Nigerian President Muhammadu Buhari’s somewhat “unconstitutional” directive to the Central Bank to stop providing foreign exchange to food importers holds weighty implications for the economy.
Naira depreciation at parallel FX market
The Central Bank of Nigeria said Thursday that restricting food importers from buying dollars from banks would lead to preserving $20 billion annually.
Audu Ogbe, former minister of agriculture, claims Nigeria imported $22 billion worth of food in 2018, which is about half of the current external reserves.
If that much demand is redirected to the parallel market, it is sure to put pressure on the exchange rate.
Currently, one US dollar exchanges for N360, but it won’t be long before it becomes more expensive than that if the parallel market has to now cater for the dollar demand of food importers.
The parallel market rate has weakened to as low as N520 per US dollar sometime in 2017 and that caused untold hardship for households, businesses and the broader economy.
“The policy will push FX demand to the parallel market and restore multiple exchange rate margin leading to manipulation and arbitrage,” said Taiwo Oyedele, an economist and partner at PricewaterhouseCoopers (PWC).
“High FX rate in the alternative market will increase cost of imported foodstuffs leading to high food inflation,” Oyedele added. This leads nicely into the second implication.
More expensive food
Nigeria has not attained food sufficiency in any meaning of the word. Truth is no country has.
Countries simply produce what they have comparative advantage in and import other foods.
This implies that Nigeria would continue to import food irrespective of a foreign exchange restriction.
That then means food importers will have to source dollars at the parallel market which would be more expensive.
If the cost of sourcing FX is higher, it feeds into production costs which food importers would have to pass on to consumers. And there you have it, food prices would rise, which is bad news for consumers, who are already reeling from shrinking purchasing power.
It’s also bad news for the central bank, which has been struggling to curb stubborn inflation rates.
At 11.2 percent in June, inflation remains above the preferred band of between 6-9 percent. Higher food prices will put pressure on the food index and drive the CBN’s inflation target farther away.
“The biggest negative for now will be higher food prices,” Ayorinde Akinloye, a consumer goods analyst at Lagos-based CSL Stockbrokers, told BusinessDay, adding that because Nigerian consumers are struggling to manage stagnant incomes, “the last thing they would welcome is higher food prices”.
Smuggling and lower government revenue
The last thing the federal government wants would be to see a further reduction in already thinning revenue or a wider budget deficit. But that’s what an FX ban on food imports could lead to.
That’s because it would discourage some importers from importing food through official channels, thereby leading to reduced collection of import duties.
“There will be less supply of food and since the demand is not going to reduce; food prices are going to go up and the implication is that it will increase smuggling of food items into the country,” Henry Ogbuaku, head, Asset Management, Growth and Development Asset Ltd, said.
“We have porous borders, so potentially, you will lose revenue to smuggling, as food importers try their best to cut corners and costs,” Ogbuaku said.
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