- Removal of currency peg hasn’t alleviated dollar shortage
- Manufacturers passing higher import prices on to consumers
Flour Mills of Nigeria Plc, the country’s biggest miller by market value, said manufacturers in Africa’s most populous country are finding profits under pressure from a fall in crude prices, a weak naira and rising input costs.
“Taken together, these factors have contributed to a perfect storm,” Chairman John Coumantaros told investors at a meeting in the commercial hub, Lagos, on Thursday. Flour Mills was able to “offset the impact” of the challenges “through commensurate increases in the selling prices of its products,” Coumantaros said.
The manufacturing industry is grappling with “monumental challenges” including a deteriorating road network, inadequate power supply and worsening security concerns, the chairman said.
A fall in oil prices from 2014 that cut government revenue prompted the Central Bank of Nigeria to peg the naira at 197-199 to the dollar for 15 months in a bid to conserve reserves and cap price increases. The move, which caused a scarcity of dollars, crippled imports and increased costs for industries. It also led to the exit of foreign investors who are yet to return, almost three months after authorities allowed the naira to trade freely.
The country’s gross domestic product contracted by 2.1 percent in the three months through June from a year earlier, while inflation accelerated to 17.1 percent in July, the highest rate since October 2005.
Expectations that dollars would become available to manufacturers after the central bank abandoned its peg have been dashed, Paul Gbededo, Flour Mills managing director, said in a separate interview. “The aspiration is that once you devalue, the people will bring in their dollars; that we are not seeing yet,” he said. “Nigeria is badly hit with foreign-exchange earnings, thereby not being able to fulfil its import bill.”
Nigerian companies will need to increase prices to remain profitable, according to Gbededo. “For those who are import-dependent, you have to see an increase in price, tracking the foreign exchange issues,” he said.
Flour Mills is issuing 40 billion naira ($123 million) of shares through a staged process instead of a one-off initially planned as the country’s “economic headwinds” limit the ability of investors to buy securities, Coumantaros said.
The company plans to expand its Sunti Golden Sugar Estate Ltd. unit, a farm in Nigeria’s northern Niger state where it cultivates sugar and rice, as it targets to reduce the dependence of the West African country on imported sugar, Gbededo said. It has invested 40 billion naira in sugar cane production and a sugar mill that is planned to begin work in early 2017, he said.
The Lagos-based firm is also expanding investments in agricultural products to enable it source raw materials for its agro-allied industries locally, thereby reducing dependence on foreign exchange, according to Gbededo.
“We want to see how we can aggregate corn for feed mill, aggregate oil bean for vegetable oil mill, aggregate sorghum for sorghum mill which we will bring on stream next year,” he said. “Since we have issues with foreign exchange, Nigeria needs to look inwards,” he said, referring to companies operating in the country.