The Manufacturers Association of Nigeria (MAN) has raised the alarm that the country’s manufacturing sector is facing some difficulties over the Central Bank of Nigeria (CBN)’s intention not to honour $2.4 billion worth of forward contracts from the backlog of $7 billion.
Specifically, MAN explained that the apex bank’s decision was already disrupting the country’s manufacturing sector value chain.
The Association lamented that many businesses borrowed money from banks to open clean line for letter of credit (LC) based on the forward contract arrangement.
In addition, MAN stated in a release yesterday that within the last six months, companies had incurred over N1.5 trillion in forex-related transactions, contributing to the poor and worsening performance of many businesses.
The Director-General of MAN, Mr. Segun Ajayi-Kadir, described foreign exchange forward contracts as financial instruments and globally practiced to enable businesses hedge against exchange rate fluctuations by locking in a future exchange rate.
He explained that the Central Bank of Nigeria traditionally issued these contracts to local manufacturers, who are into export, promising to deliver foreign currency at a specified future date in exchange for upfront naira payment.
According to him, in this particular case, there is no clear allegations or infractions levied or communicated to any of MAN members into goods export and none has been indicted for any infractions, thus, wandering why the forwards have remained unredeemed by the apex bank all this while.
Ajayi-Kadir said: “This $2.4 billion worth of forward contracts from the backlog of $7 billion has triggered severe crisis for the manufacturing sector and Nigerian economy.
“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 that barely make margins of five per cent on the sales of the products.
This rather worrisome breach of contract has further exacerbated currency risk for businesses, leading to substantial financial losses and operational disruptions.”
“Businesses with substantial foreign exchange liabilities face acute credit and liquidity risks due to their inability to settle forward contracts. This strains cash flow and jeopardizes overall financial stability.”
Speaking further, the MAN boss said: “While many small and medium-sized enterprises 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.
“Financial planning and budgeting have been severely compromised due to the uncertainty surrounding future exchange rates.
“The cascading effects on the economy are far-reaching, impacting production, employment, government revenue, and overall economic growth.”
The economic expert pointed out tha “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 jeopardized job security. “Consequently, businesses are struggling to meet their loan repayments, leading to the rescheduling and restructuring of loan terms.”
