…Manufacturing sector suffers setback | Naira heads for worse, puts pressure on foreign reserves
The Central Bank of Nigeria (CBN) has lifted the ban on 43 food and non-food items previously restricted from accessing foreign exchange from the official window, a move that would put more pressure on the Naira, and discourage local manufacturing of the items.
In June 2015, the CBN published a list of imported goods and services that will not be eligible for foreign exchange in the Nigerian foreign currency market through a circular. The list which was originally 41 was updated to include two more items.
“Importers of all the 43 items previously restricted by the 2015 circular referenced TED/FEM/FPC/GEN/01/010 and its addendums are now allowed to purchase foreign exchange in the Nigerian Foreign Exchange Market,” the apex bank said in a statement that was issued by its director of corporate communications, Isa AbdulMumin, yesterday.
This as the value of the naira came under intense pressure, sliding to N1,050/$1 to the dollar on the streets as against N1,025 which it was previously, even as the Central Bank of Nigeria seems to have commenced its intervention in the foreign exchange market.
The aim of imposing the foreign exchange restriction on the items was to encourage local production, sustain the stability of the naira and ensure the efficient utilisation of forex.
However, the CBN statement failed to give reasons for lifting the FX restriction on the items. Nigeria’s economy is still import-dependent. In the second quarter of 2023, Nigeria’s total imports amounted to N5.726 trillion, according to official figures.
The CBN also said it will continue to promote orderliness and professional conduct by all participants in the Nigerian foreign exchange market to ensure market forces determine exchange rates on a willing buyer-willing seller principle.
In the statement, CBN reiterated that the prevailing foreign exchange rates should be referenced from platforms such as the CBN website, FMDQ, and other recognised or appointed trading systems to promote price discovery, transparency, and credibility in the FX rates.
“As part of its responsibility to ensure price stability, the CBN will boost liquidity in the Nigerian Foreign Exchange Market by interventions from time to time. As market liquidity improves, these CBN interventions will gradually decrease,” it said.
The CBN further said it was committed to accelerating efforts to clear the FX backlog with existing participants and would continue dialogue with stakeholders to address the issue. “The CBN has set as one of its goals the attainment of a single FX market. Consultation is ongoing with market participants to achieve this goal,” AbdulMumin stated.
The lifting of the forex ban will expand the nation’s import bill, worsen the pressure on the local currency and deplete the CBN’s foreign reserve as more dollars would be needed to import the items. Nigeria’s foreign exchange reserves dropped to $33.23 billion at the end of the third quarter (Q3) of 2023. The reserve suffered a drop of over $500 million in the first week of September.
Between 2015 and half year 2017, the restriction on certain items led to a 65 per cent drop in the country’s monthly import bill, from an average of $5.5 billion to $1.9 billion. According to official documents, rice import to Nigeria fell by 99 percent to about 784 metric tonnes since the implementation of the figure. Most economic watchers believe that with the new development, the value of the naira will depreciate beyond the current $1/1050.
Operators in the manufacturing sector believe that the development will compound the many challenges facing the sector, including the unrelenting increase in production costs. The implication is a possible loss of more jobs as local manufacturers would be forced to compete with imported products – which are mostly cheaper.
Another fear is that lifting the ban would make Nigeria a dumping ground for foreign manufacturers of the products through neighbouring countries, especially as the operationalisation of the African Continental Free Trade Agreement (AfCFTA) takes full effect.
The Nigerian manufacturing sector suffered a 4.1 per cent decline in capacity utilisation in the second half of 2022, according to the H2 2022 bi-annual economic review of the Manufacturers Association of Nigeria (MAN).
The items hitherto banned from access FX are rice, cement, margarine, palm kernel, palm oil products, vegetable oils, meat and processed meat products, vegetables and processed vegetable products, poultry and processed poultry products, tinned fish in sauce (Geisha)/sardine, cold rolled steel sheets and galvanised steel sheets.
Other items on the list include roofing sheets, wheelbarrows, head pans, metal boxes and containers, enamelware, steel drums, steel pipes, wire rods (deformed and not deformed), iron rods, reinforcing bars, wire mesh, steel nails, security and razor fencing and poles, wood particle boards and panels, wood fibreboards and panels, plywood boards and panels, wooden doors, toothpicks, glass and glassware and kitchen utensils.
Also on the list are tableware, tiles-vitrified and ceramic, gas cylinders, woven fabrics, clothes, plastic and rubber products, polypropylene granules, cellophane wrappers and bags, soap and cosmetics, tomatoes/tomato pastes and Eurobond/foreign currency bond/ share purchases.
Naira Hits N1,050/$1 as I&E Window Inflow Spikes by 1,300%
Meanwhile, the naira exchange rate continued its downward trend yesterday on the streets, even as it gained on the Investors’ and Exporters’ (I&E) window. Inflows into the Investors’ and Exporters’ window, which is also known as the Nigeria Autonomous Foreign Exchange (NAFEX), soared to $407.66 million as against $29.06 million recorded on Wednesday, more than 1,300 per cent increase over the previous inflow.
Currency changers in the street of Lagos told LEADERSHIP Friday that the naira changed for between N1,050 and N1,052 to the dollar. Meanwhile, the value of the naira at the I & E window appreciated to close at N759.20 per dollar as against N766.41. The CBN has said it will continue to intervene in the foreign exchange market so as to meet the high demand for the greenback in the official market where a backlog of requests are yet to be met.
Experts Laud CBN Move
Reacting to the development, chief executive officer (CEO), Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, welcomed the lifting of the forex ban on 43 items by the CBN.
To him, “it is a move in the right direction. It is part of the policy normalisation process. The exclusion of the 43 items was one of the several drivers of distortions in the forex market. The exclusion of the items also contributed to the persistent divergence in rates between the official window and the parallel market.
“The exclusion was also in conflict with extant trade policy as the items were not under import prohibition in the first place. It was an example of lack of policy coordination under the previous administration.”
The new directive, he added, will also improve transparency and disclosures in foreign exchange transactions. He, however, warned the apex bank to avoid market suppression tendencies, especially outside the I&E window, adding that all policy impediments to forex inflows should be removed.
The fiscal authorities should also continually monitor the economic landscape to shape the character of fiscal policy measures to regulate imports in line with comparative advantage principles. “We need to worry about the risk of import surge. There is also need to upscale the use of fiscal policy measures to boost domestic production and productivity,” he added.
Also, commenting on the lifting of foreign exchange restrictions on the 43 items, analysts at Cardinal Stone Research, in an emailed note, described it as a move to gradually improve confidence in the FX market, which had been weighed down by long-dragging illiquidity and unorthodox policies.
“We recall that the ban was instituted due to a material plunge in forex inflows. Thus, to forestall the re-occurrence of the underlying drivers of dollar demand management and unorthodox forex policies in Nigeria, the supply of forex will have to improve sooner rather than later.
“To improve forex supply, the CBN and fiscal authorities may have to evaluate the possibility of raising dollar facilities (via Diaspora bonds, Eurobonds or concessionary loans from bilateral/multilateral institutions), and asset sales (full or partial), among others. Curbing oil theft, enhancing domestic oil production efficiency, and issuing new oil mining licenses are potential short-to-medium solutions.”