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Forex pressure to force Naira’s further fall - The Nation Newspaper

By Collins Nweze

Demand for foreign exchange (forex) by manufacturers and other end users through the official window will increase in the meantime, putting pressure and weakening the naira further.

The naira at the weekend, exchanged at N515 per dollar at the parallel market, a rate many manufacturers considered to be too high for their businesses. The naira exchanges at N410.1 per dollar at the official market.

Head of Africa Research, Africa Economist at Reniassance Capital, Yvonne Mhago, said following the central bank’s decision to cease forex supply to the bureaux de change (BDCs), the parallel forex market premium will widen.

In an emailed report to investors, Mhago said demand for ‘cheaper’ forex at the official window will increase, placing pressure on the naira to weaken.

More than 90 per cent of forex needs by manufacturers are sourced from the parallel market where rates touched N525/$1 last week.

CBN Governor, Godwin Emefiele had announced at the close of the Monetary Policy Committee (MPC) meeting in Abuja stopped weekly allocation to BDCs and directed banks to sale personal travel allowances, business travel allowances, school and medical fees payment, among others.

CBN weekly interventions of  $100 million will now go to the banks for meeting foreign exchange demands. Many banks also attract funds from International Money Transfer Operators (IMTOs) which will serve as additional interventions for sales.  Emefiele had accused the BDCs of breaching regulatory guidelines, including engaging in money laundering.

A report released by Lagos Chamber of Commerce and Industry (LCCI),  said the manufacturing sector was faced with several structural challenges, with adverse impact on growth performance.

The sector has been struggling with growth in recent years due to tough operating conditions in the local business environment and has made most industry players less competitive in the domestic and regional markets.

Manufacturing sector contracted by 8.8 per cent at the peak of pandemic in second quarter of 2020 as COVID-19 disruptions, border closure and forex illiquidity subdued activities in the sector.

The group said lingering forex crisis was perhaps the most significant challenge for the sector as most industry players found it increasingly difficult to access forex meant for importation of critical factor inputs. Moreover, increased pressure on consumer purchasing power threatened the earnings performance of manufacturers in the fast-moving consumer goods space, which propelled them to ‘sachetise’ their product portfolio in a bid to boost patronage.

“The shortage in foreign exchange available to businesses and end-users will continue to be one of the biggest hurdles that will dent business environment outlook in 2021,” it said.

The economic think-tank group said there are no quick fixes for the structural issues and the desired regulatory and institutional reforms that are needed to boost business outlook for the year.

The LCCI explained that while forex supply will face continued pressure in year 2021 in the light of relatively lower dollar inflows from oil, foreign investment, and diaspora remittances, the CBN is expected to sustain its demand management strategies via rationing and restricting access to forex for food imports.

It said that without bold policy pronouncements, constraints to the ease of doing business including foreign exchange shortage, escalating production costs, high regulatory costs, infrastructure inadequacies, and delayed cargo clearance, will persist.

It said Nigeria’s trade dynamics with the global community is expected to remain almost unchanged in the short-term. With imports continuing to outpace exports, trade deficit is expected to widen in excess of N5 trillion in year 2020, thereby putting pressure on forex.

“Looking ahead in 2021, we expect crude oil to sustain its dominance in Nigeria’s export while manufactured imports will most likely dominate the country’s import bill. We anticipate sustained trade deficit in agriculture, manufactured goods and raw materials goods in year 2020,” it said.

The group expects headline inflation to remain elevated as the combination of food supply shocks, forex policies, higher energy costs, forex  illiquidity, heightened insecurity in major food-producing states, continue to mount pressure on domestic consumer prices.

“We believe a broad-based harmonization of fiscal and monetary policies towards addressing the identified structural constraints will significantly help to moderate inflationary pressure in the medium term,” it said.