Nigeria is an import-dependent economy. Meaning Nigeria’s economy relies heavily on importing goods from other countries. For instance, about 70 percent of the medicines used in Nigeria are imported. And despite being an oil-producing country, Nigeria imports about 56 million litres of Premium Motor Spirit (PMS) and 12 million litres of diesel daily.
Accordingly, Nigerian importers need a lot of foreign currency (or “forex”) to import goods priced in the currency of their importing partners. Because of Nigeria’s large importation appetite, the estimation is that Nigeria could spend up to $16.2 billion (₦6.72 trillion) in 2023 to import petrol into the country and keep it at a price that is affordable for Nigerians.
In July 2021, the Central Bank of Nigeria (CBN) stated that it had ended the sales of forex to small-scale foreign exchange traders in Nigeria, commonly known as the “Bureau de Change (BDC) operators.” The apex bank also declared that it had stopped approving BDC licence applications. This CBN’s monetary policy was intended to create stability and transparency in the forex market. Unfortunately, that policy has inadvertently led to forex scarcity in Nigeria since all forex applications have to go through the commercial banks who end up disbursing forex arbitrarily. This has made accessing FX challenging for importers.
The forex scarcity situation means the country’s high demand for dollars strengthens the dollars against the naira. This increased demand for forex has a damaging effect on the economy, especially for Nigerian businesses. To properly appraise the situation, let’s look at how Nigeria’s liquidity crisis is currently affecting businesses:
Inability to Import Goods
Nigerian business owners now cannot import goods into the country. Hassan Bello, the Executive Secretary to the Nigerian Shippers Council (NSC), in a conversation with The Guardian, revealed that Nigerian shippers do not presently have access to foreign exchange for imports and exports.
Jonathan Nicol, the President of the Shippers Association of Lagos State, has also complained about the impact of forex scarcity on Nigerian businesses. He stated that “without foreign exchange, people cannot place Form M, and without Form M they cannot place orders, and this will have a ripple effect on the economy.”
Arbitrary Increase In The Price of Goods
There has been an arbitrary increase in the price of goods in Nigeria. This is because Nigerian business owners must pay their foreign trade partners with foreign currency when they import goods. When dollars are scarce for importers, it causes an increase in the price of imported goods, ultimately transferring them to the consumers. Thus, consumers will have to pay more for these goods when forex becomes costly, insufficient, or inaccessible because of financial restrictions from the central bank. Already, many economic observers are attributing the current food inflation in Nigeria to many factors, including forex scarcity.
Low-Profit Margin
An analysis of unaudited financial statements of consumer goods companies by The Punch revealed that many consumer goods companies in Nigeria saw either reduced profit margins or losses. In contrast, two reported profit rises in the first half of this year. For instance, Nestle Nigeria Plc, the largest FMCG company listed on the NGX by market capitalization, saw its profit before tax in H1 2021 decrease by 1.43 percent year-on-year to N33.38bn despite a revenue increase of 21.57 percent. International Breweries Plc, another major consumer goods company in Nigeria, also recorded a 43.71 percent in its loss before tax, which deepened to N17.22bn in H1 2021 from N11.98bn in the corresponding period of 2020, even as its revenues rose by 35.22 percent from N60.61bn to N81.96bn.
Consequently, the cost of business production in Nigeria has increased by 30-100%, which has invariably affected the profit margin of many Nigerian businesses.
Inability To Create Employment
The forex scarcity in Nigeria has also affected the ability of many businesses in Nigeria to employ and retain professional staff. According to Dr. Muda Yusuff, the Director of the Centre for Promotion of Private Enterprise (CPPE), the forex scarcity in the Nigerian business environment has severely damaged the ability of Nigerian businesses to create new jobs and retain existing employment.
The financial challenges in sourcing raw materials and maintaining other business processes mean that employing new and vibrant staff must take the backseat as businesses plot new strategies to survive in Nigeria’s harsh forex environment.
Lack of Access To Raw Materials
The forex liquidity crisis in Nigeria is significantly affecting the business environment as many business operators have had to shut down operations due to the inability to source critical raw materials that are critical to their businesses. Among the Nigerian companies that have shut down within the past six years due to failure to procure raw materials following the forex shortage is Kenfrancis Farms. According to its Chief Executive Officer, Ifeanyi Okeke, he stated that “we had to exit the Nigerian manufacturing space because the cost of dollars made it practically impossible to remain in business. You buy a pack of your raw materials at N20,000 today; the next day, it is N23,000. We are no longer interested in manufacturing anything here because the country is simply comfortable with importation”.
A Proposed Solution To The Forex Liquidity Crisis
I advise the Central Bank to avoid over-regulation of the forex market through price-fixing of the exchange rate. The foreign exchange market rate must be allowed to reflect Nigeria’s business environment, and this can only be done when there is a free market for the sale and purchase of forex. We must reduce the speculation of the naira as this affects the value of the naira, allowing currency traders to earn from scarcity and price fluctuations. The CBN needs to cut out BDC operators and enhance the trade system portal, a direct line for FX access between financial institutions and people who need it.
Much more, the federal government must, as a matter of utmost necessity, prioritise the diversification of the economy away from crude oil to stabilise the economy and allow for more forex inflows into the country.
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