Experts say naira depreciation and forex scarcity doing damage to business
By Jeph Ajobaju, Chief Copy Editor
Information and Communications Technology (ICT) and other businesses are grappling with higher operational costs because of unrelenting depreciation of naira and the lack of access to foreign exchange (forex), experts have reiterated.
Experts at the Centre for the Promotion of Private Enterprise (CPPE) said the two factors have contributed between 30 and 100 per cent to the rise in the cost of production.
They noted that output has declined significantly in many industries because of challenges in accessing raw materials due to forex scarcity, with many operators forced to source costly forex from the black market.
“Many businesses have suffered serious dislocations as a consequence of foreign exchange liquidity challenges, volatility, and the depreciation of the currency,” CPPE said in its Half Year Economic Review issued by founder and Chief Executive Officer Muda Yusuf.
“These have severely affected businesses across all sectors of the economy. Costs of operation and production have gone up from between 30-100 per cent as a result of the exchange rate crisis.
“Output has declined significantly in many industries because of the challenges of accessing raw materials due to the scarcity of foreign exchange.
“Many players in the economy now resort to the patronage of the parallel market at very prohibitive cost, at very little access exist on the official window.
“The sharp depreciation of the exchange rate and the parallel market which is over 300 per cent has worsened the profitability of investments.
“The capacity to retain employment and the capacity to create new jobs have been greatly endangered because of the foreign exchange crisis.”
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Downside risks to investment
CPPE said uncertainty around forex policy has negatively impacted Foreign Direct Investment, Foreign Portfolio Investment and other capital inflows.
In its view, multiple exchange rates and the huge parallel market premium in the forex market are a downside risk to investment growth and attraction of foreign capital into the economy, according to reporting by The PUNCH.
CPPE also said:
Foreign investors are struggling to repatriate their profits, dividends, and income which is also affecting investors’ perception, and reputational and nation risk issues.
Exchange rate depreciation, high energy cost, increasing financing of the deficit by the Central Bank of Nigeria (CBN), insecurity affecting agricultural production, and high cost of logistics are stoking inflation which rose to18.6 per cent in June.
Rising inflation is taking a toll on businesses, increasing production costs, elevating operating costs across sectors, reducing profit margins, and reducing turnover and sales for businesses.
“Debt service to revenue ratio for the first four months of the current year is over 100 per cent.The implication of this is that the actual revenue of government over the period is not sufficient to service debt.
“Therefore, financing of the operations of government – personnel cost, overhead cost, capital expenditure and even part of the servicing of the debt will have to come from additional borrowing. These portends severe vulnerabilities for the Nigerian economy.
“The fiscal outlook is clouded by elevated downside risks in the near term, driven largely by the huge burden of financing petrol subsidy, fiscal leakages, and unsustainable public debt trajectory.
“The outlook poses significant risks to macroeconomic stability amid heightened inflationary pressures, depreciating currency and increasing exchange rate volatility.”
