Wednesday, March 06,
2019 04.38PM / CSL Stockbrokers
The
Central Bank of Nigeria (CBN) recently placed a restriction on the sale of
foreign exchange to importers of textiles and other clothing materials in the
country. This according to the CBN would help reposition the textile, cotton
and garment industry for job creation and the development of the economy. The
CBN also promised a financial intervention to textile manufacturers by
providing funds to them at single digit interest rates.
This
policy is broadly in line with governmentís diversification focus and import
substitution measures which have been implemented largely across agriculture
and manufacturing in an attempt to replicate the success of the cement sector
which has arguably now reported production in excess of domestic consumption.
The prohibition of certain import items from officially assessing FX is also
being touted as an import substitution strategy which is expected to lead to
further accretion in the nationís foreign exchange reserves and ultimately
support the local currency.
Beyond
this being another administrative measure to reduce Nigeriaís import bill and
protect the exchange rate, we look at the effect of this policy on the ailing
Nigerian textile industry. While it is possible to argue that this will only
increase the rate of smuggling in the textile industry, one cannot deny the
fact that it would, to a reasonable extent, support the patronage of local
textiles.
The
Nigerian textile industry was the second largest employer of labour between
1960 and 1990, and contributed as much as 23% to GDP. However, the industry has
been moribund in the last two decades, contributing only 2% to GDP as at Q3
2014. Among reasons given for the decline in the industry is the high
infrastructural deficit, particularly inadequate electricity supply leading to
high and uncompetitive production costs, resulting in locally made textiles
being often more expensive than imported, or smuggled alternatives.
The
government had made some attempts in the past to revive the industry. In 2010,
the Federal Government introduced a N100bn Cotton, Textile and Garment Revival
Fund. However, most players in the industry did not avail themselves of the
loan as repayment became a major challenge to those who did, since it was
difficult to contest with imports from Asian countries which had taken over the
market. In 2015, the government again approved the ëNational
Cotton, Textile and Garment Policy in which it targeted cumulative investments
of over N255bn (US$0.71bn) in the textile industry over five years. The policy
provided that all military, para-military agencies and government schools
purchase only made-in-Nigeria textiles and garments.
In
our view, the Nigerian textile industry can still be a major revenue earner for
Nigeria and a major employer of labour considering the local availability of
the major raw material (cotton) and the chemicals needed for production (mainly
by-products of petroleum). However, we believe that the success of the
industry depends more on the ability of the government to address the
fundamental challenge of poor infrastructure, mainly power.
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