2016 for the first time in a quarter century.
The idea is that by creating a market for some types of investment transactions, policy makers can satisfy calls to float the currency without risking an inflationary spiral that may come from a formal devaluation.
Managing Director, Cowry Assets Limited, Johnson Chukwu, said $158,000 maximum amount of LC is a significant improvement compared to what obtains earlier in the year when companies could not even access $10,000.
He said that Nigeria’s forex earnings have improved, but the CBN does not have the capacity to meet all the forex demands. He said that the ongoing forex rationing is likely to end when the CBN has enough dollar to go round.
On whether the ongoing rationing can lead to job losses, he said: “Every economic situation has implications. Six months ago, you cannot even get $100,000. I believe we have suffered the worst of situations. The CBN has to prioritise its dollar disbursement plans because it does not have the wall chest to meet all demands,” he said.
Former Executive Director, Keystone Bank, Richard Obire, said the era of full forex availability is over, and we are in a regime where forex is scarce. He said the rationing of forex is not good enough for genuine manufacturers and could lead to more contraction in the economy if forex is not accessed at and when needed. “The economy has contracted and industrial capacity utilization at the end of 2016 was 25 per cent. “If companies are producing at 25 per cent capacity, expanding production to boost the employment market will require providing enough forex needed to fund import of raw materials for real sector operations.
He said although forex availability has improved, there is need for companies to also use local raw materials so as to reduce the demand for forex. He said that forex scarcity has led to many banks closing their branches, job losses in telecoms and other key sectors of the economy.
MTN Nigeria, for instance, a fortnight ago sacked 280 workers while Ecobank Nigeria closed 74 of its branches as rising cost of operations worsened.
Obire said not adequately providing forex to real sector operators can worsen the fate of the companies, as rising cost of operations impact on their profitability.
Still, Group Chief Executive Officer, Ecobank Group, Ade Ayeyemi, defended the forex policies and actions of the CBN.
He spoke in South Africa at the 2017 World Economic Forum for Africa. Ayeyemi said the CBN was in the best position to decide forex management issues based on facts available to the financial regulator.
In a note to investors, Managing Director, Afrinvest West Africa Limited, Ike Chioke, said the CBN’s- Purchasing Managers’ Index Report for April, showed an upturn in manufacturing activity in the first month of the new quarter.
Buoyed by knock-on effects of the significant improvement in fiscal balance and the forex market – particularly related to forex liquidity – April manufacturing PMI expanded to 51.1 points (relative to 47.7 points in March 2017) after three consecutive months of contraction, settling in the positive region for the first time in 2017.
The major drivers of the expansion in composite PMI were production level (58.5 points), new orders (50.1 points), and inventories (50.6 points) sub-indices which grew 7.7 percentage points (ppts), 4.5ppts and 1.5ppts month-on-month respectively to more than offset sustained contraction in employment level and relapse in supplier delivery time which posted an increase in March.
He said: “Whilst we believe that the improvements in the manufacturing and non-manufacturing sectors reaffirm that the economy is on the path to recovery in the second quarter, as other macroeconomic indicators also suggest the decline in the employment sub-index of the manufacturing and non-manufacturing sectors remains a concern.”
Chioke said the step-up in the CBN’s forex interventions has had a greater-than-expected impact arguing that the regulator may not abandon multiple currency practices and move to unification of the many rates. “We do not feel that these practices will generate sufficient autonomous inflows to create a fully functioning forex market. A downward adjustment to the interbank rate is likely,” he said.
Other analysts said ongoing rationing of forex will adversely affect the manufacturing sector, and reverse the gains of recent months.
For instance, at the height of forex scarcity last year, South African firms, Truworths and Clover announced their exit from Nigeria back in February last year, due to difficult operating environment. Tiger Brands also sold off its stake in Nigeria-based Dangote Flour, following challenging economic environment, biggest of which was forex scarcity.
Managing Director, Financial Derivatives Company Limited, Bismarck Rewane, said the CBN supplied total of $1.2 billion in April into the interbank market, with intervention frequency of two to three times per week.
Also, the cumulative forex supply since February 20, this year to date remained at $3.61 billion, compared to $5.83 billion sold in January to April 2016.
Rewane explained that the new forex window for investors and exporters is trading at N374 to 380/$ leading to an acute naira shortage. However, the external reserves grew marginally to $31 billion and can take care of import and payment cover of 6.9 months.
He said that foreign portfolio investors shun the Nigerian market as they await an adjustment in the official rate and remain skeptical about the investor/export forex window.
Rewane said Nigeria is expected to return to positive growth this year at 0.8 per cent, and that will be driven by a recovery in oil production, continued growth in agriculture, and higher public investment.
Speaking at the Access Bank Forex Seminar 2017 held in in Lagos at the weekend, with the theme: “The Nigerian Foreign Exchange Market- Paving the Way towards Restoring Confidence: A Market Perspective”, Rewane attributed the current naira appreciation to a sharp increase in Nigeria’s oil revenue estimated at a monthly value of $2.5 billion as well as the opening of a new investor/exporters window as a proxy for price discovery.
Speaking on exchange rate stability, Managing Director, Renaissance Capital (RenCap) Nigeria, Temi Popoola, said the rate at which the naira exchanges against the dollar is inconsequential. He said the most important thing was for the investors to be able to come in and exit at will without encumbrances.
“The argument should not be whether the naira is exchanged at N300 or N450 to dollar. It should be whether investors will be able to come in and go out of the market,” he said.
Group Head, Global Markets at Access Bank Plc, Dapo Olagunju, said the new window allows investors to sell dollars at any rate they chose and is expected to help bring investors’ confidence into the market.
He said: “Investors /Exporters FX Window help participants execute deals as based on their own market agreement. Today, both the dollar demand and supply sides are beginning to talk to each other and there is likely to be rate convergence soon,” he said.
Continuing, he said previously, the CBN had over $4 billion forex backlog, and found it difficult to settle ticket remittances of airlines.
“Today, we are seeing customers buying Business Travel Allowances and Personal Travel Allowances with ease. It has been a difficult time for banks. We also see a regulator that is ready to sanction any bank that violates its set rules,” he said during the forex seminar organised by Access Bank at the weekend.
Assuring Access Bank customers that it will continue to meet their demands, Olagunju said: “There was a time Access Bank alone sold $1.5 billion to its customers in 2015. That shows we are with you all the time. We will ensure we protect your businesses because we know that if the exchange rate deteriorates further, many people will be hurt”.
The Chief Executive Officer FMDQ OTC Securities Exchange, Bola Onadele, said foreign investors are warming to the foreign-exchange window to ease a severe shortage of dollars.
The naira opened on Monday at 380.31 per dollar in the window. That’s about 17 per cent weaker than the interbank rate of 315 and close to the rate of 391 on the black-market, which many Nigerian businesses were forced to utilise as hard-currency supplies through official channels dried up.
Eligible transactions in the window include those for loan repayments, interest payments, capital repatriation and remittances.
While Nigeria devalued the naira on the interbank market last June, it stopped short of allowing a free float and intervened to prop up the exchange rate. Investors, concerned that the currency was overvalued, have stayed on the sidelines.
Onadele, a former chief trader at Citigroup Inc.’s Nigerian unit who criticised the CBN last October for not freely floating the naira, said this time around Governor Godwin Emefiele was relaxed about the weaker rate.
“The governor isn’t calling up, worrying about the rate,” Onadele said. “The CBN is ready to sell into this window, via the commercial banks. Any foreign portfolio investor that wants to leave Nigeria will get its money. If a foreign portfolio investor wants $100 million tomorrow, its bank should present the trade to the central bank. As long as the investor’s satisfied paying the rate, it will be done.”
The CBN has consistently warned lenders to play by the rule in the forex market and equally sanctioned those that violate regulations. Last week, the CBN barred 16 commercial banks from accessing forex from the newly instituted SMEs Forex Window for refusing to sell forex to genuine Small and Medium Enterprises (SMEs) that met disbursement requirements.
CBN spokesman Isaac Okorafor said banks were barred for refusing to sell forex to the SME actors after accessing over $300 million offered to them via the SMEs wholesale forex window since its creation in April.The SMEs Forex Window, which opened about a month ago was designed to help SMEs import eligible finished and semi-finished items not exceeding $20,000 for an enterprise per quarter.
Okorafor said appropriate sanctions are spelt out by the CBN Act and the Banks and Other Financial Institutions Act (BOFIA). He said staff and even chief executives of banks the affected banks could be punished where necessary.
The CBN spokesman said the apex bank has already received series of complaints from bank customers, especially those that operate in the SMEs segment of the market that banks are frustrating their efforts at getting forex.
He said some entrepreneurs still complain that banks are frustrating their efforts at obtaining forex for their eligible imports after the stipulated 48 hours.
He appealed to bank customers and the SMEs to “please give us concrete evidence against these banks so that we can hold them responsible by way of sanctions.”
He added: “Get a photocopy of your Form Q, Form X, Form A or Form M. Give us the name of the bank, branch and send to us and we will deal with them as example to others.
“The only way we can make things better for Nigerians is for them to call the CBN whenever they are in trouble or whenever, or are getting frustrated by banks.”
He warned that the CBN would not allow any form of instability in the interbank forex market. He urged stakeholders to play by the rules for the benefit of the country and its economy.
