•Says sector incurred over N1.5tn losses in foreign related transactions
•Many SMEs forced to close operations
CHIGOZIE AMADI
The Manufacturers Association of Nigeria (MAN) yesterday, declared that continued non-redemption of the $2.4 billion FX forward contracts by the Central Bank of Nigeria (CBN) was posing a grave threat to the survival of Nigerian manufacturing companies and jeopardising the livelihoods of thousands of workers.
This comes exactly three days after the National President, Nigerian Association of Chambers of Commerce Industry Mines and Agriculture (NACCIMA), Mr. Dele Oye, also lamented that the non-payment of Foreign Exchange (FX) forwards had severely crippled affected companies, pushing many towards bankruptcy. Oye, had also said businesses and banks involved were now burdened with exorbitant interest rates, averaging over 35 per cent.
However, the latest declaration by MAN, was in a statement issued by its Director General, Mr. Segun Ajayi-Kadir, titled, “The Implications of the Continued Unsettled Forex Forward by the CBN and Its Impact on the Manufacturing Sector,” which was exclusively obtained by THISDAY.
MAN outlined in the statement that the CBN’s non settlement of the FX Forward obligations has caused over N1.5 trillion in forex-related transactions losses in the manufacturing sector that recorded 108.7 per cent increase in job losses in 2023 and forced many Small and Medium Enterprises (SMEs) to close operations to the detriment of the Nigerian economy.
The association stressed that manufacturing companies were grappling with inability to fulfill their offshore obligations due to the CBN’s non-delivery of dollars and were faced with the grim prospect of downsizing or shutting down operations completely.
It observed that the gloomy scenario was avoidable and urged the CBN that the time to end the impasse was now.
Ajayi-Kadir added: “Quite frankly, the CBN’s non-fulfillment of its forward contract obligations has led to a cascade of negative consequences.
“Manufacturing concerns have been worse hit. For instance, within the last six months, companies have incurred over N1.5 trillion in forex-related transactions losses, contributing to the poor and worsening performance of many businesses.
“The resulting exchange rate differentials and the burden of interest on loans to meet Naira deposit requirements have been entirely transferred to manufacturers, increasing production costs and impacting product prices.
“This crisis has disrupted manufacturing supply chains, hindered productivity, and jeopardised job security. Consequently, businesses are struggling to meet their loan repayments, leading to the rescheduling and restructuring of loan terms.
“Due to numerous challenges, such as high production costs and low consumer demand currently confronting manufacturers, there is little hope of meeting financial obligations as scheduled. “As a result, these rescheduled loans often come with higher interest rates.”
He noted that the immediate implication of this was the sector’s declining contribution to the overall economy and erosion of trust among foreign suppliers and financial institutions due to Nigerian businesses’ inability to honour their initially issued letters of credit, which has further compounded the challenges of foreign financial flows and investment into the country.
According to him, “it is expedient to note that many businesses borrowed money from banks for working capital that was used by the banks to open clean line for letter of credit for their companies based on the allocated forward contract from the CBN.
“Worse still, the commercial banks have continued to charge dollar account along with other Naira bank charges such as 35 per cent interest rate on the facilities that these companies have with their banks.
“All these have significantly eroded the working capital of the companies who barely make margins of 5.0 per cent on the sales of their products.
“This rather worrisome breach of contract has further exacerbated currency risk for businesses, leading to substantial financial losses and operational disruptions.”
Ajayi-Kadir argued that businesses with substantial foreign exchange liabilities are currently faced with acute credit and liquidity risks due to the unsettled forward contracts, which has strained their cash flow and jeopardised their overall financial stability.
According to him, “while many SMEs have been forced to close or temporarily suspend operations, larger corporations have incurred massive foreign exchange losses exceeding over N300 billion in the second half of 2023.
“This situation has been exacerbated by the continuous depreciation of the Naira, which has depreciated by more than 72 per cent, from N450 to N1600 per dollar over the past year.”
He, therefore, pointed out that manufacturing firms’ financial planning and budgeting have been severely compromised due to the uncertainty surrounding future exchange rates, adding that the cascading effects on the economy are far-reaching, impacting production, employment, government revenue and overall economic growth.
Ajayi-Kadir, also noted that even though the CBN recently announced its inability to honour $2.4 billion worth of forward contracts, citing an ongoing investigation by the Economic and Financial Crimes Commission into some foreign exchange transactions, “no clear allegations or infractions have been communicated to any of our members and none have been indicted for any infractions. Yet, the forwards have remained unredeemed.”
He said the $2.4 billion worth of unsettled forward contracts that stemmed from the backlog of $7 billion has triggered severe crisis for the manufacturing sector and Nigerian economy.
Having done this detailed analysis outlining the far-reaching consequences of the unsettled FX Forwards transactions on the manufacturing sector, MAN implored the CBN to, “give serious and expedited consideration to the imperative of the sanctity of contracts, explore avenues to resolve outstanding obligations, and prioritise the interests of businesses that have acted in good faith.
“Reneging on these legally binding contracts potentially undermines the CBN’s credibility and may damage investor confidence.”
The director general of MAN noted that the resulting financial strain on manufacturing businesses has led to widespread closures, job losses, and economic turmoil.
He added: “The manufacturing sector has borne the brunt of this crisis, with a staggering 108.7 per cent increase in job losses in 2023 alone.”
To prevent further damage, MAN called for collaboration between the CBN, the Federal Ministry of Finance, and the private sector to develop a sustainable framework for resolving outstanding forward contracts and improving foreign exchange inflows.
“By prioritising the survival of the manufacturing sector, the government can mitigate the negative impacts of this crisis and foster economic recovery.”
