In 2015, the Central Bank of Nigeria (CBN) introduced the FX restriction policy that makes certain imported items ineligible for FX. This means importers are not allowed to source for FX within the official FX window to import those items. At the time, the objective was to reduce the import bill of the government, conserve the FX reserve and encourage domestic production of imported items through import substitution. It is currently five years and counting since the policy was introduced and it appears that very little gains have been achieved, which questions, in retrospect, the potency of the policy.
Has the import bill of the government reduced since the introduction of the FX restriction policy? Citing data from NBS, the food and beverage import bill soared from $2.9 billion in 2015 to $4.1 billion in 2017 and $4.6 billion in 2019. The CBN is reported to have a backlog of FX demand amounting to $2 billion as of September 2020. Put together, there is still a growing demand for FX to import the restricted items. This is because there has not been any major drive for domestic production. The reality is that the import pressure will persist if local production is not encouraged.
The CBN has created an imbroglio through the FX restriction list as importers for the restricted items are forced to source for FX in the parallel market. The increased pressure in the parallel market has intensified the burden of the CBN to supply FX to BDCs from the same reserves they are trying to grow. This is a counterproductive measure somewhat. What the CBN should be doing is to divert the forex that could have been used to import the restricted items into creating commercial agriculture and manufacturing schemes.
Painting the dilemma in a different light, there is a growing demand for FX that needs to be checked but the focus of policymakers is on supply. The FX restriction does not address the demand problem either directly or indirectly; it focuses on supply. This explains why there is exchange rate depreciation and devaluation in Nigeria in recent times. To make matters worse, the supply of FX is largely dependent on crude oil, remittances, and foreign portfolio inflows, which the CBN has little control over. The point here is that, whereas the FX restriction policy is presented as a supply antidote, the big issue is how to prune demand for FX to lower levels.
Nigeria is reported to be the second-largest importer of rice despite adopting the FX restriction policy to foster domestic production. Average local consumption is put at 6.8 million MT compared to 5.0 million MT local production. like rice, some analyses suppose that items that are ineligible for FX are still being imported to Nigeria. The first step to nipping the import of these items in the bud is to drive domestic production. Automatically, and without any policy intervention, the import of these items reduces. Another strategy to adopt is to integrate effectively the primary sector and the manufacturing sector. State governments should be implored to drive the production of raw input for the manufacturing sector in their states. Further, manufacturers should be encouraged to substitute their preferred imported raw materials for domestic ones. All these are on the production end.
In terms of consumption, it is more challenging to change the taste of Nigerians. An effective strategy for achieving this is to collaborate foreign manufacturers with local manufacturers to produce the same import brands in Nigeria. This will require a serious and committed government as foreign manufacturers are skeptical of the policy uncertainties and the lack of incentives. This emphasizes a strong point – the solution to the preference for foreign brands is to improve the quality of made-in-Nigeria goods and thereafter, produce as much to meet the current demand.
An accelerated industrial drive is a complement to the CBN FX restriction list. The latter suggests placing the cart before the horse. Creating more industrial estate, revitalizing the SON for improved quality assurance, improved product audit before market launch, public-private-partnership in mechanized farming, encouraging the use of locally-sourced inputs in factories, among others are ways to curtail the FX demand pressure in Nigeria and automatically grow the foreign exchange reserves. Continued adoption of the restriction list without complementing it with an industrial drive will continue to revolve the economy in a quagmire.
Written by Michael Ogunremi
Michael is an economist with PricewaterhouseCoopers, Nigeria