Preserving forex reserves, raising local capacity through import substitution

For decades, successive governments in Nigerian resorted to protective measures, including import restrictions and exchange rate control, to manage its foreign exchange (forex) market, and deal with the problems of import and oil dependency.

This import substitution policy is usually heralded by an economic crisis, often triggered by the collapse of the oil market, and a significant drop in Nigeria’s oil revenues, which account for 70% of the country’s total revenues.

Expectedly, the Central Bank of Nigeria (CBN), followed this well-trodden path in efforts to ensure that Nigeria embraces import substitution and reduces the demand pressure on foreign exchange by importers, and ultimately conserves the nation’s hard-earned reserves.

For instance, in June 2015, it banned importers of 41 foreign products from accessing foreign exchange, as the apex bank refused to use the dwindling forex earnings to finance items it feels there are local alternatives and capacity.

This means that the Central Bank will not grant forex to import those goods, most of which are a consumer or intermediate products.

The items are rice; cement; margarine; palm kernel/palm oil products/vegetables oils; meat and processed meat products; vegetables and processed vegetable products; poultry chicken, eggs, turkey; private airplanes/jets; Indian incense; tinned fish in sauce (geisha)/sardines; cold rolled steel sheets; galvanized steel sheets; roofing sheets; wheelbarrows; and head pans.

Others are metal boxes and containers; enamelware; steel drums; steel pipes; and wire rods (deformed and not deformed); iron rods and reinforcing bars; wire mesh; steel nails; security and razor wine; wood particle boards and panels; wood fibre boards and panels; plywood boards and panels; wooden doors; toothpicks; glass and glassware.

Also included are kitchen utensils; tableware; tiles-vitrified and ceramic; textiles; woven fabrics; clothes; plastic and rubber products, polypropylene granules, cellophane wrappers; soap and cosmetics; tomatoes/tomato pastes; and Eurobond/foreign currency bond/ share purchases.

In the following years, the CBN added fertilizers and textiles to the list.

Controversies over the policy have been a common theme and unending, including misinterpretation of decisions; questioning CBN’s powers; economic benefits; wrangling over policy alternatives; claims of aggravation of economic crisis; and persistent pressure to end the ‘movement’.

But some Nigerians noted that importing virtually everything, especially for its sake and status symbol, has not gone down well with development.

However, given infrastructural constraints, lack of capacity to fill the gaps in the immediate, and short to medium-term implications, particularly, production and employment, the rationale is placed under a further inquisition.

But the CBN Governor, Godwin Emefiele, insisted that the more important aim of the forex restrictions is to tackle import dependency and to diversify the economy, to help “resuscitate local manufacturing” and “change the structure of the economy.”

Emefiele said: “Plans to restrict foreign exchange to the importation of milk into the country is correct. This is because we believe that milk is one of those products that can be produced in the country today.

“Nigeria belongs to all of us. When we make policy, we want people to respect it. We are saying that the much we spend in foreign exchange to import milk is too much and we need to reduce it. We are saying that by doing backward integration, it helps to limit or reduce herders-farmers conflicts in the country. We are determined to make milk production in Nigeria a viable economic proposition.”

He recalled that about three years ago, the CBN started a policy to encourage backward integration to conserve foreign exchange and create jobs for Nigerians.

“Today, although there have been some successful attempts at producing milk locally, the vast majority of the importers still treat this national aspiration with imperial contempt.”

CBN repeatedly said the drop in crude oil prices between 2015 -2017, marked a turning point for the economy, and necessitated the need to develop policies and programmes that will drive productivity across key sectors of the economy, but mostly create employment and support price stability.

Emefiele, in 2019, warned that the list would be extended to cover some other items, as the President Buhari-led administration aims to drive Nigeria towards food sufficiency.

Just last week, the apex bank directed banks and those permitted to trade in forex to stop processing documents for maize/corn imports “with immediate effect.”

Explaining the rationale behind this directive, CBN, in a circular signed by its Director, Trade and Exchange Department, Dr. O.S. Nnaji, said it was to boost local production of the farm product.

He explained that the present global health pandemic, COVID-19, has caused many Nigerians to lose their jobs, thereby limiting economic growth, adding that to begin a process of economic recovery, it was necessary to take this action in the interest of the general public.

He said: “As part of efforts by the CBN to increase local production, stimulate a rapid economic recovery, safeguard rural livelihoods, and increase jobs, which were lost as a result of the ongoing COVID-19 pandemic, authorized dealers are hereby directed to discontinue the processing of Forms M for the importation of maize/corn with immediate effect.

“Accordingly, all authorized dealers are hereby requested to submit the list of Forms M already registered for the importation of maize/corn using the attached format on or before the close of business on Wednesday, July 15, 2020,” and urged those involved to “ensure strict compliance.”

The apex bank believed that the management of the forex market would rejuvenate domestic production, especially in items that were wholly imported into the country.

Also, dollar demand has been swelling and piling pressure on the naira. Importers with past-due obligations have scrambled for the hard currency, while providers of the forex, such as offshore investors, have exited.

Furthermore, the oil price crash caused by the coronavirus pandemic exacerbated the shortage of dollars in Nigeria, whose reserves declined 20% to $36.13 billion over the last year.

Last week, the naira eased on the official market, losing 5.5% against the dollar after the CBN weakened the currency, in its second adjustment in six months, evidenced in the quotations from the FX futures market with the 1-year N/US$ quotation at N410.60 (as at July 13).

The argument as to whether the CBN has the right or not to ban the importation of items is considered as a usurpation of the powers of the fiscal authority.

A strong argument in favour of the CBN is that being the monetary authority, its primary responsibility is to defend the local currency, and therefore has the authority to use the banning of imports as a potent tool to control excessive depletion of forex reserves, and hence preserve the value of the Naira.

A former President, Chartered Institute of Bankers of Nigeria (CIBN), and Professor of Economics, Babcock University, Prof. Segun Ajibola, argued that the apex bank’s restrictions on some imported goods will conserve the scarce forex, and protect the local producers from unfair competition.

According to him, this would ultimately increase local value addition, generate employment, and increase the nation’s Gross Domestic Product (GDP).

However, he expressed worry over the ease of doing business in Nigeria, noting that most industries are currently grappling with the challenges of an unfavourable business environment.

That is why local production is hardly sufficient to meet demand, while some saboteurs often resorted to the smuggling of banned items to beat regulations.

Ajibola argued that “It should be noted however that the CBN policy is a ban on access to the official foreign exchange market to import those items, not an outright ban on the importation. Hence importers can still bring them in, but usually at a much higher cost, which is passed on, to consumers.

“Another challenge remains if the local producers are in a comfortable position to drive local production. The ease of doing business is still a problem, as most industries grapple with one problem or another.

“Aside these challenges, first, such restrictions will conserve the scarce foreign exchange. Second, is to protect the local producers from unfair competition, and by so doing increase local value-added, generate employment and increase the GDP.

“It also has a positive impact on local tax and other forms of government revenues. For agricultural products, it has been a success story, I believe, with rice for example, as the ban has increased local production, helped by the CBN Anchor Borrowers’ Programme.”

Ajibola also agreed that the ban or restriction on any item consumed locally comes with initial pains for Nigerians through the increase in prices and quality issues.

“The experience with the recent ban on corn/maize may follow that of rice via a boost in local production, which is good for Nigeria’s economy. This was so with rice and palm oil. It is likely to be so with corn; same with other industrial products. But if necessary support and incentives are provided for the local producers, the country stands to gain in the long run,” he said.

Corroborating, Director, Centre for Economic Policy Analysis and Research (CEPAR), University of Lagos, Prof. Ndubisi Nwokoma, said the restriction of forex to these selected items should create room for their local production, but noted that the domestic operating environment may not be conducive for local firms to live up to expectations.

He said: “Ideally, the non-availability of official foreign exchange to these selected items should create room for their local production, but the domestic operating environment may not be conducive for that. Local industries are crying out for help as they contend with challenges such as insecurity, poor infrastructure, uncertainties in government economic policies, and poor access to credit among others.

“Government needs to support the CBN efforts by addressing these challenges to enhance the full benefits, to substitute for imports by producing locally.”

For the Vice Chairman, Highcap Securities, David Adonri, the control of imports and exports ought to be the duty of the fiscal authorities, but due to their ineptitude; a fiscal policy vacuum has been created, causing uncontrolled imports to harm domestic production.

He noted that many years of import dependence led Nigerians to develop an addictive taste for foreign goods.

He said: “Nobody can fault CBN’s intervention considering the enormous harm done to the economy by unbridled importations. All that the monetary authority has done is to fill the policy gap by attacking the malaise from its own end. A careful examination of the list of items banned showed that they could be produced locally.

“If the fiscal authority had not abdicated their responsibilities of preventing dumping of foreign goods on Nigeria, through the formulation of prohibitive policies and their strict enforcement, the country would not have descended to this current excruciating level of import dependence.

“From all indications, out of unusual patriotism, the CBN has assumed responsibility for formulating both fiscal and monetary policies to save the economy; kudos to them.”

The Chief Research Officer, Investdata Consulting, Ambrose Omordion, said the ban is a good decision to further conserve or preserve Nigeria’s oscillating external reserves to boost agriculture for self-sufficiency, but the fear of food scarcity and increasing prices of food items today are due to insecurity.

‘More so, uncertainties are driving farmers away from the farm, thereby not creating the expected job for Nigerians especially now that unemployment has risen to 68%. For this policy to be meaningful the government needs to address the insecurity in the nation to support agriculture and drive self-sufficient.”