Why more firms may leave Nigeria for Ghana, others – FDC

The difficulty faced by manufacturers in sourcing for foreign exchange to acquire raw materials may force more companies to leave Nigeria for neighbouring countries, the Financial Derivatives Company Limited has said.

The FDC said the Nigerian manufacturing sector, which contracted by 1.5 percent in the fourth quarter of last year, could slip deeper into negative territory, if foreign exchange rationing continued indefinitely.

“Nigeria’s forex market is plagued with two major problems – the price and supply of forex,” analysts at the Lagos-based FDC, led by foremost economist Bismarck Rewane, said.

They said dollar scarcity had recently forced many manufacturers to the parallel market to source for over 90 percent of their forex needs, leaving them with a blended and more expensive rate around N460/$.

They noted that in the last three years, the naira has depreciated by 33.88 percent to N485-486/$ at the parallel market and 14.35 percent to N412/$ at the investors’ and exporters’ window.

“The CBN’s forex rationing and uncertainty surrounding its exchange rate policy have exacerbated the problem and increased the risk of capital flight,” the analysts said in its latest bi-monthly report.

They noted that to address the issue of dollar scarcity, the CBN had embarked on several initiatives including encouraging exporters to repatriate proceeds, licensing of 10 additional international money transfer operators and the naira4dollar promo.

“However, exchange rate policy ambiguities and forex market shortages continue to linger, worsening the business environment for manufacturers. Even though, the CBN has made moves toward naira convergence at the I&E window, forex rationing has continued,” they said.

According to the report, there is a high probability that forex rationing will increase the exchange rate pressures at the autonomous market, which could impede growth in the manufacturing sector.

It said output levels would be limited by challenges in raw materials procurement.

The analysts said, “This constrains expansion plans particularly in the face of regional competition resulting from the African Continental free trade agreement. It would also frustrate and force small businesses to shut down.

“More companies are likely to move their operations to neighboring countries if these problems persist, especially with the commencement of the AfCFTA. Other African countries like Ghana and South Africa would be more enticing for business operations. This would worsen the country’s already abysmal state of forex inflows.”

The immediate impact, is a further depreciation of the naira at both the parallel market (N490/$ – N500/$) and I&E window (N412/$ – N415/$), according to FDC.

It said currency volatility would heighten import costs and increase imported inflation, adding, “The impact on economic agents is largely dependent on who bears the final burden of higher costs.”

“If manufacturers decide to absorb the costs, corporate margins will likely remain squeezed. However, if they decide to pass the burden to the already embattled Nigerian consumer, disposable income will be negatively affected,” the analysts said.

They said a tough business environment would continue to encourage capital flight and loss of the much-needed investment inflows.

According to them, the manufacturing sector is a huge player in the government’s plan to diversify its revenue base and fasten the pace of industrialisation.

The analysts said, “The world is fast transitioning away from oil; so this should be a wakeup call for the government to hasten its steps towards boosting the activities of other sectors that have the potential to drive economic growth.

“More noteworthy is that if these forex challenges persist, alongside the rising insecurity levels and already weak macroeconomic environment, Nigeria could lose its chance of being a hub as the AfCFTA progresses.”