Import Substitution - CBN Bans FX Sale To Textile Importers

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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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