Nigeria has remained a net importer of wheat in the past years. This is because there has been growing demand for this commodity while production has remained sub-optimal. Nowadays, commodities made from wheat are more popular than traditional staples made from produce such as cassava and maize. In Sub-Saharan Africa, Nigeria is the second-largest consumer of wheat after South Africa.1 Nigerians consume over 4.5 million tons of wheat annually while the country produces a meager 60,000 metric tons (0.0001% of global production).2 As a result, the country relies heavily on imports to bridge the huge demand gap. In Q4'20, the government spent N252.98bn to import wheat, annualized at N1.1trn.3 This is 5.53% of total import bill and 0.71% of the country's GDP.
Nigeria's sub-optimal wheat production can be largely attributed to heightened insecurity in the wheat producing states, which has prevented farmers from operating at optimal capacity. Wheat is mostly grown in the northern part of the country, where temperature in the night ranges between 15OC - 20OC. These states include Borno, Bauchi, Yobe, Kano, Jigawa and Zamfara.
In addition, the use of traditional farming tools and techniques, limited access to improved seedlings, fertilizers & chemicals, high production costs, inadequate irrigation infrastructure, insufficient funding systems, as well as uncompetitive pricing have further constrained wheat production in Nigeria. According to the Food and Agriculture Organization (FAO), Nigeria's wheat yield is 10,699hg/ha compared to Ireland (93,787hg/ha), Netherlands (93,781hg/ha) and Belgium (93,364hg/ha). This has weighed on the profitability of the produce and has kept domestic prices elevated compared to imports.
FX Restrictions on Wheat Import: Impact on Economic Agents
The government is currently considering adding wheat to the list of items that are prohibited from accessing forex at the official foreign exchange window. The CBN has been reviewing its forex restriction list these past few years, with maize being the most recent addition. The aim is to conserve the country's gross external reserves (which has lost 2.94% ($1.04bn) so far on 2021) and encourage local production amid forex supply dearth. The currency was devalued twice at the IEFX window and once at the official window in 2020. However, the inclusion of wheat to the list of items that are prohibited from accessing foreign exchange at the official window means that wheat importers will have to source for forex mainly from the parallel market. This will increase forex demand pressures at the parallel market and push up import costs. So far in 2021, the naira has weakened by 3.40% at the parallel market and currently trades at N486/$.
The impact of higher import costs on economic agents largely depends on who absorbs the increased costs. If manufacturers decide to bear the burden, it means operating expenses will increase, weighing significantly on corporate margins. Manufacturers may however decide to pass on the additional cost burden to consumers in form of higher prices. This will further squeeze consumer disposable income. This is troubling at a time when poverty and unemployment rates are climbing. It could be a recipe for social unrest and an increased crime rate. Unemployment jumped to a record high of 33.3% in Q4'20
Reforms and Policy Changes: Understanding Times and Seasons
While reforms and policy changes are expected to help stabilize the economy, the timing of such policy will largely determine its effectiveness. A policy with good intentions could become bad if the timing is not right. While the possible inclusion of wheat to the forex prohibition list is expected to conserve the gross external reserves, it is happening at a time when economic agents are still reeling from the negative impact of the COVID-19 pandemic. Consumers are embattled with rising commodity prices and low discretionary income while businesses are struggling to recover to pre-pandemic levels.
More so, the forex restriction is coming at a time when the Nigerian agric sector is still struggling. There has not been enough investment in the local wheat industry to meet growing demand and in some cases, the varieties of wheat do not meet manufacturers' requirements. This leaves manufacturers with no other choice but to scramble for dollar at the parallel market, thus increasing import costs.
The possible inclusion of wheat to the forex restriction list could be a step in the right direction. However, getting the timing right is critical to the effectiveness of such a policy.