‘How unfulfilled $2.4bn FX contracts pushing manufacturers to the brink of collapse’

BY TEMITOPE ADEBAYO

Nigerian manufacturers are facing an existential crisis as the Central Bank of Nigeria (CBN) continues to delay the redemption of $2.4 billion in forward contracts, part of a larger $7 billion backlog. This delay, according to the manufacturers has severely hindered companies’ ability to meet offshore obligations, pushing many to the edge of bankruptcy.

To this end, the Manufacturers Association of Nigeria (MAN) has warned that this unfulfilled commitment has led to crippling financial losses, jeopardizing the stability of the entire manufacturing sector, stressing that the continued non-redemption of the $2.4 billion forward contracts posed a grave threat to the survival of some Nigerian companies and job loss to thousands of workers.

This is even as companies grapple with the inability to fulfill their offshore obligations due to the Central Bank of Nigeria (CBN)’s non-delivery of dollars, many face the grim prospect of downsizing or shutting down operations completely.

Foreign exchange forward contracts are financial instruments and are globally practiced to enable businesses to hedge against exchange rate fluctuations by locking in a future exchange rate. The Central Bank of Nigeria traditionally issues these contracts, promising to deliver foreign currency at a specified future date in exchange for upfront naira payment.

The manufacturers association said, the CBN’s non-fulfillment of its forward contract obligations has led to a cascade of negative consequences as within the last six months, companies have incurred over N1.5 trillion in forex-related transactions losses, contributing to the poor and worsening performance of many businesses.

“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,” the association said.

The director-general of MAN, Segun Ajayi-Kadir stated that, “this 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 who 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.”

He added that businesses with substantial foreign exchange liabilities face acute credit and liquidity risks due to their inability to settle forward contracts, saying, “this strains cash flow and jeopardizes overall financial stability. 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.”

Ajayi-Kadir pointed out that businesses are struggling to meet their loan repayments, leading to the rescheduling and restructuring of loan terms, adding that, “due to numerous challenges, such as high production costs and low consumer demand currently confronting manufacturers, there is little hope of meeting financial obligations as scheduled.

“As a result, these rescheduled loans often come with higher interest rates. The immediate implication of this is the declining contribution of the sector to the overall economy. The erosion of trust among foreign suppliers and financial institutions, triggered by businesses’ inability to honour their initially issued letters of credit, has further compounded the challenges of foreign financial flows and investment in the country. All these adversely affect the business operations and the Nigerian economy at large.”

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MAN implored the CBN to give serious and expedited consideration to the imperative of the sanctity of contracts, explore avenues to resolve outstanding obligations, and prioritize the interests of businesses that have acted in good faith.

MAN DG emphasised that, “the resulting financial strain on manufacturing businesses has led to widespread closures, job losses, and economic turmoil. The manufacturing sector has borne the brunt of this crisis, with a staggering 108.7 per cent increase in job losses in 2023 alone.”

To prevent further damage, MAN urged collaboration between the CBN, the Federal Ministry of Finance, and the private sector to develop a sustainable framework for resolving outstanding forward contracts and improving foreign exchange inflows, explaining that, by prioritising the survival of the manufacturing sector, the government can mitigate the negative impacts of this crisis and foster economic recovery.