In light of Nigeria’s ongoing foreign exchange (forex) crisis, industrialists are urging both small and medium-sized enterprises (SMEs) as well as large manufacturing companies to adapt to the challenging forex environment by focusing on export-driven growth and leveraging local fabrication capabilities. The current scarcity of foreign currency to import essential machinery and equipment has created an opening for domestic fabricators to thrive, while at the same time offering manufacturers a chance to earn foreign currency through exports, which could help alleviate the pressure on the weakening naira.
Experts within Nigeria’s industrial sector have emphasized that the devaluation of the naira has made it increasingly costly for businesses to import vital components, machinery, and equipment. As the country’s foreign exchange market continues to experience volatility, they recommend that Nigerian manufacturers explore opportunities to export their products and services as a means of generating hard currency. By tapping into international markets, local manufacturers could not only support the stabilization of the naira but also buffer their operations against ongoing forex challenges.
Embracing Export as a Buffer for Forex Scarcity
Dr. Graham Hefer, the Managing Director and CEO of Okomu Oil Plc, has shared his perspective on how companies like Okomu have successfully navigated these challenges. Hefer pointed out that while the devaluation of the naira has significantly impacted businesses, his company’s involvement in rubber exports has provided a financial cushion. Okomu, which exports rubber, has been able to bring foreign currency back into the country, offering a degree of protection from the prevailing forex scarcity.
“By exporting rubber, we have been able to bring foreign exchange into the country, which helps buffer us against the negative impact of the devaluation of the naira. However, the broader issue remains the challenge of finding the forex we need to import machinery and parts,” Hefer noted in an interview. He emphasized that, despite the forex scarcity, companies that can engage in export activities have a clear advantage, as it not only provides financial relief but also strengthens their competitiveness.
Hefer’s insights align with the larger trend of Nigerian companies adapting to the forex crisis by redirecting their focus towards international markets where their products are in demand. The need to secure foreign currency has pushed Nigerian manufacturers to look beyond domestic markets and pursue new export channels to sustain their businesses.
Nigeria’s Forex Market: Volatility and Challenges
The current volatility of the naira, which has fluctuated dramatically against major currencies such as the US dollar and British pound, continues to be a key concern. Since the naira was floated in mid-2023, exchange rates have been unpredictable, with the naira reaching an exchange rate of N1,537.96 to the dollar by mid-February 2024. On some days, the naira has ranged from N1,000 to as high as N1,631 against the dollar, signaling a high level of instability.
Additionally, Nigeria’s Central Bank has adjusted the exchange rate used for customs duties, from N1,472.76 to N1,493.23 to the dollar, reflecting the fluctuating nature of the currency market. Analysts believe that the current exchange rate structure is unsustainable, with some even arguing that the government’s budget assumptions for 2024, based on a rate of N800 to the dollar, may be overly optimistic given the current economic climate.
Encouraging Local Fabrication in the Face of Import Challenges
In parallel to the push for increased exports, industrialists are also advising manufacturers to turn to local fabricators of manufacturing equipment to mitigate the shortage of foreign-made machinery. Ehrunse Oviawe, the Managing Director of Bragav Nigeria Limited, which specializes in the oil palm sector, emphasized the growing capabilities of local fabricators who can design and build equipment tailored to specific needs, reducing the dependency on foreign imports.
“We are fortunate to have access to brilliant local engineers who can fabricate machinery that meets our specifications. In the face of forex scarcity, these local fabricators have become an invaluable resource for our operations. We no longer have to rely solely on imported machinery,” Oviawe said. He highlighted that despite the challenges, local engineers have been resourceful, innovating and creating custom solutions that meet the demands of the business, especially in the agricultural sector.
Challenges in Nigeria’s Forex Market and the Need for Reform
Analysts at the Financial Derivatives Company (FDC), based in Lagos, have pointed to several factors contributing to Nigeria’s ongoing forex crisis, including a low supply of forex, rising speculation, and a loss of confidence in the naira as a store of value. They also noted the negative real interest rates that exacerbate the problem, making it harder for businesses to access financing or attract foreign investments.
To address these issues, FDC advocates for a reform of the forex market to improve transparency and competitiveness. They suggest that Nigeria’s Central Bank should adopt a more open auction system for forex and dismantle the monopolistic structures that currently dominate the market. This, they argue, would allow the forces of supply and demand to dictate exchange rates, leading to greater stability and investor confidence.
