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CBN, this is one option that’s better than forex ban – Kalu Ajah

In 2015, the CBN released a list of 41 items prohibited from being imported into Nigeria with FOREX sourced from the CBN.

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In 2015, the Central Bank of Nigeria (CBN) released a list of 41 items prohibited from being imported into Nigeria with FOREX sourced from the CBN. The intent of the policy was simple – the CBN was seeking to utilize the FOREX (FX) market to support the import substitution policies of the FGN.

The 41 banned items included commodities such as rice, tomato paste, cement, meat, eggs and private jets. Milk has also been added to this list. If importers cannot access CBN FX, they will have to buy foreign exchange from the parallel market at a higher price. The CBN hopes the higher prices on imported food will make them too expensive for the Nigerian market. This will then incentivize the food importers to restrategize their operations and begin local production in Nigeria and avoid expensive FX for imports.

[READ MORE: CBN clears air on Diaspora Remittances, official inflows $2.6bn not $26bn]

Of rice and milk

The President of Nigeria further “directed” the CBN to cease providing dollars to importers. In essence, Nigeria does not want to subsidize food imports.

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There are three problems with this.

  • local food costs will rise;
  • local food supply is inadequate; and
  • monetary policies alone cannot fix this.

To be clear, imports for final consumption tend to be economically bad. Imports weaken the local currency. When a nation imports, she sells her currency and buys the currency of the exporter nation, thus the local currency loses value and falls. Imports also kill local jobs. The President and the CBN are not wrong in principle but they are attempting to cure an economy generating less than 5000mw for 190 million people with FX bans.

An FX ban works where the local market can meet local demand but cannot operate at maximum capacity because imports are cheaper and gain market share from local producers. A forex ban makes those imports more expensive, thus allowing local products to regain market share.

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If local supply cannot meet local demand as in the case of rice and milk, then a forex ban simply raises food inflation because those imports of essential stable food items will still come in but at a higher price. A policy that simply increases the prices of local products is an incomplete policy.

Nigeria used to be a massive importer of cement until President Obansanjo banned the importation of bulk cement. This led to local cement companies like Ashaka and WAPCO and a new entrant called Dangote Cement to invest to expand local cement capacity in Nigeria. Today, Nigeria manufactures all the cement she needs locally.

Of rice and milk

Success? Not quite.

Nigeria’s self-sufficiency in cement has come as at literally a high price. A World Bank report titled “breaking down barriers” published in June 2016 found that African cement prices are 183% higher than global prices, on average, a bag costs $9.57 per 50kg bag compared with $3.25 globally. The question to ask is if a strategy that creates local jobs for cement and rice producers but increases costs in the entire economy is worth it. Food remains a major component of the inflation Consumer Price Index (CPI).

In 2015, Aliko Dangote set up a tomato processing plant in Kano to process approximately 900,000 tons of tomatoes produced locally in a bid to cut imports of about 300,000 tons imported yearly from China. The Dangote factory has not optimally operated continuously since inception, a key reason is that the local farmers could not meet the demand of the tomato factory, according to Abdulkareem Kaita, the Managing Director of Dangote Farms Ltd.

Hold on, we just read the total local production of tomatoes is more than local demand, Yes, but all those tomatoes have to be harvested, packed all over Northern Nigeria, and transported to Kano to the Dangote factory. In the absence of a functional cold chain or rails that can move bulk cargos, most tomatoes simply waste on account of bad rural roads. A ban on FX for tomato imports does not solve the problems Dangote Tomato factory is experiencing in Kano. Zero imports do not create local logistics or rural roads, the FX ban simply makes tomato import substitutes more expensive, raising food inflation.

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What about Rice?

The US Department of Agriculture puts Nigeria’s demand as at 2018 at 7.3m metric tons, with local supply at 4.9m metric tonnes, clearly a deficit of 2.5m metric tonnes. With the FX ban and border closure, the price of locally-produced rice has moved from N13,500k to N16,500k, according to the Business Day newspapers. Basic economics says with higher demand, prices will rise, thus the CBN FX ban for rice importation has led to a rise in food inflation in Nigeria. Again, bans and tariffs only work when local supply can meet local demand.

Rather than forex bans, the CBN is better served by targeted subsidies to reduce local prices and eliminate food importation by making local food production cheaper in Nigeria.

[READ ALSO: CBN gives new directive to facilitate efficient payments system]

So what can the FGN and the CBN do?

  • Subsidize local production.
  • Give the local food companies a 90% rebate on cost of generated power. According to the Nigerian Labor Congress, “Between 30% and 35% of manufacturing costs are energy-related expenses”.
  • Give food processors 0% interest loan from the CBN to build embedded power plants or pipelines to get gas to their factories.
  • Give manufacturers direct allocation of diesel from NNPC based on food prices falling.
  • Deploy gas flaring fees to fix rural roads.
  • Build solar powered storage warehouses.
  • If NNPC sells diesel to food processors in Nigeria at N20 a litre, it becomes harder for importers to bring in tomatoes grown in China, shipping, insurance paid & locally transport paid and beat local prices.

There are many other incentives that can be applied to drop the cost of production, that should be the priority.

Once costs fall, and productivity rises at Nigerian based food processors, local food will be more available and food inflation will reduce. The CBN is investing in direct lending to boost output, that is commendable, but it cannot do everything alone, this is a team play.

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Columnists

Local refining; A panacea for Nigeria’s reliance on imported refined products

The start up of refineries will attract , enhance employment opportunities and conserve the foreign exchange earnings of the country.

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Analysis: NNPC and its refining losses 

News reports earlier this week say the Vice President, Prof. Yemi Osinbajo, speaking at a virtual meeting noted that the problems associated with Nigeria’s refineries will persist if the Federal Government continues to own and run them. According to him, the government should have no business running refineries as they should be in the hands of the private sector. He further noted that the government’s focus currently is to assist the private sector develop modular refineries. He listed a few private refineries coming on stream which include a 100,000-barrel capacity refinery located near Portharcourt, the Niger Delta Petroleum refinery in Delta state and six modular refineries that should come on stream soon.

Explore the Nairametrics Research Website for Economic and Financial Data

About 90% of the refined petroleum products consumed in Nigeria are imported. The nation’s refineries located in Kaduna, Warri, and Port Harcourt with a combined nameplate capacity of 445,000 bpd have long operated at low levels due to many years of underinvestment and poor maintenance. Despite continuous talk of revamping the
refineries, in 2019, combined capacity utilization of Nigerian refineries fell to 2.5%, an all-time low annual activity level since 1998 when NNPC started providing the data. Last year, Pipelines & Product Marketing Company (PPMC) reported that it imported 9,158,528mt of refined products (PMS, HHK, AGO & ATK) while it evacuated only 963,302mt of refined products from Nigerian refineries, implying local production was just at 10.5% of total refined products available for distribution. Going by the historical performance of these refineries, it is safe to agree with the Vice President that the Nigerian government has no business running refineries.

READ: Hotels in Nigeria are on the verge of collapse

Asides the modular refineries mentioned by the Vice President expected to come on stream soon, the country is also patiently awaiting Dangote’s 650,000 barrels perday capacity refinery. The BUA group also recently announced plans to commence a 200,000 barrels per day refinery and petrochemical plant in Nigeria to be located in Akwa Ibom State. Although it is widely believed that the local refining operations will reduce the nation’s reliance on
imported refined products, the question in the minds of many Nigerians is how local refining of petrol will impact the pump price. In this regard, the Minister of Finance, Budget and National Planning, Zainab Ahmed, stated that refining petrol locally will not significantly reduce the price of petrol since the refineries will sell at the international price, noting that the only expected savings will be freight or shipping.

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READ: DPR reveals 4 major areas of focus for downstream operations of oil and gas sector

That said, Nigeria as a country has a lot to benefit from being a net exporter of refined petroleum products. Nigeria is the second largest producer of oil in Africa. The combination of rising shale production in the US, continued oversupply in the export market and weak demand, means the market for Nigerian crude is quite uncertain and a shift from export of crude to refined products bodes well for the country. The start up of these refineries will also
attract investment in warehousing and storage facilities, enhance employment opportunities and conserve the foreign exchange earnings of the country

READ: Six Modular Refineries billed to commence operation, FG says 

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CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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Key ‘side-hustles’ Nigerian Bankers supplement their income with

The need to meet up with their financial obligations has forced some bankers to adopt side hustles.

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bankers, How much banks pay, Key 'side-hustles' Nigerian Bankers supplement their income with

The headline above seems a little inappropriate given the earnings of Bankers, vis-à-vis statistics on salaries and wages in the Nation.

The average Nigerian Banker earns at least four times the poorly implemented National minimum wage of N18,000; gets his pay promptly without being owed arrears, and enjoys other employment benefits, such as healthcare, without hassles.

Why then would these privileged few, whose wage bill cost the 13 NSE listed banks, a whopping N178b in the first three months of 2020, lockdown notwithstanding, need to supplement their already impressive income?

READ: 3 major ways COVID-19 will affect Banks’ 2020 profits

Simple, because they need to meet up with their financial obligations.

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The expectations are high for anyone with a decent job in a country where the unemployment rate is currently 27.1%, and where 28.6% of its population are underemployed.

The expectations are even higher for those whose work is in the banking sector, of whom it is erroneously believed, have access to unlimited funds, and an endless flow of credit facility, because they facilitate the consummation of volumes of such transactions daily.

(READ MORE: Naira expected to be under pressure until backlogs for FX payments are cleared )

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The peculiarity of HR policies in Nigerian banks does not allow for ‘helping’ of relatives into the same system, as is obtainable in the Nigerian Civil service. Hence, the basic assistance which Bankers can offer their ever-expanding network of dependants is direct financial aid, forcing them to engage in moonlighting activities to meet up the ‘hype’.

The activities below are from close observation and interactions with Nigerian Bankers.

Forex dealings

The existence of different exchange rates, coupled with the scarcity of FX for most sectors of the economy has given rise to opportunities for arbitrage and round-tripping. Most bankers, who by virtue of their jobs have become privy to their customers’ FX needs, are able to broker deals; matching the demand of FX with supply, and earning handsome margins in the process. Gratitude, loyalty, and referrals from their customers are an added bonus for flouting their Bank’s internal policies on staff participation in FX dealings.

Such dealings have in recent times expanded to include transactions in cryptocurrencies.

Personal professional practice

Nigerian Banking industry is a melting pot of various first degrees, with some using their bank jobs as a stop-gap for their employment problems, as they seek to improve on their chosen professions. Hence, it is not uncommon to see bankers start and run their startups in other fields, while still in paid employment of their banks.

Although, the Banks are likely to frown on not getting 100% commitment from their employees; they continue to provide a rich base of potential clients for these startups and have been their customers too.

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Sports betting and Mobile Money agencies

Sports betting in Nigeria has opened up a new world of investment possibilities for sports enthusiasts and shrewd businessmen. Since 2009, when the first online sports betting site launched in Nigeria, over twenty more have joined to compete for the market in Africa’s most populous black nation, and they all seem to be thriving, as each sports competition sees the unveiling of another sports betting site in Nigeria.

(READ MORE: Bank like a hero with the Stanbic IBTC Super App “Voice Banking” feature)

Bankers, with their knowledge of the industry figures, have had a first mover’s advantage in being agents of these sport betting firms.

The same holds true for Mobile Money agencies, where Bankers have been known to use the influence of their office to expedite mobile money agent approvals and secure POS terminals, which have consequently become inaccessible to the common man.

READ: Analysis: UACN, is the dividend worth it?

Other activities

As with most business endeavours, Bankers generally indulge in businesses, in which they have a comparative advantage. Bankers in big cities use their cars to run shifts under popular cab-hailing services; some moonlight as real estate agents, because they can match customers with their real estate needs. A few others have become millionaires, by investing in their customers’ businesses. The possibilities are endless, as Bankers seek to make ends meet through their ingenuity, while staying relevant in their careers.

Explore the Nairametrics Research Website for Economic and Financial Data

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Cyprian Ekwensi in his classic novel ‘Chike and the River’, made popular the phrase of a man who lives by the bank of the Niger, washing his hands with spittle. Sadly, this has become the lot of most Nigerian Bankers, as they live from paycheck to paycheck, exploring one loan option to pay off a previous loan, even as they condescend to their customers in volunteering financial advice, that they are better off implementing in their personal finances.

No one is immune to the economic squeeze our double-digit inflation has brought on fixed income earners, especially not our beloved bankers.

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Emerging concerns on crude oil price dents economic recovery

The economy continues to face severe dollar shortages due to lower oil receipts which continues to pressure the nation’s FX reserves.

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Crude Oil prices, oil

Yesterday, Brent crude oil price settled at US$41.44/bbl, down 10.7% from 6-month high of US$45.86/bbl. We note rising emerging concerns on the outlook for oil price in the global market. Cases of coronavirus are now rising faster in many European countries that had earlier taken gradual steps to open up their economies. For example, in the United Kingdom, Prime minister Boris Johnson stated the possibility of another lockdown to curtail the recent resurgence in new cases of infections. Furthermore, Libya (who has not been producing crude) announced the lifting of the force majeure on some oilfields & ports where fighters no longer have their presence. This implies Libya would resume production soon which may lead to a glut in the crude oil market particularly as the country is exempted from all OPEC cuts. The fear of increased supply comes amidst fragile demand for jet fuel.

The renewed concerns around crude prices is an unwelcome development for Nigeria considering the fact that hope of an economic rebound is largely hinged on sustained rebound in crude prices. Last week, the Minister of Finance highlighted that the country has suffered a 65% slump in revenue largely due to weak oil revenue. Furthermore, the
economy continues to face severe dollar shortages due to lower oil receipts which continues to pressure the nation’s FX reserves. In addition, external trade condition continues to worsen with a trade deficit of N2.2tn in H1 2020. With oil prices still down by c.30% from 2019 levels amidst the nation’s pledge to OPEC cuts, we do not expect any significant improvement in external conditions. However, we believe news of a decline in crude prices may provide succour for the Nigerian consumer given that lower crude price is expected to translate into lower petrol prices following the deregulation of the downstream sector.

That said, we reiterate our position that the diversification of the economy from oil remains the key strategy in reducing the vulnerability of the Nigerian economy to volatilities in oil market. The non-oil economy (which accounts for c.90% f GDP) remains crucial and its potentials can be best exploited by the private sector.


CSL Stockbrokers Limited, Lagos (CSLS) is a wholly owned subsidiary of FCMB Group Plc and is regulated by the Securities and Exchange Commission, Nigeria. CSLS is a member of the Nigerian Stock Exchange.

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