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The recent report that foreign suppliers are rejecting letters of credit (LC) as well as refusing to deliver goods to Nigerian business owners unless down payments are made in hard currency should worry our policymakers. Another issue that should be of concern to the government’s economic team is the rising loss of jobs across the country.
The Manufacturers’ Association of Nigeria (MAN) has disclosed that no fewer than 3,567 jobs were lost in the first half (H1) of 2023 in the manufacturing sector. It also revealed that the economy has lost over N272 billion of unsold goods as a result of shortage of foreign exchange and the strict conditions of payment from foreign suppliers.
The country also recorded 32.8 per cent reduction in employment generation within the period under review. It is indeed unfortunate that foreign suppliers of Nigerian businesses are demanding cash transfer into escrow accounts in place of letters of credit. This indicates that foreign investors have lost confidence in the Nigerian economy. Despite moves by President Bola Tinubu to attract foreign investors, the economy appears to be wobbling. Tinubu’s economic team must work assiduously to rescue the economy.
In spite of the recent unification of the exchange rates, the forex market still needs urgent structural reforms. The governor of the Central Bank of Nigeria (CBN), Olayemi Michael Cardoso, and his team should meet the unsettled foreign exchange obligations, including the contract forwards it has sold to many Nigerian businesses. It is the duty of the banks to open letters of credit, which are used to import goods from abroad. Sadly, the CBN has not been able to settle the contracts since February this year. At present, there is a backlog of $3 billion unsettled payments.
The commercial banks have been providing trade finance to companies to cover the FX cost of imports. This means that the banks are already on the hook, if the companies fail to make the foreign currency payment. According to Moody’s, the exposure of Nigerian banks to businesses in foreign trade was $9.8 billion in 2022, which translates to 54 per cent of the banks’ liquidity FX assets. The challenges faced by Nigerian businesses involved in importation of goods will persist as long as FX remains in short supply and the naira continues its present free fall against major foreign currencies.
The increase in import bill is already having its toll on Nigeria’s foreign reserves. This is so because the economy is import-driven, with key transactions done in foreign currencies. For example, Nigeria’s external reserves lost $167.2 million in July. The CBN figures also showed that the external reserves fell to $33.95 billion as of July 28, 2023, from $34.12 billion recorded in June 2023.
Also, the commercial banks have in the last one year lent $10.4 billion of foreign exchange in aggregate terms to the CBN. This poses further risk to banks’ liquidity. Though the CBN has a strong track record of repaying the FX it owes to the banks, there are fears that it might extend the life of some contracts and postpone repayment.
Nevertheless, the CBN should endeavour to clear the dollar backlog, which is already putting businesses in a tight FX liquidity position and forcing them to suspend several transactions, including school fees and personal travel allowance applications. Consequently, Nigerian businesses have resorted to the parallel market to source dollars at a premium of over 20 per cent to fund critical imports. The increasing recourse to the black market is pushing up the cost of business and inflation. Nigeria’s inflation for August was 28.8 per cent, the highest in 18 years.
The scarcity of forex in the official exchange market has almost collapsed to a daily average of $99.81 million, down from $295.58 million between May and June 2023 and $318.46 million between January and May 2023. This is bad for business operations. In initiating fiscal and monetary policies, the government and the CBN must improve the ease of doing business.
The high cost of doing business has led to the collapse of many businesses. Some have left the country, while others have relocated to neighbouring countries. The government must address the shortage of forex forthwith. Allowing market forces of demand and supply to determine the value of the naira is unrealistic and unsustainable. The value of the naira should be stable and predictable. The fluctuation of the value of the naira has led to increase in inflation and cost of goods and services. The unbridled depreciation of the naira is neither good for the economy nor for businesses.
