Why You Should Worry Again About The Central Bank’s New FOREX Ban

Nigeria’s Central Bank Governor Godwin Emefiele has just issued a directive to the effect that traders in “all forms” of textile and clothing import business will no longer obtain access to foreign exchange for their transactions. In a meeting with cotton sector lobbyists (Nigeria Cotton Association), Emefiele also vowed to go a step further to give hell to “recalcitrant smugglers”.

Why it matters

Growing the textile industry is the Nigerian central banker’s explanation for the latest restriction. While it has been interesting to watch Emefiele’s obsession with trade policy – ranging from Agriculture to manufacturing – one thing is clear that this latest move is an early warning sign of a foreign exchange crisis.

Nigeria’s FX reserves are under serious pressure, CBN increased FX interventions by 87% in 2018, splashing $39billion in order to stabilize the Naira. This move is reminiscent of a June 2015 CBN directive labeling about 41 items ineligible for FX in order to ease the pressure on the Naira. The ban was only lifted two years later in 2017.

Emefiele is advancing his usual protectionist narrative with an unverified claim that Nigeria spends about $4 billion yearly on imported textiles. A cotton lobbyist at the meeting praised his decision: “Better days are ahead for us,” he said. This position, however, is in sharp contrast to the implications of this decision to Nigerians in general.

Inflation, Inflation, Inflation: In the short or medium term, Nigeria is simply unable to produce enough textile to meet current demand. A 2016 report by the International Cotton Advisory Committee estimates Nigeria’s cotton production as a meager 51,000 metric tonnes.

The underlying issue remains poor electricity supply, poor infrastructure, agricultural inputs – which are things that an FX ban is unable to immediately rectify. The 2010 Nigerian policy on cotton, textile, and garments, a part of an industrial revolution plan has been unsuccessful likewise in spite of the investments made in supporting producers.

The implication simply is, that the prices of imported goods, which remains the only viable option would skyrocket and trigger inflation. For the bulk of Nigeria’s over 80 million extremely poor people, the impact on clothing cost – an essential commodity could be quite significant.

More incentive for smugglers: As much as $1.4bn worth of textiles is smuggled already into the country, according to a 2018 claim by Nigerian Textile Manufacturers Association. Mr. Emefiele’s directive would even incentivize smuggling, the same issue with his similar policy on Rice which has seen our tiny neighbors Benin Republic become the world’s highest importers of Rice. The World Bank estimates that $2.2bn dollars of textile is being smuggled into Nigeria from Benin. Such moves would ultimately hurt the economy, also denying the Nigerian customs of critical revenue.

There is no real upside: Bottom line is that Nigeria stands no chance to compete in the international textile trade. Nigeria does not produce enough cotton, Nigeria’s cotton is ranked low grade internationally, energy costs are up, and logistics costs are up. This means that there is no upside to this policy. However, Nigeria’s sudden interest in restricting textile import following a $2billion textile investment deal signed with China at the 2018 FOCAC stokes curiosity. A number of analysts are thinking that such moves might have been influenced by expansionist China which is strategically leveraging Africa in its trade wars with the United States. China’s Rui Group says the investment will enable it to provide textile products to about 20% of the West African market. Effectively advancing restrictions in the most important regional market effectively help it lock out Western competitors. Right?

Source:
http://www.thescoopng.com/2019/03/06/why-you-should-worry-again-about-the-central-banks-new-forex-ban/