Forex scarcity forces manufacturers to get creative

Nigeria’s manufacturers have devised ways to access foreign exchange given the perennial scarcity of forex in the official Central Bank window, otherwise called Nigerian Autonomous Foreign Exchange Market (NAFEX) or the I&E Window.

The I&E FX Window is the market trading segment for investors, exporters, and end Users that allows for FX trades to be made at a market-determined exchange rate. But challenges with meeting the growing demand for forex have forced manufacturers to rely on a combination of creative ways to access the forex that they need.

Nairametrics investigation reveals some of the manufacturers get their forex through a combination of official and unofficial means often times at risk of receiving illicit global money flows.

Pervasive dollar scarcity

The current dollar scarcity being experienced in the country started in early 2020, a few weeks into the pandemic and months after the apex bank withdrew its OMO policy of giving out high-interest rates in exchange for foreign portfolio inflows.

The first wave of official confirmation came from members of the Manufacturers Association of Nigeria (MAN) who in 2020, raised the alarm that they experienced difficulty obtaining forex “for five weeks due to lack of Central Bank’s interventions.”

The scarcity was confirmed at the time by FBNQuest in a note on May 7, when it said, “There is an estimated $1 billion backlog of unmet dollar demand.”

While some complained of access to forex others who were able to access revealed it cost a bit more to buy when compared to the official market price. Unilever, an FMCG company, revealed that the time that it bought dollars at 9 percent above market rates.

It is now three years since then and the disparity between the official and parallel market rates have only widened currently by as much as 70% in price differentials.

Manufacturers get creative

To meet their demand manufacturers have gotten creative by leveraging on sourcing from the official window (when available), black market, dollar receipts, import substitutions, related parties, or by reducing imports of raw materials inputs.

Sourcing from CBN window – Manufacturers, such as cement companies, BUA tend to rely on the CBN window primarily for the purchase of spare parts. “For the rest of our operations such as the purchase of spare parts or new equipment, we rely on sourcing FX from the CBN, using the I&E window”, its CEO, Yusuf Binji, revealed in the company’s 2021 Annual Report and Accounts.

But while large corporations like BUA and Dangote can still access forex from the official window it hardly meets their demand requiring that they will rely on other sources to meet their demand. Smaller businesses are not anywhere close to securing forex from the official window.

The Black Market – Most manufacturers however admit to obtaining forex from the black market despite the about N300 difference between the official market and the black market.

Commenting on the move by manufacturers, Shola Obadimu, director-general of the Nigerian Association of Commerce, Industry, Mines, and Agriculture (NACCIMA), in a chat with Nairametrics said, “If the banking system cannot give us what we want, we go to the alternative market.”

Other manufacturers who spoke to Nairametrics reveal they get their forex via “inflows” which is a term for trading forex via international bank transfers between a bank account outside Nigeria and the payment for the forex closed in naira in a local bank account.

However, the inflow market bears several risks that can range from purchasing illicit money flows, to terrorist financing and money laundering. Most manufacturers mitigate the risk by vetting the sellers of the forex and their source of inflow.

Dollar receipts – Some manufacturers are able to generate dollar receipts which also represent inflow from exports. Some of them in this category are Olam, BUA, and Dangote Cement.

The other part of the BUA MD’s statement lends support to this finding. He said, “for the rest of our operations such as the purchase of spare parts, we rely on …making use of FX proceeds generated from cement export.”

In a WhatsApp chat with Nairametrics, Ade Adefeko, Vice President at Olam, said the conglomerate’s source of forex is “exports only”. “We are the largest non-oil exporter,” Adefeko concluded.

Most oil and gas export companies like Seplat also earn a significant amount of their revenues in dollars and tap into this inflow to meet the cost of their foreign currency related expenses.

Related Party – For companies that do not have export earnings, now rely on forex bailouts from their parent companies in Europe. Some of the bailouts are in the form of interest-linked loans while others are interest-free loans.

For example, PZ Cussons revealed in its latest full-year results that it obtained a $40 million interest-linked finance from its parent company.

Nestle Nigeria Plc, one of the country’s largest food manufacturing companies, also relies on intercompany loans to fund its forex needs.

In its 2022 half-year results, the company reported it has obtained intercompany loans to the tune of $160 million at an average interest rate of about USD Libor plus 11.34% and including a moratorium of interest payments.

Many more foreign-owned and managed companies utilize the same strategy to meet forex needs.

Import substitution – Manufacturers are able to conserve forex by getting local alternatives from previously imported machinery or raw materials.

“We continue to reduce our reliance on imported raw materials as a strategy to manage the (FX) risk. For instance, we substituted local coal with LNG at our Sokoto plant to improve our mix and sought opportunities to replace imported spares with local substitutes,” Binji.

The Dangote Group is following a similar route. “We make sure we look at things that can be produced locally”, Olaukunle Alake, group managing director, once said at an infrastructure event organised by the African Finance Corporation (AFC).

What NACCIMA is saying -The director-general of the Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture (NACCIMA), Mr. Shola Obadimu, in a chat with Nairametrics, said manufacturers are sourcing forex the same way with ordinary Nigerians.

“If the banking system cannot give us what we want, we go to the alternative market. The manufacturers who are exporting goods have asked for a special window, which is the official rate the government has for those who go on pilgrimage.

If those who go on pilgrimage are given a special forex window, which guarantees them an official rate, why not extend it to manufacturers who employ and pay staff and also pay taxes? The difference between the official rate and the parallel market is too wide, that’s about N300.

They are getting it at N420 and selling it to us for as high as N740. All this is adding to the cost of operations which is weighing down the manufacturers”.
Solutions?

How can the CBN solve the scarcity problem?

Professor of Economics at the Lagos Business school, Bongo Adi, thinks that the apex bank has found itself in a conundrum. “They are caught between the Devil and the Deep Blue Sea”, he said.

He expatiates:

“Deregulation would have been countenanced if the country isn’t so neck deep in debt, and foreign revenue is scanty. Borrowed against some predetermined exchange rate. Liberalizing now risks the naira falling to unforeseen and therefore, unplanned low. That must trap them in facing sovereign default. I want to believe that the recent policy on mutation of the naira note could be an experiment to see if it is possible to garner extant liquidity. But I cannot see how that helps anything”, he stated

Not liberalizing he explained means the current scarcity must continue, thereby hurting and squeezing the little life out of the real economy.

They should talk to the ministry of finance and the presidency and begin to find a solution to the debt crisis. Renegotiate, restructure, etc. Beyond direct macro actions, the FG should need to fight oil theft. That’s the beginning and end of their palaver.

Until all the wholistic approach of Professor Adi is applied, Dr. Bigman Nwabueze of Rivers State University recommends that “one thing the CBN can do to avoid a collapse of the manufacturing sector is to deliberately allocate a better chunk of forex to that sector.”