The present relative ease in accessing foreign exchange by manufacturers appears to have put into distant memory, the forex crisis that almost crippled the nation’s manufacturing sector and threw it into recession. Industrialists complained about a N500 billion loan caused by the modified flexible exchange rate difference, but with the recent revelation that they are repaying the loan, things couldn’t have turned out better. How were they able to do it? AJOSE SEHINDEMI examines the Investors’ and Exporters’ window’s contribution to it.
It now seems like it never happened; or that it happened ages ago. But it was just in the business season of 2016/2017 that manufacturers were off their heads, confused about how to solve a major problem that threatened their continued being in business. Investments running into several billion across several industries were at stake because manufacturers did not have access to imported raw materials; and that was because they did not have access to foreign exchange, which had become very scarce and the naira = dollar exchange rate had shot for the roof, hitting it, at one point, at N520 to $1. It was indeed a climate of serious concern as the fragile Nigerian manufacturing sector, which had long been left crippled, faced imminent total collapse, buffeted too by high-interest rate, which put serious pressure on many manufacturers’ operational cash flow positions.
It was a tale of woes, especially for those without deep pockets as their little savings were used up to try to mitigate the situation, while others, such as Erisco Foods, took a duck at the height of the crisis. With the hues and cries that enveloped the period, the Central Bank of Nigeria (CBN), the country’s apex bank and manager of the domestic currency, the naira, which had stood its grounds against calls and suggestions from local and international individuals and organisations that market forces should be allowed to determine the exchange rate of the naira, decided to save the situation by introducing a flexible exchange rate policy on June 20, 2016.
That singular action of intervention led to something else in the manufacturing sector – a debt pile-up of over N500 billion incurred by manufacturers as a result of differentials in the Letters of Credit and Form Ms, already approved to manufacturers at N197/US$ before the introduction of the then new flexible exchange rate, where manufacturers were expected to be redeemed at N320 to the $1.
The exchange rate losses required additional working capital to shore up cash difference between N320 and N197, which unfortunately could not be met by most of them. In the midst of it all, the CBN was introducing different forex liberation regimes into the financial polity, amongst which was the establishment of a forex window for Investors’ & Exporters’ (I&E) at which pricing for the dollar would be determined by market forces, against previously held stance by the government banker.
The I&E window, or appropriately – the Nigerian Autonomous Foreign Exchange Rate Fixing (NAFEX) mechanism – was established in April 2017 “to boost liquidity in the FX market and ensure timely execution and settlement for eligible transactions as stipulated by the CBN. The operating modality is on a willing buyer, willing seller basis and the exchange rates of the transactions are as agreed between Authorised Dealers and their counterparties, which engender transparency and liquidity.
A year after, it seems to have been the long-sought-for a solution, and the CBN had nailed it as relative stability enveloped the forex market.
Aside helping to ensure exchange rate stability by attracting significant dollar inflow into the country, the I&E forex window has positively impacted on the nation’s economic growth as manufacturers can now access the international market for raw materials, which are not on the prohibited lists and are determined to be crucial as local sourcing is the way forward to avoid a reoccurrence of the challenges, according to CBN.
Analysts at FSDH Merchant Bank in a report, sum up the benefits of the window as they said the implementation of the I & E has increased the supply of foreign exchange into the Nigerian economy and in addition, it has attracted more investments into Nigeria as consequently, they observed relative stability in the foreign exchange market as companies and individuals are now able to access more foreign exchange in the market than before to carry out eligible transactions and economic activities are gradually picking up.
“The introduction of the window has encouraged exporters to bring back their export proceeds to the country and through the official sources, thus increasing the stock of foreign exchange in the country. Another important gain of the window is that it has attracted more foreign capital into Nigeria for various forms of investment,” the analysts added.
The recent disclosure by some members of the organised private sector (OPS) that the introduction of the window and other forex windows have led to the repayment of financial commitment valued at N500 billion to foreign trade partners, revealed the confidence now reposed in the system.
Kola Jamodu, chairman, Nigerian Breweries Plc, and an industrialist, said the apex bank’s intervention brought about considerable improvement in accessing foreign exchange by manufacturers for the importation of raw materials and led to improvement in liquidity, which enhanced the capability to import raw materials, boosted capacity utilisation and helped in the payment of financial commitments to foreign trade partners. Jamodu said there has been relative stability in the exchange rates and availability of forex since the apex bank created the new forex window for investors and exporters and that this has also eased manufacturers’ plight.
Particularly, the industrialist noted that the window also led to the improvement in liquidity, which enhanced the capability to import raw materials for production.
According to industry watchers, the increase in foreign capital importation due to the implementation of the I&E forex window was responsible for the Bull Run that Nigerians experienced in the stock market last year. While the praises appear to just be starting, some analysts are of the belief that the stability might not last as it’s being held with proceeds from oil sales hence, they said, limited forex and uncertainties caused by the exchange rate mean consumers are having to bear the inevitable price surges.
Isaac Okorafor, acting director of CBN’ corporate communications department, is bullish about the apex bank’s ability to sustain the stability in the market. As the bank’s ability to intervene in the market to maintain stability has been helped by Nigeria’s rising foreign reserves levels, now close to $50 million, Okorafor states that the CBN was even more determined to sustain the gains recorded through the various policy options it took in the course of stemming the depletion of the external reserves and steering Nigeria out of recession.