CBN Goes Into Overdrive On Protectionism

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Friday, August 23, 2019   /08:49AM / By FDC / Header Image Credit: Picbear

 

President Muhammadu Buhari has disclosed his intentions to direct the Central Bank of Nigeria to stop providing foreign exchange for food imports. The directive, which is in line with Buharis trade protectionist stance, is aimed at stimulating agricultural output and reducing the countrys dependence on oil exports.

 

Impact on the economy and policymakers 

Since 2015, the CBN has been enforcing policies that deny access to foreign currency for several imported products. Currently, there are 43 items, including some foodstuffs such as rice, tomato paste, vegetable oil and recently, milk. Food items are a major import item into Nigeria. In the last 6 years, Nigeria spent approximately $19.24bn on food importation. 

In Q1 2019, food imports was estimated at $1.1bn, 10.7% of total imports. Imported food inflation in Q2 was 15.72%, 2.04% higher than domestic food inflation. Hence, the prohibition of forex access for all food imports could push up commodity prices, stoke inflation and could make the CBNs single-digit inflation target unattainable. 

This will also increase the cost of imported food. Importers of food products would have to source for forex from other windows such as the parallel market. The resultant increase in demand at the parallel market will result in a weaker exchange rate from the current N360/$ level. It will also heighten the pressure on the exchange rate at the parallel market. 

Currently, the exchange rate at the Investors & Exporters Foreign Exchange (IEFX) window (N363.68/$) is more expensive than the parallel window (N360/$). This has widened the spread between IE rate and parallel market rate to 1.02%. 

By implication, we could see a shift to the parallel market, thus, increasing demand pressures. This would be further exacerbated by the forex restriction on food imports. Hence, naira could depreciate to about N370/$ before the end of 2019.

 

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Impact on the consumer 

Food inflation declined to 13.39% in July (7th highest in Africa) and it is expected to sustain this trajectory in Q3. However, the denial of forex for food imports would push up food inflation to about 14.5% and reduce consumers purchasing power. A resulting effect of this is an increase in poverty, 93,823,485 Nigerians (47.7% of the total population) live in extreme poverty, with an aggregate consumption of $410bn and consumption per head of $2,039. 

To put this in context, if food prices spike further due to the possible full foreign-exchange ban on all food imports (raw materials and finished products), the poverty level and economic hardship will rise steeply. Furthermore, given that poverty is the bedrock of the unrest Nigeria faces on numerous fronts, we would see an increase in corruption and kidnapping.

 

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Impact on smuggling 

The agric sector has been growing at an average of 3.53% in the last 5 years. It remains one of the most resilient since the recession in 2016. However, the sector is held back by more than just cheap imports. The sectors performance is still limited by poor quality seedlings, inadequate fertilizers, pesticides and herbicides, outdated machinery and farming techniques, high post-harvest losses and instability in the Middle Belt. 

The widening supply gap has led to increased smuggling of food items to and from neighbouring countries. For instance, the reduction in rice imports has been compensated by a corresponding increase in its smuggling from porous borders. Data from the IMF shows that as Nigerias rice imports have been declining, rice imports into Benin Republic have been on the increase. So, if the total foreign-exchange ban on imported food products is actualized, higher food prices or outright shortages would quickly turn Nigeria to a smugglers paradise.

 

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Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.


Proshare Nigeria Pvt. Ltd.

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