Lingering forex crisis undermining stock market growth, say experts

Experts have renewed calls to the Federal Government (FG) to adopt a policy that would help tackle the prolonged volatility in the nation‘s foreign exchange (forex) market to spur stock market investment, sustain the current uptick and boost listed firms’ profit.

The stakeholders argued that one of the major reasons the stock market witnessed an unprecedented lull in the past few years was due to investors apathy, fueled by a lingering shortage of forex, stating that this has continued to deter investment growth and profitability.

They insisted that the scarcity of forex prevents productive diversification and discourages investment inflow into the country while stabilised and liquid forex markets would pull back foreign investors who have been waiting on the sideline or exited the country.

According to them, if the shortage of forex that is currently biting hard in the country were tackled, it would improve the profitability of quoted companies and boost dividend payout to shareholders.

They added that it would also attract investment into the country and spur activities in the primary market segment of the exchange.

The experts pointed out that when the Importers and Exporters window was introduced in mid-April 2017, it helped to stabilise volatility and liquidity in the forex market as well as attract foreign investors into the market, just as average Foreign Portfolio Investment (FPI) per month rose to N85 billion, as against N43 billion recorded in 2016.

Therefore, they suggested that the government should create a special funding arrangement such as the establishment of an intervention fund, which is a vehicle where manufacturers can have easy access to forex.

Recall that the value of Foreign Portfolio participation in equity trading in the NSE also hit N851 billion as of October 2017, representing a 60.8 per cent higher than N517.55 billion recorded for the full year ended December 2016.

Chief Executive Officer of Valmon Securities Limited, Tajudeen Olayinka, described foreign currency scarcity as an external sector misalignment and an indication of inadequate supply of a major international currency in an economy, relative to the demand for imports in that economy.

He pointed out that the prolonged dollar shortage, which is currently biting hard on manufacturers, has resulted in operators sourcing foreign exchange from multiple sources, thereby worsening the cost-push inflation that is currently ravaging the economy.

Olayinka stressed the need for the Central Bank of Nigeria (CBN) to ensure that the foreign exchange market functions optimally, so that the economy can run in a manner that helps to restore external equilibrium.

An assessment of the negative effect of the lingering forex shortages on listed firms performance showed that International Breweries Plc incurred a loss of over N11 billion in the second quarter of 2021, three times the N3.7 billion loss it recorded in the corresponding quarter in 2020.

Foreign exchange loss of N7.8 billion recorded by the company accounted for much of the loss it incurred in the second quarter. The half-year loss figure was above the full-year loss of N12 billion in 2020.

A build-up of foreign exchange losses in the second quarter has sustained operating pressures giving rise to the companys cost-income imbalance. The company also incurred another expense of over N11 billion, which was driven by forex loss during the second quarter, 2021

Chairman of the company, Kolawole Jamodu said despite all measures put in place by the regulators to stabilise the market, the non-availability of forex has remained one of the biggest challenges businesses face in 2021, especially on transactions with overseas partners and suppliers for imported raw and packaging materials

To tackle the lingering forex challenge, the CBN introduced varied policies including the adoption of NAFEX as the official rate, halting the sale forex to Bureau de change operators and rationing of forex.

“It also affected investors confidence, as foreign investors were unable to easily repatriate their dividends. Non-availability of input materials contributed largely to the difficulty faced by manufacturers in maintaining an uninterrupted supply of finished products to the market.”

President of Ibadanzone Shareholders Association, Eric Akinduro said the foreign exchange shortage has impacted negatively the operations of listed companies in Nigeria and dampened their stock prices on the exchange.

When you look at annual reports of companies recently, the losses recorded on foreign exchange shortages are alarming. These companies deposits for foreign exchange with the CBN take longer than expected before supply. The official rate of the apex bank is cheaper but the dollar is not available at the stipulated time for these companies to import their goods and such importation is always time inbound.

In view of this, some of the companies do not have an option but to look for alternatives through the alternative market at a very high rate. CBN policies on foreign exchange are not too good for businesses in Nigeria.

“There is a need for the apex bank to review these policies and create an enabling environment for businesses in Nigeria. The best way to tackle the foreign exchange problem in Nigeria is for the companies to develop local materials. Too much dependence on foreign materials will always lead to the high cost of goods.”

President of New dimension Shareholders Association, Patrick Ajudua, stressed the need to create an intervention fund which is a vehicle where manufacturers can have easy access to forex.

According to him, such a fund, which is in the form of a loan, will attract low-cost interest rates at a single-digit so that manufacturers can break even due to high inflation.

He added that such funds must be deployed into financing import-related activities of these companies and encourage local production of raw materials in order to reduce the pressure of utilisation of forex for importation.