Importers, forex dealers battle CBN over exchange rate crisis

– As Naira nears N230 to 1$

+ Foreign investors flee with N5 trillion

WHEN ENCOMIUM Weekly predicted last year that the battered naira would soon exchange for N200 to 1 US dollar, we were dismissed as harbingers of economic doom. But more alarming scenarios are now unfolding as the Nigerian currency wobbles and fumbles at the forex market even as it is increasingly killing business.  (The current exchange rate of the naira to the dollar at the parallel market is N227!).

With the closure and pegging of the exchange rate at N198 per dollar, the apex bank stopped naira speculation as commercial banks were banned from reselling Central Bank of Nigeria (CBN) dollars to other banks. Under this policy, the CBN scrapped its window of direct sale of foreign exchange to end-users and directed that all forex needs should be sourced from the interbank market.

Expectedly, the closure of the Retail Dutch Auction System and the Wholesale Dutch Auction System (rDAS/wDAS), the official window through which the CBN sold foreign exchange to buyers, is negatively affecting  business since the system made buying and selling of foreign currencies easier and cheaper than what obtains at the interbank market.

ENCOMIUM Weekly recalls that the apex bank had on Wednesday, February 18, 2015 announced that it was closing its biweekly sale of foreign exchange through the rDAS, in a move that most people considered a strategic devaluation of the naira after a similar approach late last year. And weeks into the new foreign exchange regime, it has been tales of woes by the business sector.

For manufacturers and importers, the cost of raw materials had tripled since the closure that was aimed at saving the naira from its unabated free fall against all major foreign currencies.

For instance, Henry Rowlands, an Abuja-based importer, in an interview with ENCOMIUM Weekly (on Saturday March 7, 2015) lamented that some of the dealers he had prior business understanding with had to adjust their prices as the value of naira depreciated.

“I wanted to import goods which I had already paid for. But, prior to the delivery, my partners asked for additional funds.  Even the cost of clearing the goods has also been increased as a result of the volatility of the foreign exchange rate.”

Similarly, Chukwudi Ikerionwu who deals in printing materials also shared his frustration with us.  “Scores of printing jobs I have to do have to be delayed as the rise of dollar means we have to spend more to deliver them.”

The Managing Director of the Port Harcourt Rivers-based Ikerionwu Resources further bemoaned the huge loss the economic situation has caused Nigerian entrepreneurs.  “We’ve never had it this bad.  The free fall of the naira which CBN partly caused by not churning out appropriate monetary policy mix might finally send us to the village, if the trend is not arrested.  I also think the way and manner our politicians spend dollars and pounds also kills the already weak naira. I might be wrong. But now that the CBN has closed the windows we source foreign exchange, are they (politicians) not getting theirs?”

From our investigations, with the cost of importation going up by 30 per cent, it is only natural that prices will increase. And this will sure affect demand and sales which in turn lowers profit.

Commenting on the implications of the closure of the rDAS/wDAS for importers, Cardinal Stone, a private research firm, noted in its paper that the feed through from exchange rate pressure, given about 18 per cent instant readjustment, will now be immediate.  The study added that ‘combined with the high interest rate environment, the negative impact would be further felt on the already-pressured earnings and profit margins, especially of the consumer goods companies.

A manufacturer of fast-moving consumer goods based in Ogba, Ikeja Lagos, Okeke Timi, also told a national daily, he lost over N500 million because of the general depreciation and devaluation of the naira.  “Things have just been going downhill.  The closure of the rDAS is just a climax to the whole exchange rate crisis.  We did a lot of import finance offshore for working capital and a lot of our raw materials were imported through offshore financing. With the sudden crash in exchange rate, what we need to service that debt has gone up several fold. That means increase in cost of production. We can’t transfer all that cost to customers because many people will not buy from us.”

For the MD/CEO, Mr. D Chinese Kitchen, Mr. Mma Donatus, these are indeed challenging times for Nigerian businesses.  The A- list caterer explained that even the rich are now mindful of how they spend their hard-earned money.  Mr. Donatus claimed that many of them have shelved parties that would have created jobs for his sector.

“Even when we are contracted, the high exchange rate also shrinks our profit since we equally depend on imported ingredients for some of our foreign cuisines and snacks.”

Also contributing to the plight of entrepreneurs, Chairman/CEO EOM Group, Mr. Elkanah Mowarin urged the CBN and the economic team to wield into the disturbing naira exchange rate.  “The new foreign exchange regime has sure affected business.”

The recent fuel scarcity was also blamed on the raging foreign exchange crisis with petroleum products marketing companies claiming that the devaluation of naira will soon drive them out of business.

Executive Secretary of Major Oil Marketers Association of Nigeria (MOMAN), Mr. Obafemi Olawore reportedly said the high exchange rate resulted in high cost of petrol and diesel.

“The unfortunate situation in which we found ourselves is that as the price of crude oil and the international price of diesel were dropping, we devalued the naira. For example, for Premium Motor Spirit (petrol), the exchange rate for bringing products before the devaluation was N171.36 per dollar.  At that rate, the landing cost of PMS was N90.67 per litre.  There was a time the rate rose to N188 at interbank rate while CBN gave us N171.36. But when it went to N188, the landing cost of PMS rose from N90.67 to N98.36.  As at today, the exchange rate has gone to N199 (there is no window again), the landing cost rose to N103.45.  So, you see the main issue is the exchange rate.”

Relatedly, ENCOMIUM Weekly also scooped that banks have been warned by the CBN to evaluate the risks involved before granting credit to importers these unpredictable times.  This has compounded the woes of investors operating in a turbulent economy, yet to coming to terms with an estimated capital flight of $25 billion (about N5 trillion) over the last few months amidst rising political tension enveloping the nation.

Interestingly, in a press statement issued immediately after the CBN forex exchange policy, the Lagos Chamber of Commerce and Industry had observed that the decision to close the rDAS by the apex bank would lead to about 20 per cent increase in the cost of production for firms in the country. LCCI President, Mr. Remi Bello, declared that the measure was bound to impact on sales performance, profit margins and ultimately capacity utilization of their firms. Bello, according to the statement, also added that import duty and other port charges, which were computed as a percentage of import costs, would also correspondingly increase.

“Following the revision of the guidelines and the exclusion of some transactions, this forex window was targeted at providing support for the real sector of the economy because of their strategic importance to the development process, job creation and inclusive growth. They are therefore the first natural victims of the closure, particularly the few that had access to this window.” Exchange rate-induced losses could trigger a new wave of non-performing loans in the banking system and this has implications for financial system stability.  However, given the record disparity between the CBN rDAS forex window; the interbank and the parallel market rates, it was clear that the rDAS forex window was not sustainable. The CBN could obviously not meet the huge demand for forex under the rDAS window.  In spite of repeated assurances, many genuine requests for forex for industrial raw materials and other vital inputs were denied by the CBN.”

Although the Director-General, LCCI, Muda Yusuf, said the action by the CBN created a level playing field for investors and also brought an end to a regime of round tripping and speculative buying of foreign exchange, he also agreed it amounted to higher operating and production cost for investors generally.

“The LCCI feels that the government should devise a means of cushioning the effect of the closure of the rDAS because we are an import-dependent economy and the exchange rate has continued to depreciate,” Yusuf said in a recent interview.

He added that the chamber was also proposing a refinancing facility in the form of cheaper and long term funds for companies that have high foreign exchange exposure because before now, it was cheaper for businesses to source working capital from outside the country at a lower interest rate.

“Many of them did not envisage this kind of exchange shock. Now, a lot of them have been caught in the trap of this exchange rate and it has thrown quite a number of them off balance.”

He advised that critical raw materials for industries should be allowed to come in at zero duty as this would help mitigate the problems the industries were facing since the whole idea of supporting them was to enable them to create jobs and promote economic development.


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