Foreign suppliers’ rejection of letters of credit (LCs) amid unsettled foreign exchange obligations has worsened the economic woes facing manufacturers in Nigeria.
In recent months, rising operating costs as a result of the naira devaluation have weakened the purchasing power of consumers and dampened businesses in the manufacturing sector.
“The rejections of LCs started immediately after the naira was devalued. In the past six months, I have downsized about 40 percent of my staff because of the dollar problem,” Melvin Anu, managing director/chief executive officer at Kerlin Products Nigeria Limited, said.
He said the situation has affected the company’s ability to source for raw materials used in producing wines and spirits, as one of his key suppliers of flavours – Germany — told them that the only way to place a local purchase order is by paying in dollars as the suppliers cannot give them the goods in naira.
“And even though they are collecting dollars, how and where can we source dollars. As of now, we are not making any profit, we are just doing all we can to remain in business because it is more expensive to go out of business,” he added.
George Onafowokan, managing director/chief executive officer at Coleman Technical Industries Limited, said most manufacturing businesses have shrunk as the working capital or funds available to manufacturers have reduced by 40-60 percent.
“If the money for buying raw materials has shrunk by that percent and you don’t have enough dollars to back that up, it means a lower capacity utilisation for manufacturers,” he added.
BusinessDay had reported three weeks ago that several Nigerian businesses that rely on imports have been cut off by their foreign suppliers who are rejecting LCs and refusing to deliver goods without payment as foreign currency shortages worsen in Africa’s biggest economy.
A letter of credit is a mode of payment used for the importation of visible goods. It is a written undertaking given by a bank at the request of its customer, in which the bank obligates itself to pay the exporter up to a stated amount within a prescribed time frame upon presentation of stipulated documents in exchange for goods.
Foreign suppliers were said to be demanding cash transfers into escrow accounts in place of LCs as faith in the Nigerian banking system wanes owing to the dollar shortage.
“The banks have a lot of backlogs of LCs which has made international exporters and investors to no longer take them from Nigerian banks and importers. What the banks now tell us to do is to pay cash into the accounts of the exporters,” Femi Egbesola, national president of the Association of Small Business Owners of Nigeria, said.
He said local importers are forced to settle for the parallel market to get funds at a very high cost which makes them increase the cost of their products and services.
A Lagos-based banker who asked not to be named said many manufacturers have not fulfilled their financial obligations.
“We are dealing with a lot of backlogs because the Central Bank of Nigeria (CBN) is not giving us funds. There are a lot of commitments to banks or suppliers abroad that we have not met up with. So, based on that, a lot of them are not comfortable with our LCs,” he said.
A recent report by PwC Nigeria noted that the rejection of LCs may lead to less imports of the much-needed inputs and goods for manufacturing and retail/wholesale trade.
“This may heighten inflationary pressures and negatively impact Gross Domestic Product growth,” the report added.
Nigeria has been grappling with a severe dollar shortage for years, which worsened following the fallout of the Russia-Ukraine war that started in February 2022.
In June this year, the CBN collapsed all segments of the FX market into the Investors & Exporters window and devalued the naira.
The naira depreciated from 416.52/$1 as of February 28, 2022 to 848.12/$1 on Tuesday at the official market. At the parallel market, popularly called black market, it weakened to 1,050/$1 from 575/$1.
The high cost of sourcing FX was one of the major factors that pushed the country’s inflation rate to an 18-year high of 26.72 percent in September from 25.80 percent in July, according to the National Bureau Statistics.
The Manufacturers Association of Nigeria (MAN) say manufacturing activities continue to suffer due to persisting scarcity of forex and further depreciation of the naira.
“Only 14.7 percent of manufacturers enumerated claimed that the rate at which forex was sourced improved in Q2; 66 percent disagreed while 19.3 percent were not sure if forex sourcing had improved in the quarter under review,” it said.
The association added that the lingering forex scarcity and continuous depreciation of the naira have left manufacturers bleeding and limited their capacity utilization since the importation of non-locally produced critical input has become a nightmare.
According to Segun Ajayi-Kadir, director-general of MAN, many manufacturers rely on foreign suppliers for their raw materials in order to produce.
“Government has to address the root cause of this problem by giving priority to manufacturers. Manufacturing is the bedrock of any economy. And if you are failing in that space, you will trigger inflation and unemployment which could result in a decline in revenues,” he said.
The CBN last week restored the 43 items prohibited from accessing forex in the official market after eight years in a bid to boost dollar inflows.