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Resolving Forex Crisis In Manufacturing Sector

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The manufacturing sector has witnessed lots of challenges but the key problem is the inability of businesses to access dollars to import raw materials and machineries.

The Nigerian manufacturing sector has been practically on a progressive decline since the early eighties. For the first decade after independence, the sector grew on the back of resource-based industrialisation where industrialisation was shaped by raw materials availability in-country. Then there was a transition to an import substitution strategy of industrialisation following the oil boom, hence, there was enormous foreign exchange to import raw materials in abundance.

With collapse of oil prices in the early eighties, the manufacturing sector suffered considerable setback as there was no sufficient forex to support the import dependence of the sector.  This age-long challenge is still bedeviling the sector till date.  The performance of the various sub sectors was largely dependent on the extent to which they could source their raw materials locally.  This became a major factor in the competitiveness of industries.

Despite the numerous policies and measures that have been articulated by successive governments, manufacturing contribution to GDP remains less than 10 per cent on average over this period.

The sector has remained largely import dependent which has made it very vulnerable to external shocks. This feature is also factored on the weak competitiveness of the sector. Many manufacturing firms have low local value addition, weak backward integration, inadequate forward integration, and low job creation potentials. All these weakened the impact of the sector on the economy and the development process.

Speaking at the Commerce and Industry Correspondents Association of Nigeria (CICAN) annual workshop and awards held in Lagos, the CEO of Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf said: “the sharp depreciation of the naira exchange rate in the parallel market remains a cause for concern.  It is a trend that should not be allowed to continue and all necessary steps need to be taken to stem the slide and volatility.”

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This, he said, calls for an urgent review of the current foreign exchange policy, saying ‘my proposition is that we should adopt a flexible exchange rate policy regime.’

He clarified that this is not a devaluation proposition, rather it is a pricing mechanism that reflects the demand and supply fundamentals in the foreign exchange market.

According to Yusuf, it is a model that is sustainable, predictable and transparent.  It is a policy regime that would reduce uncertainty and inspire the confidence of investors.  It is a policy framework that would minimize discretion and arbitrage in the forex allocation mechanism.

He explained that a flexible exchange rate regime is adopted to cope with changing demand and supply conditions in the forex market and the benefits of a flexible exchange rate model are; it enhances liquidity in the foreign exchange market; it reduces uncertainty in forex  market and therefore enhances the confidence of investors; it is more transparent as mechanism for forex allocation; among others.

He noted that, in the light of the foregoing, the following policy options could be explored to mitigate the current crisis. He listed them to be; adoption of a flexible exchange rate regime, as this would improve liquidity in the forex market, reducing uncertainty and enhancing investors’ confidence.

He added that, these will deepen the autonomous foreign exchange market through the liberalisation of inflows from Export Proceeds, Diaspora Remittances, Multinational Companies, Donor Agencies, Diplomatic missions among others.

The CPPE CEO said: “the Nigerian economy has the capacity to weather the current turmoil if the policy contexts are right.  We have the market, the people and natural resources. The opportunities that the present situation offers would only be realized if policy obstructions to resource flows are removed.”

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On his part, the managing director of NISPO, Sir Afam Ukatu said: “the manufacturing and steel industry is facing lots of problems, regarding accessibility to foreign exchange to buy raw materials and also the spare parts.”

He noted that “these two important things are what keep manufacturing going or manufacturing working. If you are not able to have access to forex, in order to buy those items, you are collapsing the factory. Manufactures Association of Nigeria (MAN) has been advocating that the Central Bank of Nigeria (CBN) should create a window that can help genuine manufacturers access forex with ease but to no avail.

“We are appealing to the government to make an investment friendly monetary policy to prevent the total collapse of industries. It is becoming so obvious that it has affected so much industries, basically because of the high exchange rates of which some have to go out of the way to buy from the parallel market to continue in production.”

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