Manufacturers bleed as currency shortage hits harder
Worsening currency shortage is inflicting more hardship on manufacturers, reports ODINAKA ANUDU.
Nigerian manufacturers are struggling to access the foreign currency needed to import raw materials, spare parts and machinery.
Most of them turn to depository banks where one dollar sells for N415-N420, but the banks themselves do not have enough dollars to meet their needs.
The situation is such that an industrialist who asks for 1 million dollars only gets 2 to 5% of it from the banks, according to the players in the sector interviewed. The punch.
Manufacturers Association of Nigeria President Dr. Michael Ola Adebayo told The Punch that the situation was even worse as some would receive even less than that.
“There is no change anywhere. If you ask for, say, $100,000, they’ll only give you $1,000, and it may take you 90 days.
Banks would split the requested amount into chunks for months for manufacturers due to lack of foreign currency, he said.
Therefore, manufacturers have resorted to the parallel market, where one dollar is worth up to 615 naira, but this has had a severe impact on their production costs and the country’s inflationary trend.
Inflation in Nigeria reached 17.71% in May 2022. One of the main causes of inflation in Nigeria is the high cost of the dollar in the parallel market, which serves as a market for various sectors, according to economists.
how it started
The current currency crisis began in late 2014 when the price of crude oil plunged due to market volatility. Crude oil provides over 70% of Nigeria’s foreign exchange and any disruption in the oil market often hurts the Nigerian economy.
The problem worsened in 2016 when the price of crude oil fell below $40 per barrel and below $30 per barrel in December 2016.
Therefore, manufacturers began to change their plans and projections. Some of them, who could not resist the pressure, had to close their doors.
By August 2016, at least 54 manufacturing companies had closed, with more than 220,000 jobs lost in manufacturing and other ancillary sectors, according to the Manufacturers Association of Nigeria.
The Central Bank of Nigeria intervened in the market and ordered licensed brokers in the foreign exchange market to allocate 60% of their total foreign exchange purchases from all sources (including interbank) to manufacturers.
The CBN, in its circular dated August 22, 2016, had stated: “Following the examination of the returns on the disbursement of currencies to end users, it was observed that a negligible proportion of the sales of currencies is channeled towards the import raw materials for the manufacturing sector.
“In this context and in order to remedy the observed imbalance, authorized resellers are now invited to devote 60% of total purchases of currencies from all sources (interbank included) to end users strictly for the purpose of importing raw materials, plants and machinery.
“The 40% balance should be used to meet other business obligations, visible and invisible transactions. For the avoidance of doubt, authorized dealers should continue to publish weekly FX sales to end users in national newspapers and to promptly return statutory declarations to the CBN. Please ensure compliance accordingly, until otherwise advised.”
MAN welcomed the move at the time, but acknowledged that the dollars available were still not enough for manufacturers.
FX deteriorates, closes more businesses
However, with the volatility of the oil market and Nigeria’s inability to boost the non-oil export sector, the currency crisis worsened, claiming several victims.
One of the companies claimed by the forex crisis is Moak Industries.
Moak, a pure, bottled water company, was located in Sango-Ota, which was closed due to rising raw material costs.
Moak Industries CEO Olatunde Akintunde said The punch that the company had no choice but to close because it was unable to procure preforms, which were essential raw materials.
“The cost of the preforms prevented us from continuing our activities. Prices have increased four times in one year. We couldn’t continue so we had to shut down,” Moak Industries managing director Olatunde Akintunde said.
Another victim is Kenfrancis Farm, an agricultural processing company.
Kenfrancis Farms managing director Ifeanyi Okeleke said he also closed his small agricultural processing business when it was unable to continue operations due to the currency crisis.
“We had to leave the Nigerian manufacturing space as the cost of dollars made it virtually impossible to stay in business. You buy a pack of your raw materials at N20,000 today, the next day is N23,000. We are no longer interested in making anything here because the country is just comfortable with the import,” the Anambra state-based entrepreneur told The Punch.
SMEs are not left out
Small manufacturing companies are also faced with the mass of foreign exchange.
The former president of the National Association of Small Industrialists, Mr Segun Kuti-George, told The Punch that many small businesses in the productive sector of the economy were closing due to their inability to obtain raw materials when they needed it.
He said the inability of a nation like Nigeria to produce was a major challenge that must not continue.
Meanwhile, the president of the Small and Medium Enterprises Association of Nigeria, Degun Agboade, told The Punch that the situation threatened to kill off the country’s manufacturing sector.
“I know a lot of them who need spare parts and can’t get any because of the forex crisis. If they only ask for $2,000, they won’t even get it.
He urged the country to support small businesses to boost export-oriented businesses to earn more foreign exchange and minimize the impact of dollars on the economy.
Manufacturers are major importers
Check that the next time a 40ft container arrives at Apapa or Tin Can port, it may well be raw materials, spare parts or even packaging materials imported by a manufacturing company.
The percentage of local raw materials sourced from Nigerian manufacturers fell to 52.4% in 2021 from 57.5% obtained in 2020, according to MAN data.
According to MAN, the drop in local input sourcing from 57.5% to 52.4% was attributed to the scarcity of raw materials.
The reasons for the situation are obvious to many. Some raw materials are not available locally. And even when they are available, they are expensive or unsatisfactory in terms of quality.
A professor of ceramic engineering, Patrick Oaikhinan, explained that his experience in ceramic-related raw materials showed that Nigeria was still far from developing its raw materials.
“The main reason why companies source raw materials from abroad is the lack of details on the chemical and mineralogical compositions of the raw materials. Companies also ignore the physical and mechanical properties and application areas in various industries of these raw materials,” he said.
“We don’t know the extent of the deposits, let alone the chemical and mineralogical compositions of our raw materials. We do not have the laboratory to characterize the raw materials. If you do not know these compositions, you cannot formulate the products. If you use trial and error, you may not get the quality you want. Many local industries do not have laboratories to characterize raw materials before use because it is expensive,” he explained.
Manufacturers explore the export market
In order to overcome the currency crisis, several manufacturing companies started exporting their products in 2016.
That year, Flour Mills concluded the registration of its Daily Delight and its semolina in the ECOWAS trade liberalization program in order to earn foreign exchange and mitigate the impact of the crisis.
The ETLS allows products to be moved from one ECOWAS country to another without payment of duties/tariffs.
According to information obtained at the time from the Manufacturers Association of Nigeria Export Group, Rom Oil of Flour Mills has also registered its spread and margarine brands for export. Its subsidiary, Northern Flour, also prepared Massa Flour and Massavita for export.
Similarly, Guinness Nigeria plc has registered its drink Orijin for export to the regional market, and Dangote Group’s Agrosack has also been registered for export in the PLEC.
While Mamuda registered her bags, Nasco prepared her biscuits for export.
Invest in upstream integration
One of the solutions to the forex crisis in the manufacturing sector is backward integration, which occurs when a company buys or acquires its supplier. Dangote, Flour Mills of Nigeria, PZ Wilmar, BUA among others have all invested in backward integration but this is not enough to satisfy market cravings.
Dangote and Flour Mills have invested billions in sugarcane plantations, while PZ Wilmar has acquired 26,500 hectares of land for palm oil plantations at Calaro Estate in Cross River State, spending more than 150 million dollars in the process. In addition, FrieslandCampina WAMCO has also set up more than 16 milk collection centers to acquire more raw milk locally.
But Oaikhinan called for a policy to develop local raw materials and make them more marketable, stressing that manufacturers must be funded by the CBN to develop upstream integration projects as they were expensive to undertake.
The chief executive of the Center for Promoting Private Enterprise, who was chief executive of the Lagos Chamber of Commerce and Industry, said it was high time Nigeria addressed its core industries.