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RDAS closure will cause 20% increase in production cost – LCCI

By BusinessNews Staff on February 25, 2015

The Lagos Chamber of Commerce and Industry (LCCI) has said the decision of the Central Bank of Nigeria (`1) to close the Retail Dutch Auction System (RDAS) will lead to about 20 per cent increase in the cost of production for firms in the country.

The measure would also impact on sales performance, profit margins and ultimately capacity utilisation of their firms, the Chamber added, noting that import duty and other port charges, which are computed as a percentage of import costs will also correspondingly increase.
President of the LCCI, Alhaji Remi Bello made these remarks in a statement.

The CBN had scrapped the official segment of the forex market last week and directed authorised dealers and members of the public to channel their forex demands to the interbank market.

However, Bello maintained that the CBN policy implied that additional pressure on operating costs for erstwhile beneficiaries of the CBN RDAS forex window. Nevertheless, he noted that the policy has its merits and its downsides.

“Following the revision of the guidelines and the exclusion of some transactions, this forex window was targeted at providing support for the real sector of the economy because of their strategic importance to the development process, job creation and inclusive growth. They are therefore the first naturally victims of the closure, particularly the few that had access to this window,” he said.

According to Bello, as a result of the policy, firms’ funding requirements (in naira) will increase to reflect the new exchange rate and this has implications for cost of funds.

He explained: “Many firms, especially manufacturers with high foreign exchange exposure have been thrown into loss positions as a consequence of the depreciation of the naira over the last couple of months and the eventual closure of the RDAS window. This is a major challenge currently being faced by many real sector operators, especially the medium and large firms.

“Exchange rate induced loses could trigger a new wave of non-performing loans in the banking system and this has implications for financial system stability.

“However, given the record disparity between the CBN RDAS forex window; the interbank and the parallel market rates, it was clear that the RDAS Forex window was not sustainable. The CBN could obviously not meet the huge demand for forex under the RDAS window. In spite of repeated assurances, many genuine requests for forex for industrial raw materials and other vital inputs were denied by the CBN.

“Foreign financial obligations could also not be met by many firms as remittances were affected. This resulted in serious confidence issues among foreign creditors of Nigerian companies with some credit lines to Nigeria companies being put on hold.”

Bello pointed out that the huge premium of over 20 per cent was a major incentive for round tripping, corrupt practices in the management of the forex, speculative activities in the foreign exchange market and many other abuses.

It was also a major source of uncertainty and volatility in the market, he said, stating that there had been concerns about the lack of level playing field in the management of the RDAS window.

“In the light of all these, it is difficult to fault the decision of the CBN to close the RDAS window. Meanwhile, the LCCI proposes mitigating measures to cushion the effect of this policy on investors with high foreign exchange exposure. Besides, many real sector investors are faced with numerous investment climate challenges which include high cost of fund, competition from unbridled smuggling and dumping of finished goods, counterfeiting and faking, high energy cost including electricity tariffs, high cost of regulatory compliance and high transactions costs at the ports.

“The ECOWAS Common External Tariff (CET) will soon come into force and would create new competition challenges for domestic firms. A combination of monetary and fiscal measures will need to be deployed to mitigate the pressure on the affected firms and save them from going under,” he added.

As a way of cushioning the effect of the policy on industrialists, he advised the CBN to urgently provide a refinancing facility as life-line for investors in the economy which have high foreign exchange exposure.

“The sustainability of this class of businesses is currently at risk. We recommend a minimum refinancing facility of N200 billion to be provided at single digit interest rate and a 15 year tenure. All critical raw materials and other imported inputs of manufacturing firms should henceforth attract zero import duty. All machineries and equipment should attract zero import duty. Port charges should be waived for raw materials importation and machineries,” he suggested.

[ThisDay]

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