Real sector: Sectoral forex allocation to the rescue

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The 60 per cent special foreign exchange (forex) allocation to manufacturers may have raised their capacity. This has prompted the Central Bank of Nigeria (CBN) to extend the initiative to Small and Medium Enterprises (SMEs) operators. Experts say this can be the wedge for this troubled segment of the real sector, if effectively monitored and enforced. CHIKODI OKEREOCHA and OKWY IROEGBU-CHIKEZIE report. 

It has been particularly tough for real sector operators, especially those in the Small and Medium Enterprise (SME) segment. For long, they watched helplessly as the crisis in the foreign exchange (forex) market hit hard on their businesses. Because of scarcity of forex, many of them could not fund the importation of essential but eligible raw materials and finished goods critical to their operations.

Given that SMEs were crowded out of the forex market, many of them who could not stand the heat either disappeared from the manufacturing landscape or scaled their operations, leading to massive job losses. This has been the situation since mid-June 2014 when global oil prices began declining, forcing a number of fiscal and economic distortions on SMEs’ operations.

Some of the distortions included drop in foreign earnings, decline in foreign reserves and an unstable macro-economic environment among others. The crisis in the forex market, which was also a fallout of the oil price crash, was, perhaps, the most devastating for real sector operators, especially SMEs.

The crisis was also an addition to the multitude of business environment-related woes plaguing SMEs, such as lack of electricity supply, rising inflation, declining consumer purchasing power, multiple taxation, weakening manufacturing base and policy inconsistency, among others.

However, a turnaround in the fortunes of this segment of the real sector appears to be in the offing. This is sequel to the recent unveiling of a special form X by the Federal Government through the Central Bank of Nigeria (CBN) to ease access to forex for SMEs.

On the strength of the intervention, which came on stream about two weeks ago, SMEs were granted special consideration for $20,000 to import essential but eligible raw materials and finished goods critical to their operations.

CBN spokesman Isaac Okorafor explained that the purpose of the intervention was to ease the difficulties encountered by small manufacturers. He said the Manufacturers Association of Nigeria (MAN) acknowledged that the earlier 60 per cent forex allocation to the sector raised their capacity hence, they canvassed more forex to be made available for SMEs.

Last year, the CBN waded in to avert the collapse of more companies by creating a 60 per cent special forex allocation window for manufacturers. This was after manufacturers, through several representations and stakeholders’ engagements, sought the creation of a special forex window to allow them fund the importation of raw materials.

MAN President and arrowhead of the advocacy Dr. Frank Udemba Jacobs lamented that the inclusion of essential raw material inputs for manufacturing in the CBN import prohibition list forced many outfits to close shop and relocate to neighbouring West African countries.

The CBN in June 2015 announced a forex policy that restricted importers of 41 items from accessing its official window. Even those who export products that fall under the 41 items listed in the CBN circular were barred from using their export proceeds to fund the importation of their raw materials, which were unfortunately classified as not valid for forex.

The CBN had explained that the policy was necessary to promote locally-produced goods, build robust foreign reserves, and also create jobs. “…..We needed to aggressively begin the process of feeding ourselves and producing much of what we need in this country.

“The huge amounts of money the country spends on importing things we can produce locally have become a significant drag on our foreign exchange reserves …,” CBN Governor Godwin Emefiele said.

But manufacturers and other members of the Organised Private Sector (OPS) kicked, arguing that the forex restriction was “obnoxious, superfluous, and ill-conceived’’. They also pointed out that the vague nature in which the items in the import prohibition basket were described in the circular impeded the access of several local manufacturers to forex for procurement of raw materials.

Following persistent requests by real sector operators, the CBN directed that a special 60 per cent forex allocation window be set aside for manufacturers. The apex bank said that the gesture was to address an observed imbalance in the sector, as a negligible proportion of forex sales were being channelled towards the manufacturing sector.

Obviously encouraged by the success of the intervention, manufacturers were said to have requested for its extension to SMEs. The request, according to Okorafor, was examined and the result of the examination showed that indeed, SMEs were being crowded out of the forex market hence the need for steps to address their challenges.

The Nation learnt that with the opening of the special window, genuine SME operators are no longer patronizing or sourcing forex through unofficial windows. By extension, this has reduced the pressure on either the Bureau de Change operators (BDCs) or any other unofficial sources.

However, the special forex window for SMEs was the latest of such sectoral forex allocations by the CBN aimed at stabilizing the value of the naira and galvanising the real sector, which is credited with the capacity to create jobs and engender economic growth and development.

For instance, the CBN created a special forex window for investors and exporters on April 21, 2017. This was to boost liquidity in the forex market and ensure timely execution and settlement of eligible transactions, which included invisible transactions such as loan repayments, loan interest payments, dividends, income remittances, capital repatriation, management service fees and consultancy fees.

Other transactions on the eligible list are software subscription fees, technology transfer Agreements, personal home remittances including ‘miscellaneous payments’ as detailed under Memorandum 15 of the CBN Foreign Exchange Manual.

The invisible transactions under this window excluded international airlines ticket sales’ remittances. CBN said the window covered bills for collection and any other trade-related payment obligations, which are at the instance of the customer.

It clarified that the permitted invisible transactions and bills for collection were eligible to purchase forex sourced from the CBN forex window limited to secondary market intervention sales (SMIS) wholesale, which is spot and forwards sales.

“International airlines ticket sales’ remittances shall only be eligible to access the CBN FX window (SMIS-Retail and Wholesale) spot and forwards. The supply of foreign currency to the window shall be through portfolio investors, exporters, authorised dealers and other parties with foreign currency to exchange to Naira,” CBN’s Director, Financial Markets, Dr. Alvan Ikoku, explained.

Like the forex intervention for SMEs, the special forex window for investors and exporters was music to real sector operators. For instance, the Lagos Chamber of Commerce & Industry (LCCI) has applauded the policy, noting that its significance lies in the widening of the scope of the market in forex transactions.

LCCI Director-General Mr. Muda Yusuf said the policy was an important step towards the restoration of normalcy to the foreign exchange market as it signposts the easing of restrictions in the forex market.

Yusuf said the policy has implications for the economy because of its capacity to boost the confidence of foreign and domestic investors while also moderating the effect on the country’s risk.

He also said it will impact positively on the liquidity in the forex  market by impacting positively on forex inflows from the autonomous sources, increase transparency in non-oil export transactions and further reduce pressure on foreign reserves as autonomous inflows increase.

The LCCI DG listed other benefits to include improvement in the stock market performance, positive impact on investment growth, and reduction in the transparency problems and sharp practises that exist in the foreign exchange market.

Besides, the policy, he said, would significantly check the phenomenon of round tripping including the reduction in the gap between the official rate and parallel market exchange rates.

Yusuf said: “We seek the cessation of the multiple windows in the forex market. Multiplicity of windows hurts the economy. The CBN could intervene from time to time to modulate the rates in a manner consistent with its capacity.

“Investors need to be assured of CBN’s commitment to a market-based exchange rate policy as enunciated in the Economy Recovery and Growth Plan (ERGP) of the Federal Government”. He, however, stressed the need to review the CBN’s policy restriction on 41 items.’’

Similarly, a financial expert, Dr. Uche Uwaleke, believes that the policy will encourage return of portfolio investors to the capital market.

According to Uwaleke, who is Head of Banking and Finance Department, Nasarawa State University, Keffi, the new policy will impact positively on the capital market with more portfolio investors returning to the market.

He noted that constraints in the forex market caused illiquidity in the market, leading to exit of foreign investors from the capital market.

“CBN’s conscious attempt to ease forex access through a special window for foreign investors promises to impact the capital market positively with more portfolio investors returning to the market,’’ Uwaleke stated, adding that the development has brightened Nigeria’s chances of re-admission into the JP Morgan Index.

Earlier last November, the CBN granted manufacturers access to over $660 million foreign exchange through the inter-bank forex market to source raw materials and spare parts for their industries. The apex bank was emphatic that the intervention was in keeping with its promise to strengthen the real sector of the economy.

The Chairman, Apapa branch of Manufacturers Association of Nigeria (MAN), Mr. Babatunde Odunayo, described CBN’s interventions in the real sector as “welcome development.” He said such gestures would bring some relief to manufacturers affected by the restrictions on the sourcing of forex.

Encouraged by the anticipated positive spin-offs from such interventions, the CBN has vowed to sustain its intervention in the forex market. The apex bank believes that this would not only stabilise the value of the naira, but also galvanise the real sector.

The CBN boss noted that the country’s foreign reserve currently stands at $31 billion, and that the increasing strength of the nation’s foreign reserve is giving CBN the necessary firepower to play in the forex market.

“You will all have observed that in the last two months, CBN has been involved in some form of intensive intervention in the forex market and this has fortunately resulted in a downward trend in the parallel market price of foreign exchange, Emefiele said, shortly after a closed door meeting with Senate President Bukola Saraki, in Abuja.

Continuing, he vowed, “We are going to continue this intervention because the reserve looks very good. Our reserve stands at above $31 billion and that provides us enough of firepower or ammunition to be able to defend the currency and we will do so with all intensity to ensure that foreign exchange is procured by everybody.

“You want to import raw materials, you will get foreign exchange, you want to import plant and equipment you will get foreign exchange, you want to pay school fees or you are a small business that wants to buy foreign exchange for you to import your small items you will procure foreign exchange.”

However, there are fears that CBN’s sustained sectoral interventions particularly in the real sector where it now targets SMEs might fail to make the anticipated impact unless they are backed by proper monitoring, supervision and enforcement.

Perhaps, to demonstarte its resolve to make it work this time, the CBN on Tusday

suspended 12 banks from participating in the weekly forex intervention to the SMEs.

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