CBN and the local industry debate

By Maureen Babatunde

There were mixed reactions last year when the Central Bank of Nigeria (CBN) decided to stop forex supply for the importation of 41 items. The major criterion for exclusion was any item Nigeria can produce domestically. For as long as we continue to import these items, the local producers will suffer, according to the CBN. Rice, cement, textiles, woven fabrics, clothes, tomatoes/ tomato pastes, soap and cosmetics are some of the items on the list. Many of the items are also not considered to be of critical importance, for example Indian incense and toothpicks.  Metal products such as cold rolled steel sheets, galvanized steel sheets, roofing sheets, wheelbarrows, head pans, metal boxes and containers are also on the ‘exclusion’ list.

Reactions came in different tones. Some derided Mr. Godwin Emefiele, the CBN governor, for practising “voodoo economics”. The Economist of London, in a widely circulated editorial, was very brutal in its criticism of the policy. According to the newspaper, the logical thing to do was to devalue or float the Naira to encourage realistic demand for FX rather than an outright ban on allocations. Other analysts thought it was an inevitable measure by the CBN given the global commodity crisis which affected Nigeria’s oil income – the biggest source of public revenue. Failing to contain demand for FX would have led to a run on the reserves and this could eventually put Nigeria in a clumsy situation in international trade. This debate is still on.

My take to the CBN action was that it is impossible to stimulate local industry with monetary policy alone. Inasmuch as Emefiele had to react to the threat to foreign reserves which, if not properly managed, could topple the economy and return us to the inglorious days of the early 1980s, the reality was that he needed support on the other side of the divide – the fiscal side. Maintaining healthy key rates is the primary responsibility of the CBN, but importation is a trade policy which is under the purvey of the Federal Executive Council (FEC). Therefore, Emefiele was fighting a mammoth battle all alone. Unfortunately too, the cabinet had not been constituted at the time and there was no minister to look up to for answers to the fiscal questions.

It is instructive, however, that the CBN policy has ignited a national debate on the place of locally made goods in the Nigerian economy. This is one positive outcome of Emefiele’s FX policy. For decades, Nigeria had been importing many products that it could produce domestically. As long as the CBN was making FX available to the importers, they had nothing to worry about. They had no incentives to invest locally. Nigeria’s import bill rose by over 500% in 10 years because of this unfettered access to FX. Agricultural produce such as vegetables, poultry chicken, eggs and turkey were freely imported. This had negative impact on Nigeria’s balance of trade and placed enormous pressure on FX demand. Not only was local industry stunted, our FX reserves were not growing.

The sharp drop in oil prices since 2015 exposed Nigeria’s vulnerability to these external shocks. Although Emefiele was derided for his FX restriction policy, it is a good thing that other Nigerians have now taken up the issue on the need to buy locally produced goods in place of foreign products. On the social media, #BuyMadeInNigeriaToGrowTheNaira has been trending. Nigerians are saying: why buy imported corn flakes when there is one made in Jos? Why not patronise locally assembled cars? Why not reduce dependency on foreign spirits and wines? This campaign has opened the eyes of millions of Nigerians to the fact that we are hurting the Naira every time we choose foreign above local products. This pressure on the dollar to import products cannot go on forever.

However, and this point is very important, Emefiele needs support. The reality, at the end of it all, is that he cannot use monetary policy alone to encourage domestic industry. Now that there is a full cabinet in place and very competent ministers, the fiscal side of the equation needs to kick in. The Ministry of Finance, for instance, can introduce tariffs that will protect locally manufactured goods. There will be a lot of fuss about free trade and international rules, but there is nothing in the World Trade Organisation (WTO) rules that prescribes compulsory suicide for countries. To the best of my knowledge, different countries adopt many WTO rules to suit themselves so that their industries are not sent out of business.

Furthermore, it is very important that security be tightened at the country’s borders so that what we are gaining through differential tariffs and FX restrictions, we will not lose through smuggling. No matter how well-meaning the CBN and the Ministry of Finance are, as long as other agencies of government do not do their own part of the job and live up to expectations, we will be back to square one. It is good news that Col. Hameed Ali (rtd), the Comptroller-General of Customs, has tried to clean up the service so that it can deliver better security and screening at the country’s borders. But it is equally important to help him achieve the desired results so that all the efforts of other agencies are not in vain.

Beyond the FX restrictions, the CBN, according to news reports, is also offering loans to manufacturers and other members of the real sector at a single digit. This stimulus is expected to allow the real sector access to cheaper finance so that the businesses can expand. If it works out well, it will stimulate output growth, enhance value addition and engender economic productivity. The results will be favourable to the economy if credit goes to sectors that have sufficient employment capabilities and high growth potentials. Nigeria can start earning FX through other sources as the industrial base expands and the economy is diversified. Laudable as this stimulus is, it desperately needs the buy-in of Nigerians to succeed.

The CBN alone cannot bring about the needed change in the appetite of Nigerians for foreign goods. Although, the controversial restriction on FX has made some of those imports very expensive and uncompetitive compared to Nigerian products, we must think of ways to make this sustainable. The tendency in Nigeria, as we all know, is that as soon as oil prices recover and the country’s reserve position improves, we tend to forget where we are coming from. We throw caution to the wind and return to an unsustainable lifestyle. We need to re-examine our tastes and priorities as our own contributions to national development. It does not make any sense for us to be consuming foreign products at the expense of made in Nigeria. We need a new orientation altogether.

I understand quite well that many people think Nigerian products are substandard and do not compare with imported products. There is no argument to be made against this fact. However, there is something called differentiation in an open market. If Nigerian products begin to enjoy good patronage, the companies will have to start competing for the consumers’ loyalty. At this stage, they will seek to improve the quality of their products in order to become the market leader or the dominant product. This will lead to healthy competition, and the smartest producers will go for international standards so that their products can be export quality. But without demand, they cannot recoup their investment, much less improve the quality of their products.

To sum up, I would emphasise, yet again, the importance of fiscal measures to complement the monetary measures being rolled out by the CBN. If you have malaria and the doctor prescribes Quinine, paracetamol, B-Complex, a lot of fluid and rest, the tendency may be for you to take just the Quinine and go back to work, but you are exposing yourself to another breakdown soon because you are reliant on just one of the prescriptions. This is also the case with the country’s economic crisis. We need a cocktail of policies to tackle overdependence on imports and protect our FX reserves. Monetary policies will help but alone, they cannot solve the “malaria”.  It is, thus, imperative for the federal cabinet to look at other ways of complementing CBN’s efforts.

*Dr. Babatunde is an economist.