The liquidity crisis in the foreign exchange (forex) market is becoming increasingly unbearable as many businesses face challenges with importation of raw materials, equipment, spare parties and other inputs, Director-General, Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf has said.
By Collins Nweze
The development, he added, has created a new dimension to the supply chain problems, which many manufacturers had suffered from in the peak of the lockdown.
Yusuf said the forex crisis had put enormous pressure on the parallel market, resulting in a sharp depreciation in the exchange rate in that segment of the market.
“Across practically all sectors, we are experiencing cost escalation, loss of credit lines enjoyed from foreign creditors, forex remittance challenges and many more. We need an urgent response from the CBN to calm the situation and restore confidence in our foreign exchange management framework,” he said.
According to the LCCI D-G, the dollar shortage is hitting most of its 2,000 members hard.
“If the situation persists, it will lead to lay-offs. If you are not producing, there will be a shortage of goods in the market, prices will go up,” he said.
Also, foreign banks are holding back dollar credit lines for banks as dollar scarcity in the economy worsens.
Many of the correspondent banks are capitalising on the projected 8.9 per cent shrink in domestic economy this year and continued drop in the country’s dollar earnings to take extra caution in providing dollar credit lines for local banks to avoid loss of the funds.
With the oil market depressed by a producer price war and the Covid-19 pandemic-induced global recession, the nation’s foreign reserves have fallen 20 per cent in the past year to $36.1 billion, around five months of import cover.
There have also been two devaluations of the naira’s official rate this year, with the local currency exchanging at over N470 per dollar at the parallel market.
Despite assurances by the Central Bank of Nigeria (CBN) that they will not lose their funds, the international banks are still cautious on dealing with local banks.
CBN Governor Godwin Emefiele had at the onset of the COVID-19 pandemic in March, asked correspondent banks and creditors to local lenders not to panic over Letters of Credit and other obligations extended to businesses during the economic crisis.
The bank has also identified a few key local pharmaceutical companies who shall be granted naira and forex funding facilities to support procurement of raw materials and equipment required to increase local drug production in the country.
Emefiele, who spoke at the Special Bankers’ Committee meeting in Lagos, said the apex bank will guarantee Letters of Credit from Nigerian banks (on behalf of their customers) to their correspondent banks abroad.
Manufacturers are facing serious dollar scarcity, making it difficult for them to meet market demand through imports.
The CBN initially sought to stem the decline by suspending dollar auctions in March and continues to severely ration their supply. The Bureaux De Change (BDCs) have also not accessed official dollar sales from the apex bank since March.
Inflation has risen for 10 straight months, hitting a two-year high of 12.56 per cent in June, piling on greater economic hardship for a population.
Despite these challenges, Emefiele said engagements would be held with correspondent banks, trading partners, regarding Letters of Credit and Trade Commitments with banks for companies.
“We will be holding engagements with our correspondent banks and trading partners. In 2016, when we had same incidence, we held engagements with our trading partners, with our correspondent banks, who provide credit lines to customers through Nigerian banks. During those engagements, we told them there was no need for everyone to rush to the door at the same time. We were very clear, that in as much as we agreed that the Letters of Credit and Trade Transactions have been conducted by Nigerian banks on behalf of their customers, those obligations will be met,” he assured.
He said the obligations would be met though slowly, but the important thing is that they will be met. “Those were the commitments we made in 2016, and I am happy to say that as at today, there is no trading partner or correspondent bank, that will say that in 2016, the outcome was that they lost money. No correspondent bank lost money, because we were able to deal with issues concerning those Letters of Credit, bills for collection conducted in orderly manner, to ensure they got all their monies paid.”
Continuing, he explained that even at this time, there was no need for anybody to panic, as the CBN has responsibility and will be dimensioning the size of those commitments and obligations.
“All those creditors and counterparts, I use this opportunity to say, once again, they will be paid all their obligations, no need for any of them to panic. Just as we succeeded in ensuring they were all paid in 2016, I say once more they will be paid, but we need to be orderly in this process. The industry is committed to resolving these commitments in a comprehensive and orderly manner. There will transparency and open communication with all parties.”