How availability of Forex Impacts on Manufacturing Sector-MAN

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….. most manufacturers not being able to adequately source FX for importation of productive raw-materials and machinery that are not available locally

 

The Manufacturers Confidence Index (MCCI) which the Manufacturers Association of Nigeria (MAN) use to gauge the changes in manufacturing activities quarterly as a result of changes in the macroeconomic ambience and Government policies aimed at traditionally, Foreign exchange rate (FX) which plays important role in investment determination via its relationship with inflation and interest rates:  Exchange rate feeds into aggregate prices resulting to high inflation. According to the report to maintain a certain level of investment, interest rate is raised. In addition, constant and large depreciation in FX (as with the Naira) makes imports expensive, again leading to high inflation. Therefore, variability and large depreciation in exchange rate obstruct economic activities and manufacturing production is not in any way insulated.

In computing figure A above showed the presents Naira exchange rate movement viz-a-viz US Dollar in the official and BDC forex markets.

 

The Association noted that these assertions are supported by the fact Nigerian manufacturing across sub-sectors is heavily raw-materials import dependent.  The report added that a favourable exchange, a case of appreciation of the Naira, no doubt, would present good omen and improves manufacturing production.  However, it said, the case has always been that depreciation in value of the Naira reduces manufacturing production, as observed in the various FX crises.

 

 

Also figure B above shows the trend of depreciation in Naira value and the premium of BDC rate over official rate from December 2019 to November 2020.

 

 

The report disclosed that as MAN has consistently observed, FX crisis in which Naira value depreciates among convertible currencies such as the US$, strangulates and reduces the size of manufacturing in the country. This is because depreciation in Naira value causes manufacturing raw-materials and machinery imports to be more expensive, it added.

 

“The high cost import bill for the productive inputs decreases manufacturing working capital and feeds into manufacturing commodities prices, thereby making the sector less competitive.

 

“In addition, COVID-19 rode on the wings of the low international commodity prices, particularly crude oil prices to trigger the prevailing FX crisis.  The acute shortage of FX resulting in the erosion in Naira parity has been a major operational nightmare to manufacturers in the country.

MAN CEOs CONFIDENCE INDEX in fourth quarter 2020 in the current survey revealed that most manufacturers reported not being able to adequately source FX for importation of productive raw-materials and machinery that are not available locally. Most worrisome is the inability of manufacturers to meet transactional obligations with oversea suppliers as required. Moreover, because sourcing FX in the official market has become extremely difficult, operators are daily approaching the BDC segment notwithstanding the high cost implication.

 

“It is important therefore, that the available FX policies and guidelines should be appropriately reviewed to support manufacturing to import inputs that are not available locally, particularly in this precarious time.  The issues of usage of FX, exclusion of items from the official FX window, concessional FX allocation to critical manufacturing sector and the introduction of Wholesale Dutch Auction System (WDAS) should be thoroughly considered to ensure a productive FX management in the country, it stressed.


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