A few weeks ago, the Central Bank of Nigeria (CBN) announced that it planned to restrict foreign exchange allocation for the importation of milk into the country. Apparently emboldened by the bank’s announcement, the Presidency few days ago ordered that the same policy be applied to all food imported into the country. Both proclamations have terrible consequences for the Nigerian economy for different reasons.
The restriction of milk importers from forex at the official rate follows the dollar demand management template of the CBN in recent years. When oil prices slumped in 2015 and dried up the nation’s dollar supply, the CBN implemented a declared 41 items, including essentials like rice, ineligible for forex allocation. Unfortunately, over the last four years, the CBN’s monetary policy management has proven to be ineffective and in fact inimical to economic growth.
Since then the CBN has rolled out a string of policies geared towards maintaining an artificially strong naira, but the Nigerian economy has suffered a plethora of woes including the exodus of Foreign Direct Investments, low GDP growth and high inflation. Nevertheless, the bank has doubled down on its template, while the presidency seemingly believes that this approach is the solution to our economic woes. This cannot be farther from the truth.
In reality, the CBN’s forex demand management is a futile and costly approach for an economy like Nigeria which requires significant foreign exchange to satisfy demand – in 2017 Nigeria spent $51 billion importing goods and services. The local manufacturing industry relies heavily on imported raw material. This means that the nation requires significant foreign exchange to satisfy demand for both finished products, as well as raw materials for local production.
Furthermore, while the CBN claims that restricting dollars to certain imported items was implemented to encourage local production of these products and protect the local population from exploitation, this policy has failed to achieve these aims.
In fact, the federal government’s two most popular import-substitution policies in recent times, the ban on cement importation and the auto industry policy, have failed to have meaningful positive impacts on majority of Nigerians.
In order to boost the local cement industry and eliminate importation of cement, cement companies who could not prove that they were developing local processing capacity were barred from importing cement in 2002; cement is included in the aforementioned 2015 list of items ineligible for forex. Nevertheless, local cement prices remain prohibitively high and out of reach for the typical Nigerian in a country burdened with a housing deficit of 17 million homes. In fact, Nigerians pay one of the highest prices globally for cement.
The federal government’s auto policy has also failed to achieve its goal of spurring local production of cars. Despite the imposition of heavy duties on imported cars and the surge in the number of licenses issued for local car assembling, there has been no significant increase in local car production. Instead, cars are now typically smuggled into the country through land borders and have become more expensive.
Basically, whenever the government or any of its agencies bans or restricts access to a product, history has proven that the proclaimed expected benefits seldom materialize. Rather the Nigerians tend to suffer for such policies. It is therefore befuddling that the nation continues to double down on policies which are not only ineffective, costly and inimical to economic growth, but also render Nigerians poorer.
Thus the presidency’s directive that all food imported into the country should be restricted from forex at the official rate is not only appalling for being a tacit support of this ineffective policy, and even more so because the presidency is meddling in the affairs of the central bank, and as such eroding its independence.
The President’s new proclamation attacks one of the tenets of the central bank – the bank’s independence. The central bank is an institution which strives to ensure the proper functioning of an economy via a range of monetary policy and regulatory tools free of political interference. Political interference in the affairs of the bank is highly unwelcome and unacceptable.
The dangers of a compromised central bank cannot be overstated. Political interference in central bank decision making often results in terrible policies. Already, there are undertones of such policies in the Nigerian economy, including the ineffective forex restriction. In fact, Nigeria’s current economic woes can be partially traced back to the political interference with the bank. Under President Buhari, the CBN has implemented a fixed-float monetary policy that the President favours, despite the strong headwinds and adverse macro conditions which should have dictated otherwise.
Furthermore, political meddling in the affairs of a central bank always results in the loss of credibility with international finance institutions – a situation which Nigeria should be keen to avoid given the nation’s unfavourable economic outlook.
Overall, both the CBN’s adamant stance on an ineffective forex demand management policy and the President’s statement that the ineffective policy be extended to the entire food industry are damaging for the Nigerian economy.
Although it is unlikely that the CBN will actually obey the president’s directive given the impact such would have on food prices and the overall consequences on the economy, the use of forex restrictions as a medium of compensating for shortfalls in forex supply should be done away with totally. Given the relative failure of the policy thus far, there is no logical rationale for its continued implementation.
In addition, the presidency needs to realize that giving directives to the CBN is ill-advised, it harms the independence of the central bank and could have negative consequences for the economy. Both parties need to understand that government policies and actions directly impact the social and economic welfare of millions of Nigerians.
At the moment the CBN and presidency’s focus should be ensuring that the economy returns to its feet via sustainable economic policies, not stubbornly sticking to policies and proclamations which weaken it.
Olanrewju Rufai
Twitter – @LanreRufai_
