25 June 2015, Abuja – The Governor of the Central Bank of Nigeria, Mr. Godwin Emefiele, has defended the decision of the central bank to tighten foreign exchange controls by excluding 40 items comprising rice, toothpicks, cement, margarine, palm kernel/palm oil products/vegetable oil, meat and processed meat products, among others, from the interbank forex market.
In order to reduce the pressure on the naira while preserving external reserves, importers of such items would have to source their forex requirements from private channels or the bureau de change (BDC) segment of the market.
In a statement on Wednesday, Emefiele said the country spends an estimated N1.3 trillion on items that could be manufactured locally, adding that Nigerians need to have a soul-searching conversation on the impact the import regime has on the economy in the areas of industrialisation and job creation.
He explained that it was necessary to shed more light on the rationale behind the policy, “in view of the announcement we made yesterday to exclude more items from accessing foreign exchange at the interbank market”.
According to him, “Sometimes, policy changes are forced on policymakers as a result of exogenous shocks beyond their control. While most people do not like to be forced to do something, one of the hallmarks of effective policymaking is to be nimble and responsive when such situations arise.
“In the case of yesterday’s announcement, I am happy to inform and underscore that this policy change is in line with my long-held belief that Nigeria cannot attain its true potential by simply importing everything.
“At some point, we have to all decide what we really want for our country, and I believe that the time is now right for that deep and honest conversation.”
He recalled that in his maiden address as governor of the CBN, he had argued that central banks in developing countries like Nigeria could not sit idly by and concentrate only on price and monetary stability.
“I argued that additional measures would be required towards identifying productive sectors of the economy and channelling credit towards these sectors, while imposing proper monitoring and performance measures in order to ensure that the goals of increased employment and poverty reduction are attained.
“I also noted that despite Nigeria’s relatively impressive GDP growth rates over the past seven years, there seems to be an absence of a corresponding reduction in unemployment or poverty.
“My personal as well as the Bank’s institutional analyses of the situation compelled us to believe that we needed to aggressively begin the process of feeding ourselves by ourselves and producing much of what we need in this country.
“And in order to begin this process, the CBN took measures to increase credit allocations to pivotal productive sectors of the economy with a view to stimulating increased output in these sectors, creating jobs on a mass scale and significantly reducing our import bills,” he explained.
Emefiele maintained that the huge amounts of money that Nigeria spends on importing things that could be produced locally have become a significant drag on our foreign exchange reserves.
“Most of you are aware of the often-quoted number of N1.3 trillion, which is what we spend on the average importing rice, fish, sugar and wheat every year.
“Each time I ponder these issues, many vexing questions trouble my mind. Let me take the case of rice for illustration. Why should we keep importing rice into Nigeria when vast amounts of paddy rice of comparable quality produced by poor hardworking local farmers across the rice belts of Nigeria are being wasted and ignored?
“What will it take for these importers to stop the importation and instead go into processing these locally produced rice? Why are these importers not utilising the vast expanses of arable land for rice cultivation instead of taking the easy route of importing rice?
“Do we, as a people, realise how many jobs we are creating for other countries by ignoring local production and simply concentrating on imports?
“How can we keep complaining about the depreciation of the naira when all we do as a people is to import everything from ordinary Geisha (canned fish) and toothpicks, to even eggs?” he asked.
Emefiele noted that these were some of the fundamental reasons behind the central bank’s recent announcement, stressing: “Let me emphasise that the CBN does not have the power to out rightly ban the importation of the items we listed in our circular yesterday (Tuesday).
“Of course, anyone listening to me now would know what I could have done if I had that power. But what we have done is to simply say that the Central Bank of Nigeria cannot continue to support the imports of these items using Nigeria’s hard-earned foreign exchange.
“Importers who may want to continue bringing in these goods or services into the country will have to source their foreign exchange from private sources.
“Let me reiterate that the Central Bank of Nigeria will continue to be vigilant around this policy and will keep reviewing the list of these items as we become comfortable that items can be produced locally if we apply ourselves sufficiently enough.
“I believe that the current situation we find ourselves affords us a unique opportunity to embrace self-sufficiency in Nigeria, reduce our appetite for everything and anything foreign, conserve the country’s scarce foreign exchange, and create jobs here at home for our people.
“With the full complement of the top management of the Bank, I assure you that we will continue to look out for areas in which the Bank can play a catalytic financial role to helping us achieve these goals in the near future.”
However, mixed reactions have trailed the central bank’s decision to tighten forex controls, with some authorised forex dealers endorsing the exclusion of the 40 items from the interbank market.
They said the policy would lead to a significant reduction in the country’s import bill and boost the country’s gross domestic product (GDP).
But the Lagos Chamber of Commerce and Industry (LCCI) and other market analysts cautioned that the policy could result in considerable pressure on the BDC segment of the market and also widen the gap between the official and BDC forex markets.
They also saw it as a sign of the central bank’s reluctance to devalue the naira.
While the naira closed at N196.90 to a dollar at the interbank market on Wednesday, it exchanged at N220 to the dollar at some parallel market points in Lagos.
The review of Nigeria’s inclusion in the JP Morgan Emerging Market Bond Index has heightened pressure on the CBN to improve liquidity in the forex market, following the threat to remove Nigeria from the index by the end of the year.
In his comment, currency analyst and trader at Ecobank Nigeria, Mr. Kunle Ezun, pointed out that while the CBN’s decision was necessary, the effects might not be far-reaching due to the fact that Nigeria’s total foreign exchange utilisation in the fourth quarter of 2014 was $17.5 billion, with $9 billon (51.6 per cent of the total) expended on visible imports and $8.4 billion (48.4 per cent) expended on invisibles.
A further breakdown of the visible imports revealed that oil importation accounted for 30.1 per cent of visible imports, industrial – 34.1 per cent, food – 13.8 per cent and manufactured products – 15.1 per cent.
Oil importation, he pointed out, remained a significant component of the visible imports, constituting 30.1 per cent of the total visible imports.
This implies that as long as Nigeria continues to import 100 per cent of its fuel requirement, pressure would not ease on the country’s foreign reserves and the naira.
“The exclusion of the Euro bond, foreign currency bonds and share purchases is also a leap in the light of the significance of financial services in invisible imports.
“Foreign exchange usage and management will remain an issue until the oil component of forex usage is drastically reduced via local production through the refineries and increased exportation on non-oil exports.
“The immediate effect of the circular is on the parallel market (black market), where dollar to naira currently stands at N220. By this circular, the CBN has surreptitiously transferred the funding of the excluded items to the parallel market.
“This is expected to increase volatility in the parallel market and push the naira to about N230,” Ezun said.
In their reaction to the CBN directive, analysts at Cowry Asset Management Limited argued that there was merit in the exclusion of the 40 items from foreign exchange eligibility, especially with regards to foreign exchange reserves preservation.
“Assuming there is an outright ban on the importation of the affected items, a significant chunk of our import bill can be saved. A select number of the excluded items account for about a fifth of the total import bills, and if banned, could potentially be a boost to real GDP.
“However, the exclusion of these imports would unavoidably lead to undesired increase in imported inflation due to forex shortage, a widening of the gap between official and parallel market rates,” they stated in a note on Wednesday.
In her remarks, Yvonne Mhango, sub-Saharan economist at Renaissance Capital, was quoted by the BBC as stating: “We see this policy move as confirmation that foreign exchange supply remains extremely tight. But more worryingly, it suggests that the central bank remains reluctant to devalue the naira.”
The central bank has said in the past that devaluing the naira by allowing it to float freely on the currency markets is not an option.
Cobus de Hart of South Africa’s NKC Africa Economics, according to BBC, said: “The decision to, in effect, introduce additional capital controls does not bode well in relation to investor perception and may also adversely affect domestic business operations and costs.”
Speaking to THISDAY, the Director General, LCCI, Mr. Muda Yusuf, said: “The black market is too shallow to accommodate the pressure that will arise from this policy.”