Manufacturing: FX Shortage Starting to Bite

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Wednesday, May 13, 2020 / 12:22 PM / By CSL Research / Header Image Credit: BusinessDay NG


A Business Day article reports that Nigerian manufacturers are struggling to stay in business because foreign exchange shortage caused by the collapse in oil prices means they can't import raw materials. According to the report, Members of the Manufacturers Association of Nigeria have been unable to access foreign currency for the past five weeks.


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The steep dip in oil prices caused by the covid-19 pandemic has meant a shortage of FX for the Nigerian government and there were estimates in the media of a back log of c.US$1bn in the queue to access FX. The CBN at the start of the week however noted that the country's available foreign exchange will be devoted to to strategic imports or to service obligations that are a priority. Foreign investors looking to repatriate their funds were also assured of the safety of their funds but were asked to remain patient.


Foreign currency constraints, devaluation, and shrinking disposable incomes are all factors that significantly strain the performance of the manufacturing sector. A prolonged constraint in the ability of manufacturers to conduct businesses leads to a crisis in the sector and loss of loans extended to manufacturers by the banks. The scarcity of foreign exchange from the official window compels manufacturers to source funds from the black market, which trades at a significant premium to the I&E window, in order to sustain their business operations. Clearly, the obvious solution would be for these manufacturers to pass on these cost increases to consumers by increasing prices. However, increasing prices comes at a huge cost to volumes for goods which have relatively elastic demand and current economic pressures are pushing more goods into that category.


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The real GDP growth of the Manufacturing sector has been dismal in the past five years with only 0.8% growth recorded in 2019. While we believe the manufacturing sector will remain a priority to the Nigerian government in terms of FX allocation, which we think may help avert a crisis in the sector in the interim, shrinking disposable income and high infrastructure costs are two factors that will continue to impede growth in the near to medium term.


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