Lucky Fiakpa
15 December 2008
analysis
The naira depreciation which started a fortnight ago has sent cold shivers down the spines of manufacturers and are pleadingwith the monetary authorities to do something to firm the downwards movement of the currency to save their businesses, Lucky Fiakpa writes;
Alhaji Bashir Borodo, the President of the Manufacturing Association of Nigeria, MAN, would want the Central Bank of Nigeria, CBN, to do something to firm the downwards movement of the naira fast in other to save manufacturers another round of angonising moment. He believes the current operating environment is bad enough and a further fall in the value of the naira, could spell disaster for the sector.
In a chat with Financial Vanguard, the MAN President said the decline in the value of the Nigerian currency against the dollar in the foreign exchange market will have an adverse effect on the cost of production in two ways. First, he said, cost of imported raw materials will rise which will further hike cost of production and of course, lead to increase in general price level across the country.
He also believes the falling value of the naira if not arrested could also lead to increase in interest rates. Put differently, as more naira is generated to buy dollar in the foreign exchange market, what would be left for lending for businesses would be less, which will in turn push up the lending rates by banks.
Speaking on behalf of other manufacturers, he says, "We believe the Central Bank should intervene effectively to preserve the value of the naira and protect the macro-economic gains achieved in the last four years. Otherwise, we will be repeating our experiences of four years ago".
Some other manufacturers even believe the problem is worse than that. A source close to the Lagos Chambers of Commerce and Industries, LCCI, told Financial Vanguard that it will take divine intervention for businesses to survive next year if the naira continues to fall. He said there are certain businesses that take goods from manufacturers abroad, sell and return money at the end of sales. "Mind you, these contracts were entered into and the goods sold when the naira was stronger. At the current position, it means the agent in Nigeria may have to look for additional money to be able to pay the foreign manufacturer the agreed sum," he said.
Apart from that, he said that some manufacturers had opened letters of credit for imports when the naira was strong. With the fallen value of the currency now, the importer may have to source for more funds to be able to finance the same equipment or materials. "He will be lucky if he can pass on the additional cost to the consumers if not he may have to bear the cost all alone with attendant consequences on the cost of operation. This could result in drop in profit margins and there would be the temptation to lay off workers," he says.
Bola Olayinka, the Managing Director of DN Meyers Plc and Chairman, Manufacturers Association of Nigeria, Paint Group, painted a gloomier picture. "As if the situation is not bad enough for manufacturers, right now, the banks are not even willing to open letters of credit for anyone. The situation is so uncertain and only God can save the manufacturing sector from the way things are going at the moment," he said.
The naira, which had recorded relative stability over the last three years, took a turn for the worse when it shed N1.11 against the dollar two weeks ago, fuelling apprehension among major dealers and operators of a bleak next year amid a global financial meltdown. At the official market, the Wholesale Dutch Auction System (WDAS), it lost N7 and traded at N127.5 to the Dollar, a development many believe was connected with the current global financial meltdown which has weakened oil demand in the US, Nigeria's major oil importer as well as the 2009 Appropriation Bill whose indices are not too encouraging. At the parallel market and bureau de change the rates performed even poorly, nose-diving to as low as N137 to the dollar.
As against market demand of about $2 billion, the Central Bank of Nigeria, CBN had supplied only $100 million at that WDAS session, leaving banks to source for dollars from other areas thereby exerting downward pressure on the naira. Dealers at NIFEX said banks refused to quote any spreads to avoid settlement defaults, as there were no dollars to trade, which heightened fears that the Federal Government might have taken a decision to allow the naira fall to save the dollar due to a weakening of the nation's fiscal position as a result of falling oil prices.
Dashed Expectation
Nevertheless, it was thought that the fall in the naira value was precipitated by the Eid el Kabir holidays which led to the closure of the official foreign exchange market last Monday.
But at the resumption of the market last Wednesday, the naira, continued its free fall at the Wholesale Dutch Auction System (WDAS), losing N2.56 or two per cent against the United States dollar - to trade at the N132.56 to the dollar. It also shed N2 against the dollar at the inter-market to close at N134 to the dollar.
The naira had traded at N130 to the dollar and N132 to the dollar respectively at the WDAS and inter-bank market respectively the previous Friday. The inter-bank foreign exchange market is where banks, on behalf of their customers, buy foreign exchange from one another to meet their daily needs, while the WDAS moderated by the Central Bank of Nigeria (CBN) is the official market where foreign exchange end users through their banks bid for foreign exchange.
The WDAS, introduced in February 2006 to bridge the gap between the official and black market, opens for trading twice a week - Mondays and Wednesdays. The market which had hitherto been waiting for the promised intervention by the Central Bank (CBN) saw the value of the naira drop by N5.5 from the N127 to the dollar it sold for last week.
The dollar was sold at the open market for N128 to the dollar Wednesday morning but in the afternoon, when the CBN announced the result of the auction, the open market shivered and raided the stake to N140 to the dollar and N210 to the Pound Sterling.
Operators in the open market said there was a high level of uncertainty in the foreign exchange market as banks are buying to store and are not selling. A good number of operators are not very sure of the direction of the market at the moment.
The amount of dollars sold by the CBN at the auction was not enough to revive the inter-bank market, which had been shut since the middle of last week. "Demand is still building up and the Central Bank is not selling enough dollars to meet all bids at the auction," indicating that there may be some unofficial decision by the government to devalue the naira to enable it earn more naira in the face of declining oil prices and falling production levels.
Some operators see this as double standard of some kind. The CBN governor, Professor Chukwuma Soludo, had promised a fortnight ago, shortly after the initial depreciation of the currency that the apex bank would supply sufficient forex to stabilize the market. He even said that speculators would be taken by surprise when suddenly the market would be flooded with forex.
But for the same regulator to now stand by and watch the currency crash some people say speaks volume. "What is happening at the market now is at variance with what Soludo is saying unless he is making us to believe one thing and doing the opposite because, I cannot see CBN claiming to be standing for the stability of the naira and now watching or even encouraging devaluation," a market operator said.
The managing director of Personal Trust Savings and Loans Limited, Anthony Owuye, was quoted as saying that the action of CBN translates to unofficial devaluation of the naira. According to him, the fundamental problem of the budget is that the bloated N1.09 trillion deficits has to be financed and the only option left to government now is to devalue the naira so as to rake in enough to pay for its deficit.
He believes the monetary policy has failed in addressing the current problem. The only way out is to explore fiscal policy option to meet some of the objectives as spelt out in the budget.
He decried the nation's continued dependence on oil as the major foreign exchange earner, saying it portends danger for the economy. He even doubt if the proposed bonds the Federal Government intends to float will attract buyers. Worse still, he opined that since the country is operating an import dependent economy, prices of goods will rise and that will mean hardship for Nigerians.
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