The recent decision by the Central Bank of Nigeria (CBN) to readmit the 43 items to the official foreign exchange market is a policy that must be handled with utmost care. Implemented correctly, it has the potential to help the authorities tackle some of the nagging macroeconomic challenges facing the country now. But, if it is boggled, the consequences could be dire; it could hurt local production, in agriculture, manufacturing and other sectors.
The case of these items came to the limelight when the CBN on June 23, 2015, announced that importers who wished to import these items were no longer eligible to access foreign exchange from its Investors’ and Exporters’ window of the market. The items include rice, cement, margarine, palm kernel, palm oil products, vegetable oils, meat and processed meat products. The argument behind this measure was two-pronged: To encourage local production of these items, and at the same time, ensure that speculative importers did not take undue advantage of the relatively low cost of the scarce foreign exchange on this window.
There is no doubt that the expulsion of these items from the official window of the foreign exchange market impacted negatively on the economy in significant ways. It has been partly responsible for the rising inflation in the country, as people could not have their demands for these items met. While the restriction resulted in a decline in the importation of these items, local production could not rise to fill the gap created.
The differential in supply was a major contributor to the upsurge in the inflationary pressure that the country has experienced over the years, from just 9.01 per cent in 2015 to its value of 26.72 per cent.
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That said, the full ramifications of the failure or success of the exclusion of these items must be placed in a broader context. First, it was a demand management measure adopted by the central bank’s leadership at the time, given the country’s foreign exchange shortage. Sadly, the situation in the country remains largely unchanged, as Nigeria continues to face an acute shortage of foreign exchange. A good indicator of this shortage is the widening differential between the rate on the official window and the parallel market rate. As of Tuesday, October 24, the naira had fallen to as low as 1,220/$ in the major cities across the country, according to sources. With this, the arbitrage opportunities in the market remain quite high, as the I&E weighted average rate indicated about N860/$.
Right now, liquidity in the forex market is very low. So, it is appropriate to ask: Where are the dollars? Does the CBN have the dollars to meet the expected increase in the demand for forex as the door is opened to these new entrants? Secondly, restricting these items from the official window was not designed as a stand-alone policy. It was supposed to be complemented by other measures that would address the supply side, especially the local production of these goods. Unfortunately, the measures put in place with the intention to boost local production were hijacked by politicians, who overnight metamorphosed into farmers and flooded the agricultural space. These same persons hijacked the financial facilities provided in the form of loans but failed to deliver.
The Anchor Borrowers’ Fund was one of such measures, designed to boost local production of food items including rice. Regrettably, billions of naira are now trapped in unpaid loans. Yet, the rice is unavailable and out of reach of the common man. This speaks to the ease with which well-intended policies can be hijacked and consequently rendered ineffective by the powerful in our clime.
The fall in the value of the naira in the parallel market has been blamed on the resort of importers of these banned items to that market segment. But the fact remains that if local production of the same products had shown some appreciable rise, this demand for foreign exchange for their importation should have moderated, at least. Unfortunately, this has not happened.
Therefore, as the monetary authorities readmit the affected items, they must put on their full regulatory apparatus. They must monitor the allocation of foreign exchange in the banking system. Importers of these items must not be given any preferential treatment with regard to access to foreign exchange. They should be made to pay the appropriate rates. Nigeria still faces the challenge of foreign exchange supply constraint that is not likely to disappear soon. Therefore, an unregulated permission for the allocation of our scarce forex to the importers of these items will definitely impact negatively on the local production of these products.
In the short term, this is a well-intended policy. Its implementation must not entail a trade-off to the detriment of the local economy. Strengthening local productive capacity remains a key policy objective of our monetary policy.
