Former LCCI DG identifies foreign exchange crisis as the biggest problem facing investors

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… Demands improved policy to manage foreign exchange market

A former Director General of the Lagos Chamber of Commerce and Industry (LCCI), Dr. Muda Yusuf has said that the foreign exchange crisis is, perhaps, the biggest of the crisis investors are faced with in Nigeria apart from the legacy problems of infrastructure, power, roads, logistics and the seaports among others.

Yusuf who made this assertion while delivering a paper titled, “The Impact of FOREX Crisis on the Real Sector”, at the 2021 Workshop of the Commerce and Industry Correspondents Association of Nigeria (CICAN) held in Lagos last Friday stated that the challenges of FOREX in the real sector and indeed, practically all sectors of the economy were of three dimensions.

”The first is the sharp depreciation in the currency over the last one or two years. We all know what the exchange rate situation has been over the last one or two years even though the CBN has said that it doesn’t reckon with the parallel market but the reality is that the operating exchange rate in the economy today is the parallel market exchange rate because that is where close to 70% to 80% of players source their foreign exchange from.

The second dimension of the challenge is the liquidity crisis in the foreign exchange market which manifests in the acute shortage of foreign exchange in the official window. We have heard it said severally that anybody with legitimate demand will always find FOREX but the reality is that many people with legitimate demands are not able to get foreign exchange. We are seeing multinationals, top companies make request in the official window, if you are lucky, you get 20% of your request. And when you talk about liquidity, it is about the ease with which you can buy or sell in the market. If it is very easy, you can see that that there is liquidity in that market. We don’t have that as far as foreign exchange market is concerned. I am talking now about the official window which is the window that the CBN says it recognizes.

“Then, there is the challenge of the volatility of the exchange rate which creates considerable uncertainty and unpredictability in the foreign exchange market. Even for as low as those who are in the market place, I am talking about our traditional market now, most times, they are not sure what the price will be the following day because of the volatility of the exchange rate and the impact that the exchange rate is having on prices. So, volatility creates its own challenges, it creates a lot of uncertainty, it creates a lot of unpredictability in the investment environment”, he said.

X-raying the impact of depreciation on the real sector of the economy and the Small and Medium Enterprises (SMEs), Yusuf who is also the Chief Executive Officer of Centre for Promotion of Private Enterprises (CPPE) said, “First is the high cost of production because of the high import dependence of most of our manufacturing companies especially for imported raw materials, for spare parts and for equipment. So, if you have a sharp depreciation in the exchange rate, it naturally affects cost of production which is why we have been seeing the kind of inflationary pressure that we have been seeing over the last couple of months.

“The second effect of depreciation is the low sells and turnover because of the increase in price and the effect of demand. If the cost of production is increasing, the natural thing is that the manufacturer or whoever is the investor will pass on the cost to the consumers and the implication of that is that the crisis will increase. Again, the rate at which you can transfer the price depends on what we call elasticity of demand in economics and what elasticity of demands means is the sensitivity of the consumers to price changes. If you are in a business where if you increase your price by even 5%, the customers can walk away, then, you are in trouble and that is affecting a whole lot of manufacturers because if you are not producing something that is really essential, any slight increase, they will just dump your product.

“So, a lot of manufacturers have been picking the heat, some struggle with how to manage it, some change the size of their products and retain the price, some change the quality of their products so that they can retain the price. A lot of them run away from increasing price unless it becomes absolutely inevitable. So, consumer resistance is a big issue. So, once you have this kind of pressure on cost which is translated to increase in price, it affects sales and it affects turnover, then, it also erodes profit margins because not all the additional costs can be passed on to consumers. If you are not able to pass on your cost, then, of course, you are taking the heat. That means your profit is what will suffer.

“Then, it increases business continuity risk for some segments of the manufacturers. In the last one or two years, some businesses have actually gone under because they could not cope with the pressure that the depreciation of the currency has put on them because they cannot pass on the cost to the consumers. So, they have to pack. So there is the business continuity risk that this has imposed.”

Also looking at the impact of the FOREX liquidity, the former LCCI boss said, “The impact of FOREX liquidity including the challenges about the availability of foreign exchange to investors in the economy, this has also been a major challenge to investors in the economy including the real sector and just as I defined liquidity, liquidity is the ease with which you can get the foreign exchange at the rate the government says it is going to. If you can’t get it at that rate, then, that means there is no liquidity in that market and that is what is happening to the official window of the foreign exchange. So, when you cannot guarantee availability of foreign exchange, it makes planning difficult because of uncertainty, it makes it impossible for you to repatriate profit or dividend especially when we talk about foreign investors. You know, as we speak, there is a huge backlog of dividends or profits or whatever that the foreign investors want to take out. The CBN has been struggling with that, I don’t know how far they have gone but at a time, you are talking about billions of Dollars in backlog that are yet to be cleared. That is a reflection of the liquidity problem in the foreign exchange market.

“Then, it also compels investors to patronize the parallel market at a rate that is much more prohibitive because if you can’t get your FOREX in the official window and your business must go on, you can’t go and tell your shareholders, ‘well, we want to pack up the business because we are not getting FOREX”, they will ask you, “how are other people getting it? Go and sought it out.’ So, a lot of businesses now go to the parallel market and I can tell you that even some of them have been accosted by the EFCC wanting to know where they got FOREX from even when they have challenges in the official window, they went to source from the parallel market, then, you will now begin to explain how you got it from the parallel market. You now have to clear yourself whether it not money laundering and all of that. You can see that kind of problems that businesses are going through.

“Patronage of the parallel market creates compliance and regulatory issues for investors; capacity utilization is also impacted when access to FOREX is constrained. It also poses a risk to business continuity.”

On impact of the exchange rate volatility, he said, “When you cannot predict what the exchange rate can be tomorrow. It worsens uncertainty for investors including SMEs, it undermines investors’ confidence, it makes planning difficult and it also aggravates investment risks. These are the key challenges that the real sector and even other sectors face as a result of the crisis that exist in the foreign exchange market and of course, the crisis you can attribute to two things; one is that the economy’s capacity to generate foreign exchange has decline and if you have problem with supply, it will affect the rate.

“But the more disturbing one is the policy around the management of the foreign exchange market itself. At least, if you don’t have control over the external variables, you should be able to control the nature and structure of policy, at least to bring some stability to the system.

“So, the issue that many analysts have asked to deal with is the quality of the policy to manage the foreign exchange market and ensure that there is stability irrespective of what the rate is. If there is stability, if there is liquidity, it makes a whole lot of difference.”

Photo: Former Director General of LCCI and CEO, Centre for Promotion of Private Enterprises, Dr. Muda Yusuf.

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