FX ban on food importation means higher inflation rate, wider parallel market rates
President Muhammadu Buhari’s directive to the Central Bank of Nigeria (CBN) to place a ban on FX for food importation, if implemented, would mean that food importers in Nigeria would not be able to access dollar at the Central Bank’s official rate of N379, a rate that is mostly accessible to the government and selected industry players, according to analysts.
The president on Thursday stated that “nobody importing food or fertilizer should be given foreign exchange from the Central Bank”.
“We will not pay a kobo of our foreign reserves to import food or fertilizer. We will instead empower local farmers and producers,” Buhari tweeted.
Ayorinde Akinloye, equity research analyst at CSL Stockbrokers, said if the CBN enforces the FX ban on food importation, food scarcity would become a huge risk because local production capacity is grossly inadequate to cover demand.
“The scarcity would lead to a jump in prices of food items and consequently cause inflation,” Akinloye said.
Ahmed Adamu, senior lecturer, Economics, Nile University, Abuja, said the president’s directive was coming at a wrong time when the agriculture sector is not mature enough.
“If the government had provided the right enabling environment, made sure that the local food items were available in enough quantities of the desired qualities at competitive prices, then the policy would be justifiable and understandable,” Adamu said on Channels TV Sunrise Daily programme on Friday.
“We already have rising inflation, and the removal of subsidies on petrol and electricity, so these are signals for hyperinflation,” he said during the breakfast programme monitored by BusinessDay.
Largely driven by food inflation, Nigeria’s headline inflation, which serves as a measure of consumer prices, rose at a faster pace for 11 consecutive months, reaching a 27-month high of 12.8 percent in July. Food inflation rose by 15.48 percent in July 2020 compared to 15.18 percent in June 2020, according to the National Bureau of Statistics. But defending the president’s directive, Garba Shehu, SSA to the president on media & publicity, said the government’s action is for the good of the country.
“The president’s directive is a patriotic motive. Agriculture has been sabotaged by other countries who use the country as a dumping ground,” Shehu said on the Sunrise Daily programme. “This country has attained more than 90 percent in food sufficiency. As we speak, there is no shortage of food in the country. Yes, there is some high cost of food in the country but this is partly due to the dry season and the problem of fertilizers,” he said.
Damilola Adewale, a Lagos-based economic analyst, said the government’s reason for the ban is justifiable. However, he said, what the government should have done was to exempt few products in which Nigeria does not have comparative cost advantage “because for this kind of product, local supply is far below local demand”.
While no country in the world produces all its food, Nigeria, according to analysts, has one of the lowest food self-sufficiency levels in Africa. In 2017, one in four Nigerians was severely food insecure, according to the Food & Agriculture Organisation (FAO).
Data by the National Bureau of Statistics (NBS) showed that from 2016 to the first half of 2019, Nigeria spent N54.51 trillion importing manufactured goods, mostly food, and agricultural goods. Within the period, agricultural goods import gulped N38.24 billion while manufactured goods import gulped 19.51bn.
In a circular in 2015, the CBN listed 41 goods and services as items not valid for FX in the Nigerian foreign exchange market and had gradually increased the number to 44.
President Buhari has, however, advised private businesses bent on food importation to source their foreign exchange independently, urging them to “use your money to compete with our farmers” instead of using foreign reserves to bring in compromised food items to divest the efforts of local farmers.
“We have a lot of able-bodied young people willing to work and agriculture is the answer. We have a lot to do to support our farmers,” Buhari said.
Meanwhile, the ban on access to FX for food items does not imply a ban on importation of food items. Thus, food importers would simply shift demand to the parallel market which is more expensive and as a result would impact food prices.
“With more FX demand moving to the parallel market, expect the margin between parallel market rates and official exchange rate to widen,” a Lagos-based analyst said.
Data compiled from abokiFX.com, a platform that collates rates from street traders in Lagos, show that naira’s black-market rate sold at N460 per dollar on Friday from N360 it sold at the beginning of 2020.