Has Nigeria’s 2015 FX ban on imports worked?

It is been five years since Nigeria resorted to restricting some food items from accessing foreign exchange to boost local production and conserve the dollar reserve. But Africa’s biggest economy still reels from a shortage in domestic production of some food items and a dollar crisis that is squeezing life out of the economy.

Rather than pay attention to the numerous structural challenges inhibiting domestic production, from a lack of electricity to poor road network and the unavailability of basic infrastructure that has made it cheaper for businesses to import goods from abroad than produce locally, Nigeria’s central bank embarked on rationing sales of the greenback to importers, restricting access to dollars in its official market, where the naira trades stronger relative to the dollar.

That dollar restrictions started after a 2014 collapse in global crude oil prices triggered a huge decline in petrodollars, the country’s biggest foreign earner.

After banning a list of 41 items that included rice and fertilizer in 2015, the apex bank has continued to expand the list of items not allowed to access foreign exchange.

Only recently, the apex bank also prohibited maize importers, taking the total items banned from sourcing dollars in the official market to 44.

Fast-forward to today, that move is yet to yield any remarkable gains, according to various analysts who spoke to Businessday, due to the numerous structural challenges bedevilling the countries.

From spiralling inflation rate, currently at the highest levels in more than two years at 13.22 percent in August, to a huge backlog of foreign exchange demand, the economy still faces a similar scenario

that triggered the West African nation to begin the rationing of the greenback, with the recent pandemic making it more glaring.

“The policy is ill-timed as there are structural challenges that if not addressed, there would not be any improvement despite the ban on importation,” said Ayorinde Akinloye, a research analyst at CSL Stockbrokers asked.

“Structural challenges regarding transportation and storage have led to wastage and increase in cost for farmers. Since the ban on the importation of 44 items in 2016, we are yet to see any improvement, the prices of some of the ban items have doubled. Unless these structural challenges are solved, we would see no improvement,” Ayorinde said.

It seemed to the government, like the country is reaping the fruits from its decision of halting the sales of dollars to importers of these commodities after the country’s dollar reserve at some point touched a 4-year high of $45 billion.

But that was majorly due to the uptick in crude oil prices and the calmness seen in the Niger Delta region, helping crude oil production, as opposed to what was seen in 2016 when the country suffered a lengthy recession. It wasn’t really due to a boost in non-oil exports driven by increased local production.

Nigeria’s foreign reserve has been depleted to the region of about $36 billion after the novel coronavirus-induced fall in oil demand, added with a price war between Saudi Arabia and Russia (two of the world’s biggest exporters of the commodity), send prices to lower lows, wiping over a quarter of Nigeria’s revenue.

That has continued to mount pressure on the country’s currency with the naira being devalued twice to N379/$. In the black market where the greenback is accessible, the naira trades at a weaker rate of N450/$.

On top of that, many manufacturers, even those importing items not blacklisted, still find it difficult to access dollars. “Nigeria is putting the cart before the horse; this policy is archaic. Even the biggest economies have not done that. Nigeria does not use its comparative advantage as it is not cheap to produce some of the items banned in Nigeria,” Abiola Gbemisola, consumer goods analyst at Chapel Hill Denham, tells Buisnessday.

“Even if we are going to ban food items, we should have a 10-year plan; Nigeria was not ready for the abrupt change. The poor people they want to help with the policy are the ones bearing the brunt; it is a failed policy,” Gbemisola said.

Following the restriction to FX, many companies have either resorted to sourcing the dollars from the parallel market or have exited their Nigerian operations. Grif, Federated Steel, Universal Steel were among aluminium drum manufacturers that closed shop during the FX crisis in 2016. Steel importation was among the list of items restricted.

Till date, importation of palm oil hasn’t seized despite being in the list of items not accessible to the exchange. This is due to the huge demand of over 2.1 million tons, scrambling for the country’s 1.1 million tons of palm oil production. A supply gap of over 1 million tons was needed to be bridged.

Nigeria has a deficit across every type of food produced. In fact, the Agriculture Promotion Policy released in 2016 showed a 20.14 million metric tonne deficit across 13 major crops and 60 million poultry bird deficit. Three years later, with the rapidly growing population, this deficit has increased substantially, say experts.

The price of Rice which is the country’s major food staple has already risen substantially due to a land border closure last year that aimed to stamp out smuggling and boost local production.

The coming months could be worse for rice growers after reports show flood destroying 90 percent of the 2 million tons that Kebbi state officials expected to harvest this autumn, according to the head of the state branch of the Rice Farmers Association of Nigeria, who spoke to Reuters. The loss amounts to some 20 percent of the rice Nigeria grew last year, Reuters said in a report.

Problems accessing foreign exchange to import food are adding to shortages. It also appears to be a major downside to potential growth of the economy which suffered its deepest contraction in more than a decade in the second quarter of 2020 at 6.1 percent.

After adding maize to the list of banned items, the country suffered a huge shortage that has caused the price to nearly double.

Nigeria took roughly 4,000 tons of millet and sorghum from the regional economic bloc’s (ECOWAS) strategic stocks last month and released 30,000 tons of its own maize. It also gave four companies special permission to import maize.