With costs escalation manufacturers are losing credit lines – FX demand hits $1.16b

August 17, 2020
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In the search of a uniform framework that could potentially help the whole nation, the Central Bank of Nigeria, CBN, has adjusted foreign exchange rates. As a result, local demand has hit $1.16 billion thanks to the exceptional obligations. However, many local companies and manufacturers in Nigeria have noted that the factories are on the verge of shutting down, and this will happen very soon if the obligations of over one year to foreign suppliers can not be fulfilled.

In addition, the integration agenda is also stalling backward, as a result of locally sourced materials being priced at the same level that they should have been imported.

A study published recently about the activities from 2017 until 2019 show that the backward integration is at a very steady decline, this mainly happens because of local pricing and availability of raw materials in Nigeria. Also, the exchange rate is being affected a lot, recently, Naira has been selling on CNB to N379/$1.

Foreign exchange market in Nigeria

Forex trading in the country is pretty new, and although the field is developing at a very fast pace, there still are a lot of challenges. To overcome these challenges, the government will have to work very hard with the help of the Central Bank of the country.

Because of such a situation, to make sure that the market can be successful in the country, there are many things that the Central bank has to do. However, these steps should be taken with much care. If you want to learn more about the market in the country, you can follow this link for more detailed information.

The price of Naira and plans of Central Bank

The price of Naira has been changing quite a lot in the last few weeks. On July 3rd, the Naira rate was adjusted by CBN at the Secondary Market Intervention Sales. from N360/$1 to N380/$1. The very similar thing happened on July 7, the regulator adjusted the price to N381/$1. As a result of these changes, many have started talking about the possible unification of the exchange rates.

But, the tricky thing is that the exchange rate was left unchanged on its website, at N361/$1. Naira is now under huge pressure as a result of low oil prices and some other challenges, as a result of which, it is selling on parallel markets for about N475/$1 and at the I&E window, N386/$1.

Nigeria’s central bank has taken some steps to help overcome this situation, for example, the bank originally sought to get in a way of the decline of foreign exchange by suspending dollar auctions in march of this year, after which it continued to work a lot more on the supply.

As much as this decision was gratified by the Manufacturers Association of Nigeria, they also have noted that the bank should do everything to minimize the intensity of the pain. They are saying that the best way to do so is to consider the outstanding obligations of manufacturers from the Q2 of 2019.

What are the experts saying?

Many of the local manufacturers claim that the outstanding obligations that were originally given at N345/$1 prior to the unification need to have some type of a privilege that would be settled somewhere between N330 or N360 per USD. This would happen to enable banks to be able to redeem the obligation to foreign suppliers of the manufacturers. If this does not happen, experts are saying that it could have a very bad conscience. For example, factories could go as far as closing and central bank stimulus packages to the manufacturing sector would suffer from a major setback.

These experts are saying that it is very important to recognize unavoidable challenges that come naturally with the transition from multiple exchange regime to the domain of a single exchange rate. This mostly would affect the situation because of the USD dominated loans and offsetting existed credit commitments to foreign suppliers of materials.

To overcome current challenges, experts are calling on the Central Bank of Nigeria to come up with an effective strategy that could help the country to successfully transition from the current multiple windows to a single and efficient one. In addition, there are two main objectives that the strategy should be created after.

What are the two main objectives?

These two objectives are something that has the potential to make this transition effective. First of all, the number one objective is to work on the limitation of short-term pains until there is some type of a way of responding smoothly with an inward-oriented rescue guideline until the efficiency is gained. The second one is to come up with a plan that could make this process a lot faster.

These changes must happen as fast as possible. As many companies have raised concerns about the liquidity crisis in the FX market. According to them, it is becoming unbearable as many companies have already faced a number of challenges when it comes to importing raw materials., equipment, and other important materials.

COVID-19 and possible outcome

It should not come as a surprise that the ongoing pandemic had its impact on the market. However, the Governor of the Central Bank of Nigeria had a conversation with the representatives of banks calling on to them to not panic over letters of credit and other obligations that were already extended to business because of the crisis.

In addition to this, the bank also found key players in the local pharmaceutical market and granted them Naira and Forex finding facilities. This happened to support the procurement of raw materials and also to be able to equip the local drug production in the country with needed materials.

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