Exchange rate depreciation stifling private sector-OPS

Written by Siaka Momoh Thursday, 28 July 2011 00:00

The Organised Private Sector (OPS) has expressed concern that the depreciation of the Naira is having a negative impact on its businesses.

The OPS says the depreciation of the Naira in the parallel market is raising cost of importing raw materials, production and narrowing profit margin since not all costs can be passed on to Nigerias already over burdened consumer.

Femi Deru, president of the Lagos Chamber of Commerce and Industry (LCCI) expressed concern over the nairas falling value in the official and parallel market. Deru, who was particularly disturbed by the widening gap between the official and parallel market rates, observed that such a wide gap will encourage speculative demand and round tripping of the dollar.

We appreciate the commitment of the Central Bank of Nigeria (CBN) to stabilising the rate, within a 5 percent band of N150 to a dollar. But the truth is that the parallel market has strong signalling effects in the economy. Deru Said.

Analysts say if the gap between the official rate and parallel market rate of the dollar remains too wide, it could tempt some manufacturers to sell their foreign exchange for profit rather than use it buy raw materials which is the purpose for which it is meant.

BusinessDay investigations showed last week that the gap between the official and parallel market exchange rates was as high as N16 for the dollar and N31.71 for the British pound. Analysts say this huge profit on each dollar and pound is higher than the profit margin of most manufacturers on their manufactured items. And this profit comes without any production process, which makes it quite attractive to just round trip the dollar or pound instead of engaging in a long production process.

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Exchange rate depreciation stifling private sector-OPS

Written by Siaka Momoh Thursday, 28 July 2011 00:00

Deru listed the factors depressing the naira as including liquidity growth in the economy arising from the increasing burden of huge government spending - the establishment and disbursement of various intervention funds, as well as huge foreign exchange demand for the importation of petroleum products.

Other factors, he said, included the unbridled importation of all manner of products into the country, ranging from toothpicks to table water; as well as increasing speculative demand as a result of recent volatility in the foreign exchange market and the parallel market premium.

He called on the CBN to address these problems urgently.

In the face of the very difficult operating environment for businesses, high cost of funds could be the last straw for many investors. Deru Said.

Deru further said it was worrisome that lending rate in the economy was still very much on the high side. We find it difficult to comprehend the situation where deposit rates are very low, ranging from 1-5 percent; and lending rates are about 20 percent or more in many cases. This spread between deposit and lending rates is a major disincentive to saving.

He also complained about rising inflation: This is still high and it is taking its toll on operating costs for investors and the purchasing power of Nigerians. The short term outlook is not quite good because of cost related variables in the economy, such as rising energy costs, as well as the high deficit component of the budget, he said.

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