Small, medium and large businesses in Nigeria that need dollars to source inputs and equipment are currently bearing the brunt of the foreign exchange reforms of President Bola Tinubu as naira tumbles.
Nigeria on June 14 floated its naira currency to unify its various FX rates but the reform has only further widened the rates as the currency has depreciated 61.4 against the dollar since the depreciation.
The naira exchanged for N747.87/per dollar on Monday from N463.38 as of June 13th, 2023 at the I and E window. While at the parallel market, the naira depreciated by 20.1 percent to N917 on Monday from N762 in June.
The worsening naira scarcity is inflicting more pain on businesses as the cost of production doubled amid low demand from cash-strapped consumers dealing with inflationary pressures.
“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,” Segun Kuti-George, national vice president of the Nigerian Association of Small-Scale Industrialists, said.
Gabriel Idahosa, deputy president of the Lagos Chamber of Commerce and Industry, 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 percent 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.
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The high cost of sourcing FX has also led to a surge in the cost of energy as manufacturers in the textile industry complained to BusinessDay that they spent about N21 million in July, up 90.1 percent 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,” said Hamma Kwajaffa, director-general of the Nigerian Textile Manufacturers Association.
“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 percent 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 percent 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 utilization 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 percent value added tax on diesel imports pushed its pump price by about 20 percent to as high as N870 per litre last month.
Energy is a key element of the production process. Nigeria’s inability to supply and distribute sufficient electricity has left businesses at the mercy of generators that consume diesel and petrol.
Manufacturers spend 40 percent 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,” Muda Yusuf, chief executive officer of the Centre for Promotion of Private Enterprises, 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.”
Read also: Naira falls across FX markets on rising demand for dollars
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,” Femi Egbesola, national president of the Association of Small Business Owners of Nigeria, 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.
The rising cost of energy and FX pushed the country’s inflation rate to a near 18-year high of 24.08 percent in July from 22.41 percent in the previous month, according to the National Bureau of Statistics.
Data from the latest Purchasing Managers’ Index (PMI), by Stanbic IBTC Bank shows that higher prices dropped business activities for the third straight month to 50.2 in August, the lowest in five months from 51.7 in July. Readings above 50.0 signal an improvement in business conditions, while those below show deterioration.
The challenging macroeconomic issues impacted the manufacturing sector as its growth rate slowed to the lowest in three years. According to the NBS, the real GDP growth of the sector stood at 2.2 percent in Q2, the lowest since Q2 2020.
Sola Obadimu, director-general of Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture, advised the president to identify key results areas for each of the ministers and set up key performance indicators for them.
“He should have a way of evaluating performance on periodic bases and communicate his expectations clearly to them,” he said.
BusinessDay reported on Tuesday that businesses were still awaiting the N200 billion intervention the Federal Government announced on July 31, to cushion the impacts of petrol subsidy removal and naira devaluation.
