Politics, intrigues of 41 items and the CBN
At the outset of the naira’s decline and recession, the Central Bank of Nigeria (CBN) unveiled a list of 41 items restricted from accessing foreign exchange at the official interbank market. The move and motive behind the action have been queried by operators even as the apex bank justified its actions. Two years after, the debacle remains unresolved. FEMI ADEKOYA writes.
The Central Bank of Nigeria (CBN) on May 3, 2015 excluded importers of 41 goods and services from accessing foreign exchange at the Nigerian foreign exchange markets, in order to encourage local production of these items.
The action according to the CBN, was taken as part of efforts to sustain foreign exchange market stability and ensure the efficient utilisation of foreign exchange as well as aid derivation of optimum benefit from goods and services imported into the country.
The apex bank’s policy on the management of the foreign exchange market however, has been seriously criticised following the decision to place under restrictions, certain categories of imports into the country.
Most of the criticisms are anchored on the traditional support for open economies and trade liberalisation, as well as, the need for devaluation rather than monetary policies that cannot be sustained.
However, according to the Nigerian Customs Services (NCS) nomenclature for list of non-prohibited items, every single item of import in the country has a Harmonised System (HS) Code, some of which the apex bank failed to identify when it placed restrictions on the 41 items, therefore affecting activities of some local manufacturers.
For these manufacturers, many of the raw materials required for their production activities were inadvertently included in the broad groups of the initial list before a recent review last month.
The Hard Choice Versus Scapegoat
For some operators, however, when there are only bad options to choose from, you take the best bad option that offers the best chance of success, not anyone that looks good or the easiest way out, considering the need to address the depletion of reserves amidst dwindling oil revenues.
The questions asked by many operators remain, ‘what options are available?’ and ‘what criteria should guide their deployment and implementation in order to ensure financial stability, predictability, growth and employment generation?’
To some of them, a mix of fiscal and monetary policies will address the challenges, while others seek commitments from government on its diversification agenda.
To the CBN, however, using the instrument of monetary policy to restrict access to foreign exchange, in a bid to boost declining reserves remains a viable option.
An assessment of the level of FX Reserves adequacy to safeguard financial stability in the country is estimated to hover between $44billion and $66billion; and the current FX Reserves of $30.3 billion ($37billion as at November 2014) are 15 per cent below this level.
Maintaining its stance on its forex policy, the CBN at the outset, sought understanding from members of the Organised Private Sector (OPS), explaining that there is a yawning gap in the demand-supply chain of the nation’s foreign exchange earnings, therefore necessitating an adjustment on the demand side by reducing the pressure from importers of finished goods into the country.
Specifically, the CBN while describing the intense pressure it has had to cope with in defending the naira between January and May 2015, stated that $575 million was expended on wheat importation, $375 million on fish and $349 million on electrical and electronic appliances and components.
Citing the dislocations in the system, the Lagos Chamber of Commerce and Industry (LCCI), noted that many of the products on the list of the 41 products are intermediate goods, which are critical inputs for many manufacturing firms, as well as, other critical sectors of the economy.
“It however appears as if the formulation of the policy has suffered from CBN’s limited understanding of the manufacturing process of many of the sectors affected by this policy. Many of the restricted items are irreplaceable raw materials in the manufacturing process of many industries, and this policy will cause significant damage to the Nigerian manufacturing sector and economy. We affirm that while there are several items on the list, which any patriotic Nigerian will not object to, there are many others that will harm the manufacturing sector,” the LCCI had stated.
In identifying the HS codes of the restricted items, President of the Manufacturers Association of Nigeria (MAN), Dr. Frank Jacobs, noted that about 680 HS codes were identified following the breakdown and classification of the 41 restricted items by the CBN from the official forex window into HS codes.
Of the 680 HS codes, Jacobs explained that 95 HS codes are raw materials used in the course of production in factories and they are presently restricted from access to forex market.
While the CBN might have made a pronouncement unveiling its resolve to give priority to some of the HS classified products, manufacturers believe the order of priority needs to be addressed urgently, as there are outstanding requests to meet local production needs.
“We have appealed to the CBN to remove those items from the list and if that had been done, we would have been shouting for joy because the rest of the 585 items will be to the benefit of the country because if those items are not imported; it will be better for the economy,” he had said.
According to the LCCI, the unintended consequences of the CBN’s approach to the management of foreign exchange market had resulted in major disruptions, dislocations and panic among many investors in the economy because of its multidimensional and far reaching implications, with the naira plummeting to as low as N525 against the dollar in the parallel market.
FOR manufacturers/operators in the iron rods, cold rolled sheets, wire rods, reinforcing bars, polypropylene granules, glass and glass ware, textiles, plastic and rubber products, as well as tomato value chain sectors, the policy has put several investments at risk with implications for job losses, quality of loan assets in the banking system, and the welfare of citizens.
For instance, value-chain operators in the tomato paste industry have continued to warn of the potential collapse of the N19 billion tomato paste manufacturing industry before the end of second quarter of 2017, if the decision is not reviewed.
According to the operators, the value of imported tomato paste in the country used to be about $170 million before the CBN ban on the 41 items, out of which imported triple concentrate used as raw material by the packers accounts for around $50 million.
It would be recalled that an indigenous local tomato paste manufacturer, Erisco Foods Limited, rescinded its threat to shut down and relocate its $150 million plant abroad following interventions by the Federal Government and development of a tomato policy.
Spokesman of the Union of Tomato Paste Manufacturers in Nigeria, Nnamdi Nnodebe, hinted that the tomato processing industry is in dire straits as unavailability of tomato paste triple concentrate for the industry is grinding production to a halt.
The local packing industry, according to him, can also form the hub for exports to hinterland countries, as there are adequate local capacities to more than cater to the domestic requirement. Using the ECOWAS benefits, this can be a huge foreign exchange earner for the country today, and in the near future. Through the growth of the tomato industry Nigeria can compete with China instead of buying the finished goods from them.
He urged the Federal Government to review its policy on triple concentrate tomato paste importation in a bid to boost the implementation of the backward integration agenda, noting that the recent increase of import tariff on triple concentrate tomato paste will not motivate packaging companies that are planning, or already involved in backward integration exercise.
With a loss of $800 million in 2015, due to what he described as technical devaluation by the CBN, Managing Director of Coleman Wires and Cables, George Onafowokan, noted that his company having staked about N11 billion on expansion within the last four years, is currently facing a huge challenge that may affect its productivity and workforce.
“The CBN’s policy should have excluded raw materials through proper definition and identification of HS codes of some restricted items. We have staked at least N11 billion on expansions in the last four years. The loans we have taken within that period had to be restructured to cater for devaluation and changing interest rates. With this forex restriction, it seems the CBN is asking local firms like ours to shut down.
“Exporting from Nigeria is a very difficult task due to a lot of factors and circumstantial policies. The manufacturing sector needs an intervention from the CBN to address the gaps created by the policy,” he said.
The inability of many telecommunications industry operators to access foreign exchange to procure key equipment from abroad is threatening their operations and survival as many of them now plan to leave the country if the situation continues.
Chief Executive Officer of Spectranet, David Venn, said the restriction of access to forex and other challenges such as multiple layers of taxes, and exorbitant cost of right of way is killing the telecommunications industry in the country.
“The implication of this is that we find it difficult to import equipment into the country and that means capacities will remain the way they are as growth will be stagnated, while subscribers will be at the receiving end,” he said.
Venn noted that the CBN policy has made it impossible for operators to get dollars to pay for equipment needed for their daily routine and expansion and this development is not god for the economy.
He lamented that the policy has made nonsense of their planning, especially for businessmen that depend on imported equipment such as Base Transceiver Stations (BTS) to offer high quality services to customers in the country.
In his view, the President, Association of Telecommunications Companies of Nigeria (ATCON), Olusola Teniola, said multiple FOREX windows create uncertainty for service providers in the country.
Teniola said the cost of capital involved in setting up a full-fledged telecommunications outfit is very high as interest rates in the country are typically double digits and Foreign Direct Investment (FDI) relies on a guaranteed Return On Investment (ROI).
“The current FOREX window mechanism structure needs to be unified with a smaller spread to encourage investors to fund capital intensive CAPEX programmes,” he stated.
To the Managing Director of Vodacom Business Nigeria, Lanre Kolade, things appear stagnant in the sector because of some policies, including forex, stressing that the economy was biting hard on all the operators.
The Way Forward
The CBN on Wednesday May 17th released a 36-item list of materials that are essential for manufacturing purposes, that the apex bank considered ‘valid for foreign exchange,’ without actually reversing the ban on the 41 broad items.
This is believed to be an aftermath of increasing pressure from manufacturers, who through their various associations, and at various occasions, have continued to press for a relaxation on the restricted items.
According to Director General of the LCCI, Muda Yusuf, though the restriction of 41 items from access to interbank forex market added to the plight of some manufacturing firms, segments of the manufacturing sector that had substantial backward integration capabilities had a very good leverage during the review period.
He noted that such firms became more competitive and more sustainable and profitable.
Other operators noted that the new circular while lessening black market FX demand for raw materials, could lead to an increase in official demand for forex by manufacturers, a move the apex bank has made commitment to address.
Already, 20 out of the 34 sub-sectors surveyed under the apex bank’s monthly Purchasing Managers Index (PMI) report for May recorded expansion with many of them taking advantage of the forex availability to improve their inventories for production.
The report stated: “The manufacturing PMI stood at 52.5 index points in May 2017, indicating expansion in the manufacturing sector for the second consecutive month. Ten of the 16 sub-sectors reported growth in the review month in the following order: primary metal; petroleum and coal products; plastics and rubber products; paper products; electrical equipment; appliances and components; textile, apparel, leather and footwear; cement; food, beverage and tobacco products and chemical and pharmaceutical products. The remaining six sub-sectors declined in this order: transportation equipment; non-metallic mineral products; fabricated metal products; printing and related support activities; furniture and related products and computer and electronic products.
“The composite PMI for the non-manufacturing sector grew to 52.7 in May 2017 after 16 consecutive months of contraction. Of the 18 non-manufacturing sub-sectors, 10 recorded growth, while the remaining eight sub-sectors recorded contraction.
“The production level index for the manufacturing sector expanded for the third consecutive month in May 2017. The index at 58.7 points indicated an increase in production at a faster rate, when compared to the 58.5 points in the previous month. Fifteen manufacturing sub-sectors recorded increase in production level during the review month in the following order: primary metal; electrical equipment; petroleum and coal products; cement; chemical and pharmaceutical products; plastics and rubber products; computer and electronic products; food, beverage and tobacco products; textile, apparel, leather and footwear; appliances and components; paper products; non-metallic mineral products; furniture and related products; printing and related support activities and fabricated metal products, while the transportation equipment sub-sector recorded decline in production,” it added.
To address some lingering issues in the sector, Yusuf said: “We need to build capacity of investors in the value-chain for backward integration to be successful. Except for the big manufacturers with huge capacity, it could be too much for industrialists to embark on the process with little or no support. Government needs to embark on a holistic and integrated approach as some of the raw materials are not easy to get as it is being described.”
According to Dr. Ayo Teriba of Economic Associates: “A situation where Nigeria remains cyclically dependent on global economic swings, remaining especially vulnerable to a protracted decline in global prices of crops and oil; is structurally weak with forward linkages from crops to manufacturing/industry, weakened by energy supply and transport failures; and its domestic trade is boosted by high crops income, but held back by high logistics costs is not sustainable.”