John Apata, who owns a bottled and sachet water company in Ijebu Ode, Ogun State, revealed to NATIONAL ECONOMY that he has had to lay off at least 15 workers in his small factory because his small business cannot afford to pay salaries and buy raw materials to the extent that it could a few months ago. He said if the current economic situation persists, he will shut the business down over the next three months as he cannot afford to owe salaries.
Stanley Ogbeifun, a baker, makes a similar complaint. He said people are not demanding bread as they used to because the commodity has become prohibitive. Ogbeifun said the slide in the value of the naira has made it difficult to procure foreign exchange, which is needed to get raw materials that his business needs from Europe.
Apata and Ogbeifun, though operating in different industries, share a common problem in their business endeavours, forex scarcity.
The Nigerian economic landscape has been jolted by a growing crisis, as businesses grapple with the crippling effects of forex scarcity, forcing some to shutter their operations. This distressing scenario comes as the country’s manufacturing sector battles to secure foreign exchange for essential raw materials, spare parts, and machinery. The consequence is a wave of closures and job losses that threaten not only individual livelihoods but also broader economic stability.
The oil industry, a significant driver of Nigeria’s economy, is also feeling the pinch of forex scarcity. Despite the issuance of importation licenses to six downstream companies, only three of them, namely Eterna Plc, Emadeb Energy Services Limited, and Asharami Energy, are set to begin petroleum products importation. However, these companies are reportedly struggling to source the foreign exchange required to purchase the products, casting doubt on the feasibility of these imports. Such difficulties in accessing forex not only disrupt business operations but also put a strain on Nigeria’s overall fuel supply.
The foreign exchange challenge extends beyond the oil sector, with manufacturing industries bearing the brunt of the crisis. Manufacturers are grappling with insufficient access to forex, which severely hampers their ability to import raw materials and essential components. The inability to procure these materials disrupts production schedules, drives up costs, and ultimately diminishes the competitiveness of Nigerian products in the global market. Small and medium enterprises (SMEs) are particularly hard-hit, as they struggle to secure the necessary forex to maintain their operations.
The Central Bank of Nigeria’s efforts to allocate a portion of forex purchases to manufacturers have fallen short of resolving the issue. Despite the allocation directive, manufacturers are still grappling with inadequate access to forex, and some report receiving only a fraction of their requests from deposit money banks. This shortfall significantly disrupts their production cycles, leading to reduced output and potential job losses.
The grim impact of forex scarcity has further implications for Nigeria’s inflation rate. Although the Tinubu administration has attempted to harmonise the exchange rates between the official and parallel market rates, the scarcity of foreign exchange has led to a recent rise in the cost of the dollar on the parallel market, subsequently contributing to the country’s inflationary trends.
And with efforts of the CBN to intervene to save the naira the inability to access forex at official rates has forced manufacturers to resort to the parallel market, where the dollar is getting more expensive. This escalation in production costs directly translates to higher consumer prices and, consequently, a spike in the inflation rate, which reached 22.79 per cent in June 2023, according to the National Bureau of Statistics.
The roots of Nigeria’s current forex crisis can be traced back to oil market volatility, which was exacerbated by the drastic drop in crude oil prices in 2014. Crude oil accounts for a significant portion of Nigeria’s foreign exchange earnings, making the nation vulnerable to market fluctuations. The decline in oil prices led to a shortage of foreign exchange, which has persisted despite various interventions by the Central Bank.
For Professor Tayo Bello of Adeleke University, to mitigate the adverse effects of forex scarcity, the Nigerian government must consider comprehensive measures. According to him, “A renewed focus on diversification of the economy away from oil dependency is imperative. Promoting domestic industries, increasing export capacity, and investing in sectors like agriculture and technology can help generate alternative revenue streams. Additionally, enhancing the ease of doing business, reducing bureaucratic bottlenecks, and implementing policies that support SMEs’ growth will contribute to economic resilience.”
Also, a lecturer in the Department of Insurance, Ebonyi State University, Dr. Nelson Nkwo, said -Nigeria’s policymakers must also urgently address the underlying issues affecting the forex market. He said collaborative efforts between the government, the Central Bank, and the private sector are essential to formulate strategies that ensure a more stable and accessible forex market. “Exploring avenues to boost non-oil exports, attract foreign investments, and improve foreign exchange reserves will play a pivotal role in easing the current crisis,” he said.
On his part, a financial economist at Nnamdi Azikiwe University, Dr. Felix Echekoba, noted that the current state of forex scarcity and its far-reaching consequences demand immediate action. “The Nigerian government and stakeholders must engage in proactive discussions, implement strategic interventions, and adopt long-term policies that address the root causes of the crisis. By doing so, Nigeria can pave the way for a more resilient and diversified economy that can weather external shocks while ensuring sustained growth and prosperity,” he stated.
