Naira continues its free fall against other convertible currencies, especially the United States dollar, hitting an unprecedented low of over N700 to a dollar last week. Arguably, the worst foreign exchange crisis to hit Africa’s largest oil producer, Nigerians and business owners, especially members of the Organised Private Sector (OPS), are groaning over the huge toll the crisis is taking on their socio-economic life and businesses. CHIKODI OKEREOCHA, MUYIWA LUCAS, COLLINS NWEZE and OKWY IROEGBU-CHIKEZIE report.
The Chief Executive Officer (CEO), Common Sense Group, a company with interest in real estate, training and seminars, consultancy and investment, Dr. Olumide Emmanuel, is, by his own admission, unperturbed by the crisis rocking Nigeria’s foreign exchange market, where the value of the naira has been crashing against major international currencies, especially the United States dollar. It was a disaster forewarned and shouldn’t be surprising to anyone, he said.
“Since 2016, I have been telling whoever cared to listen that the naira will exchange for N1, 000 to a dollar. So, I am not worried about the state of the naira at the moment,” he told The Nation.
Justifying his unperturbed stance on the unfortunate forex market crisis, he asked: “Why should anyone be surprised at the state of the naira? Nigeria is not a producing economy but a consumption economy. What are we producing here that will make the naira strong?”
Dr. Olumide said that at a workshop his company had in 2016, in Dubai, United Arab Emirates (UAE), “It (the naira crisis) was a major discussion we had and we warned about its crash.”
However, his, and indeed, other experts’ warning, went unheeded. Now, the chicken has come home to roost, as Nigerians woke up to the rude shock of the crash in the value of the naira against the dollar, last week. The naira hit an all-time low of N700/$1 at the parallel market. A week before, it closed at N630/$1 and stayed within the N620/$1 band for weeks before the current low. Many black-market dealers were said to have asked for between N700 to N710/$1, even though actual transactions stayed within the N700/$1 band. Nigeria’s currency fell to the lowest on record amid a lack of dollar supply in the authorised foreign-exchange market.
Pressure on foreign reserves, which has been dropping in recent times, despite higher oil prices in Africa’s largest crude producer, forced the Godwin Emefiele-led CBN) to cut down on dollar sales, therefore creating scarcity of the greenback on the market. The CBN had devalued the naira several times in the last couple of years, as it succumbed to demand pressure amid worsening scarcity of the greenback in Africa’s most populous and largest oil producer. The CBN, The Nation, learnt, has a huge backlog of unmet dollar demand from investors, according to the International Monetary Fund (IMF).
However, the apex bank has not thrown its hand up in the air while the naira maintained steady steep down the slope. As part of its longer-term forex strategy to save the naira, the CBN announced a rebate scheme to raise $200 billion in earnings from non-oil proceeds over the next three-to-five years. The CBN does this by incentivising exporters to repatriate and then sell dollars into the local market. This move and several others, The Nation learnt, were targeted at making the local currency stronger against the greenback and other global currencies.
However, reacting to the steep slump in the value of the naira, which was unprecedented, and has since put Emefiele in the eye of the storm, Dr. Olumide said it was hardly surprising since, according to him, dollar is about production and consumption and since Nigeria is not producing anything as a country, there is nothing to bring into the economy as foreign exchange.
“Nigeria’s only means of dollar earning is through crude oil export. But sadly, we are selling it back through refining of crude oil abroad and also by buying it back through importation of refined petroleum products,” he said.
The investment expert said because of Nigerians’ propensity to consume and not produce, and the attendant effect of such proclivity on the value of the naira, he has long known that keeping one’s money in naira is one of the biggest investment errors to commit. “You have to diversify. You need to have multiple streams of income across industries. You also need to keep your investments across currencies, rents, and geographical regions,” he advised.
However, Dr, Olumide’s wise counsel appears to have come a little too late, as Nigerians and operators in diverse sectors are already feeling the heat of the prevailing unfavourable exchange rate of the naira, which may soon hit N1, 000/$1, as the expert predicted, if nothing is done urgently to halt the slide.
Naira crash spells doom for real sector, says LCCI
The Deputy President, Lagos Chamber of Commerce & Industry (LCCI), Gabriel Idahosa, lamented that the naira crisis spells doom for the real sector. He said, for instance, that real sector operators will experience aggravated levels of what they are in already, such as increased losses, scaling down of operations, suspension of operations, and cutting down of staff, etc. Idahosa pointed out that this will lead to further decline in production at enterprise and national levels.
“As a result, the unemployment situation and related social/security issues will escalate, as a growing number of able-bodied Nigerians willing and unable to find any viable means of earning livable income may turn to crime,” he said.
The LCCI chief further lamented that the ability of operators in the real sector to do medium-and long-term planning is seriously hampered in a rapidly inflationary environment. He added that the steady decline in Foreign Direct Investment (FDI) seen in recent times will also continue at a faster rate as confidence in the local currency drops. Indeed, FDI into Nigeria has been dropping in recent times, with the National President of Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), Ide J.C. Udeagbala, drawing attention to the National Bureau of Statistics (NBS) recent report that FDI declined by as much as 81 per cent.
Yet, the loss of FDI is just one dimension to which the Nigerian economy is affected by insecurity. “Domestic food production is at risk and there is a dimension of insecurity that is contributing to rising production costs and reduced consumption of goods and services,” Udeagbala added.
He also decried the high rate of unemployment in Nigeria, noting that it has become a major concern to the OPS. This, according to him, is so because the 33.3 per cent rate of unemployment often quoted by the NBS is two years old and does not take into full consideration the impact of the COVID-19 pandemic and the conflict in Europe, on the Nigerian labour market. Udeagbala said based on this, more than 22 million Nigerians are unemployed.
Productivity badly hit, says NACCIMA
The Acting Director-General of NACCIMA, Mr. Opeyemi Alaran, aligned with Olumide that the current sorry state of the naira wasn’t surprising. “What is happening now is what NACCIMA has been hammering on since the beginning of the year that immediate action should be taken to address all the economic indices that point to a possible recession by the end of this year,” he said.
NACCIMA, as the ‘Voice of the Nigerian Business’, last week, warned that the economy may slip into a recession by the end of this year. Udeagbala, citing NBS report on national output, said the economy grew by 3.11 per cent in the first quarter of 2022, a slight reduction from 3.98 per cent in the fourth quarter of 2021. Udeagbala spoke in Lagos, at the Association’s Third Quarter Press Briefing to review the state of the economy and NACCIMA’s contributions on key issues and policies for inclusive economic growth.
At the event, he acknowledged the positive growth statistics published by the NBS for the second quarter 2022, but said the Association’s concern stemmed from the possible false sense of security that NBS’s statistics may create. According to him, this was because the second quarter of 2022 may not fully capture the supply and value chain disruptions brought about by the COVID-19 pandemic and the Russia-Ukraine war. He said the private sector was concerned that external shocks brought about by the Russia-Ukraine conflict has put immense pressure on the economy’s productive capacity.
Udeagbala stated that as a matter of fact, Nigeria’s Gross Domestic Product (GDP) growth rate has been dropping on a quarter-by-quarter basis since the 5.01 per cent growth recorded in the second quarter of 2021. “We, therefore, urge once again, the implementation of government policy that places priority on improving domestic production otherwise, face a likely state of economic recession by the end of 2022,” he stated.
Alaran confirmed NACCIMA’s fears, saying, “It’s like what we have been warning against is coming to fruition.” It was in an apparent reference to the prevailing sharp slump in the value of the naira, which, when combined with the quarterly drop in Nigeria’s GDP growth rate raised fears that another round of recession may be lurking in the offing. A recession occurs upon two consecutive quarterly negative GDP growths. And Nigeria recorded a recession in 2016, followed by a second recession in 2020, forced by the COVID-19 pandemic, which caused a significant decline in oil revenues as global economic activities stalled for months.
As further sign of the precarious state of the economy, inflation measured on year-on-year basis has grown from 17.17 per cent as at May 2022, to 18.6 per cent as at June 2022. “As an economy, we have now surpassed the highest rate of inflation of 18.17 per cent in March 2021,” Udeagbala lamented.
He, however, said while NACCIMA welcomes the decision of the Monetary Policy Committee (MPC) of the CBN to raise the Monetary Policy Rate (MPR) from 13 per cent to 14 per cent, “we want to state that this is majorly an inflation management measure and does not address the root cause of the inflation.” The NACCIMA chief traced the cause of Nigeria’s rising inflation on rising food prices brought about by a number of factors, including the devaluation of the naira and the cost of energy, which has affected production and transportation.
From the foregoing, Alaran was emphatic that the steep slide in the value of the naira was only a symptom of the numerous familiar challenges holding the private sector down, such as high inflation rate, insecurity, high operating cost environment caused largely by poor infrastructure particularly inadequate electricity supply and the high cost of alternative sources, among others.
He lamented that the prevailing unfavourable exchange rate of the naira to the dollar is already taking a huge toll on private sector businesses. “Our productive capacity is dwindling. The private sector is alarmed because we are still very import-dependent for quite a number of raw materials and intermediate goods,” he said.
High cost-input pressures rattle manufacturers
Manufacturers appear worse hit by the prevailing unfavourable forex crisis. This is because the importation of productive inputs that are not locally available by manufacturers is done in dollars, and it has been extremely difficult for manufacturers to access dollars from commercial banks to do business. The President of Manufacturers Association of Nigeria (MAN), Engr. Mansur Ahmed, put manufacturers’ dire situation in perspective when, at a recent Annual General Meeting (AGM) of the Association, he said over 40 per cent of manufacturers could not get dollars to import key inputs, spare parts and machines for production.
He said the forex guidelines and policies have a significant impact on the sector. “Now, forex access in the sector is given based on some metrics, which include type of company, the amount being requested, what you are spending it on and sources of the forex, among other things,” Mansur stated.
As if this is not enough disincentive to manufacturers, the continued free fall of the naira has only compounded the woes of local manufacturers, as the cost of importation of raw materials and machinery has skyrocketed, for instance, with those in the Small and Medium Enterprise (SME) segment evidently worse hit. Some of them, including large manufacturers, who are unable to bear the burden of high operational cost, have been forced to increase the unit price of their manufactured products in order to remain in business.
Even at that, the declining purchasing power of most Nigerian consumers, caused by the crashing naira value and other challenges in the economy, has forced many consumers to resist any price increase by manufacturers. As a result, local manufacturers appear to have been boxed to a corner, with little room to maneuver, as inventory of unsold goods piles up, with attendant hit on their profit margin and of course, competitiveness.
This must be why the Director General of MAN, Segun Ajayi-Kadir, is pushing the Federal Government, through the CBN, to grant concessional forex allocation at the official rate to manufacturers for importation of productive inputs that are not locally available. He also urged the CBN to fast-track the move toward a single exchange rate to ensure transparency in the forex market.
Ordinary Nigerians, including students, artisans, salary earners, traders, and house wives are also groaning over the sharp increase in the price of foods and other household items. For instance, a meal of bread and beans that was regarded as ‘poor man’s food’ has suddenly become a luxury. A family loaf of bread, which hitherto sold for N400, now goes for between N800 and N1, 000. A derica of beans is now N600. Energy prices have also skyrocketed, particularly prices of diesel, aviation fuel and petrol, which all had trickle-down effects on the cost of foods, manufactured products, other commodities, transportation and accommodation. Most notably, the price of diesel has spiked by about 230 per cent in the last one year, standing at more than N800 per litre currently.
The way out
For Dr. Olumide, the only way to force a rebound in the value of the naira is by focusing on things Nigeria can export, especially those he classified as the ‘low hanging fruits’ like technology, talents and agriculture. “We also have to reduce our appetite for foreign goods. For instance, we can implement policies to put a stop to importation of foreign cars, ban all foreign clothes, foods, drinks etc. Doing this will make our local industries grow; and in 90 days you will be shocked at the result we will get,” he added.
According to him, most of the afore-mentioned were what China did by closing its economy to the world. “So, we need to close our economy to the world if only we want to revamp it. Give people like one year notice to carry out the law on this and after which you fully implement. This timeframe is important so as not to destroy peoples’ livelihood and so they will be able to clear and dispose of all their imports before the day of implementation,” Olumide stated.
On his part, Alaran said there is the urgent need for concerted efforts to reverse Nigeria’s age-long import-dependency for quite a number of raw materials and intermediate goods. “We are appealing to the CBN and the Federal Government to attack the root cause of the problem, which is the need to ensure the private sector is able to produce. If there is forex, the private sector will be able to produce more and be able to export more,” he said.
The NACCIMA acting DG also said a window of opportunity still exists for the Federal Government to implement private sector-friendly policies that will increase private sector productivity. “To us, that is the panacea to all these challenges. If the private sector is able to become more productive, gradually, all these other economic indices that are pointing to a recession will begin to disappear,” Alaran emphasised.
NACCIMA also called on the Federal Government to quickly address the increasing insecurity challenges, poor infrastructure, irregular power supply and the increasing inflation rates which have remained threat to businesses and investments in the country.
The MAN DG said the time has come to look inward. Specifically, manufacturers want government to incentivise investment in the development of raw-materials locally through the backward integration and resource-based industrialisation initiatives. They also said government should call for more investors to key into these initiatives with appropriate and definite incentives. “For instance, there is need for urgent investment and production of Active Pharmaceutical Ingredients (API) in the country; investment and production of machines; iron and steel; petrochemical materials, etc., to support manufacturing activities,” manufacturers said.
For Ajayi-Kadir, Nigeria needs to resolve all forex-related challenges confronting the productive sector by making a detour from the CBN’s foreign exchange regime that greatly contradicts one of the goals of the National Development Plan, which seeks to attain quick convergence of the foreign exchange rates.