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Border closure: Increased demand for local rice calls for higher bank lending

James (surname withheld) used to sell imported rice from Cotonou, Benin Republic, and never liked selling the locally produced brand. When asked for local rice, James would say, “I don’t sell it because it is expensive and people don’t like to buy it.” When the border between Nigeria and Benin Republic was closed, James ran out of stock.

He waited for two weeks to know if the border would be re-opened but that did not happen. James did not have a choice than to move on.

Today, he sells three different types of locally produced rice. “There are too many local rice varieties in the market but these are the ones preferred by my customers,” he said, while pointing at the brands. His problem is funding, but he is reluctant to borrow from the financial institutions due to high interest rate.

There are other business owners across the country with a similar case like James.

They experience increased demand for their products but cannot expand owing to lack of funds.

The higher demand for local rice calls for banks to see the need to lend to critical players in the industry who are helping farmers to reduce their stock.

“Banks have been lending to agriculture, not in the appropriate proportion anyway,” Ayodele Akinwunmi, analyst at FSDH Merchant Bank limited, said.

Border closure, he said, is a temporary measure. Analysts say effective border policies and policies backed up with appropriate policies can improve the business environment, judicial system and land reforms while stimulating lending to the agriculture sector in Nigeria.

There must also be adequate linkage between the agriculture sector and industrial sector to guarantee off-taking of farm produce, they add.

Aggregate banking system credit to the domestic economy (net) rose by 30.3 percent in September 2019, compared with the growth of 1.9 per cent in corresponding period of 2018.

Relative to the level at the end of August 2019, it grew by 24.3 percent, according to the economic report for the month of October released by the Central Bank of Nigeria (CBN).

Deposit Money Banks (DMBs) have been aggressively pushing credit to consumers in compliance with the Loan to Deposit Ratio (LDR) directives of the CBN.

However, Ayodeji Ebo, managing director, Afrinvest Securities Limited, said, “I’m not sure the banks will lend on the back of just border closure to rice farmers. The banks will only lend on a viable and robust rice policy that shows clearly the opportunities across all the rice value chains. The border closure timeline was only extended and it is not a permanent closure, so a lot of uncertainties still exist in that space.”

In August, President Muhammadu Buhari ordered the partial closure of Nigeria’s border with the Benin Republic to curb smuggling of rice and other commodities, and also directed the CBN to stop providing dollars to import food items in a bid to ramp up local farm production and attain full food security.

Although the borders were closed ahead of the cultivation of sufficient local capacity thus causing hike in the prices of local farm produce rice especially, it is only in the short run.

In the long run, the demand push is expected to encourage investments in the affected sector that will benefit the economy in terms of job creation, economists say.

The border closure has created scarcity of the commodity in the markets across the country, forcing prices to skyrocket to as high as N24,000 – average price for a N50kg bag of local rice varieties in September and October this year.

However, it compelled Nigerians who generally have a high preference for foreign varieties to shift to local brands.

BusinessDay’s recent survey at Daleko Market, the biggest rice market in Lagos, shows that local brands now dominate traders’ shelves with prices declining when compared to a month ago.

The average price of a 50kg bag of local brands from integrated rice millers such as Mama Pride, Umza Classic, Mama Choice, Lake Rice, Three Brothers and Al-Hamsad, among others, is N19,500 as against N24,000 sold a month ago, indicating a 19percent drop in prices.

A 50kg bag of rice from semi-integrated millers and manual millers sells for between N14,000 and N15,000. These varieties are regarded as lower quality with stones mixed with the rice grains.

In an op-ed by David Luke and Gerald Masila, titled ‘A trip to Seme-Krake: Mending the cracks in the Benin-Nigeria trade relationship’, the article said the smuggling of rice is particularly contentious. In fact, rice is first on a long list of contraband goods issued by the Nigerian authorities, the article says.

The country has invested significant resources in expanding rice production, but these efforts are undermined by smuggling from Benin. The rice entering is smuggled because it is not produced in Benin. It is sourced from outside the ECOWAS region and therefore does not meet the rules of origin requirements to qualify for duty-free treatment. Benin imports rice from outside ECOWAS at cheaper tariffs than Nigeria, and this rice enters Nigeria through unofficial routes and is then sold at below-market prices.

A single trip to the Seme-Krake border and surrounding trade routes is enough to verify that smuggling is a very real problem that requires serious attention.

The government of Nigeria has been engaging these countries about the need for them to control the influx of some of these smuggled goods into Nigeria but nothing happened.

Since 2015, Nigeria’s President Mohammadu Buhari, has been saying that there is a need for Nigerians to eat what they grow and grow what we eat.

Godwin Emefiele, governor of the CBN, in May 2019, raised concern over smuggling and dumping of goods, which he said were hindering economic policies.

“If we find a company involved in smuggling then we will use our own tools available to us to compliment the efforts of Nigeria Customs. Our instrument is to investigate that company and if found involved in smuggling and dumping, we will stop them,” he said, adding that “We will stamp economic sabotage on them and use them as examples to deal with them for people to learn to respect the economic policies of Nigeria”.

The CBN, in the second term administration of Emefiele, intends to discourage the activities of smugglers, who bring in restricted goods into the country. Perpetrators and their affiliated companies are blacklisted and denied access to banking services in the entire country.

On a monthly basis $38.5 million is being saved by the Federal Government by closing the border, because smuggling has been stopped for petrol across the border, official government data say.

Responding to questions on border closure, Gbenga Sholotan, head, Rand Merchant Bank Nigeria (RMBN) Stockbrokers Research said, “Yes, it is working in terms of government revenue and also foreign exchange, but inflation is getting higher on the back of that”.

Before the border closure, the CBN, in order to reduce the country’s reliance on the importation of items which could be produced in Nigeria, restricted access to foreign exchange on 43 items, while deploying intervention funds to support growth and productivity in the agricultural and manufacturing sectors.

These measures helped to support the attainment of its monetary policy objectives such as a reduction in the inflation rate, stability in our exchange rate and improved accretion to our external reserves.

Following the implementation of a tighter monetary policy regime and improved foreign exchange inflows as a result of the introduction of the I&E window, inflation began to decline, from its peak of 18.7 percent in January 2017 to 11.02 percent in August, before picking up again to 11.61 percent in October 2019.

At   the   height   of   drop in crude oil prices, Nigeria’s external reserves had declined to $23.7 billion in October 2016. With the introduction of the I&E window, the stock of external reserves recovered steadily and rose to $44.8 billion as at March 19, 2019 before declining to about $40 billion currently.

The CBN’s Anchor Borrower Programme (ABP) has ensured that Nigeria emerge from being a net importer of rice to becoming a major producer of rice, supplying key markets in neighbouring countries.

“In a manner of speaking, IMF supports the border closure that we’ve done because they understand that the closure wasn’t meant to be vindictive. It was meant for us to restore our relationship with our neighbours prior to the commitments that we made,” Zainab Ahmed minister of finance, budget and national planning, said during the 2019 annual meetings of the International Monetary Fund (IMF) and the World Bank in Washington.

Responding to questions on border closure in Washington, Emefiele said there is a need to ensure that Nigeria produced rice is purchased.

“It also means that we are creating jobs for workers in the mills, and for rice framers. By closing the border, where our poultry items are now being purchased, it means we are creating jobs for poultry farmers and those that are into the poultry business. That is the only way we can create jobs for our people and see to the emancipation of our country,” he said.

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