Late last week, the Federal Government announced the reversal of two key policies believed to have constituted a stumbling block to the actualisation of President Bola Tinubu’s economic growth development plans. FESTUS OKOROMADU writes on the prospect of the policy reversals.
Since his inauguration as the President of Nigeria on May 29, 2023, President Bola Tinubu has embarked on an array of policy reforms aimed at revitalizing the Nigerian economy. These reforms come in mixed bags as some of the policies are new while others are reversals of earlier government pronouncements.
For instance, while the government’s policy on the removal of petrol subsidies, Student Loans and Electricity Acts were new policy statements, others such as the segmentation of the forex markets, tax reforms were reversals of old policy stands of the Federal Government. However, the swift implementation of these policies has inadvertently squeezed the economy, as evident in the heightened inflationary pressures and reduced disposable income of consumers.
Nevertheless, President Tinubu seems not to be relenting on reversing policy measures considered to be inimical to the economic transformation agenda he has set for himself to achieve.
To this end, last week’s pronouncement on reversal of two key economic policies may not have come as a surprise to followers of Tinubu’s economic reform directions.
The lifting of the ban of the foreign exchange (forex) restriction on 43 items by the Central Bank of Nigeria on Thursday and the removal of the Federal Capital territory Administration from the Treasury Single Account operations can best be described as Tinubu’s determination to right the wrongs of the past where necessary.
This is even as the two policy statements announced late last week were presumed to have huge economic consequences on the transformation agenda of the current government.
CBN’S lifting of forex restrictions on 43 items
The Central Bank of Nigeria, on Thursday, announced the lifting of foreign exchange restrictions hitherto placed on the importation of 43 items.
The decision is a reversal of an earlier pronouncement by the apex bank via a circular, “TED/FEM/FPC/GN/01/010,” issued on June 23, 2015, which put 41 product categories on a list of items not valid for FOREX in the Nigerian Foreign Exchange market. Two more product categories were added in subsequent years, bringing the total of imported product categories restricted from accessing FOREX to 43.
According to the CBN, the restriction was aimed at reducing foreign exchange demand for products that could be locally produced, improve employment generation and conserve foreign reserves.
“It is expected that employment generation will be boosted as closed factories reopen. Price stability will benefit the economy and the standard of living in general”
The items were Rice, Cement, Margarine, Palm kernel, Palm oil products, Vegetable oils, Meat and processed meat products, Vegetables and processed vegetable products; Poultry and processed poultry products; Tinned fish in sauce (Geisha)/sardine; Cold rolled steel sheets; Galvanized steel sheets; Wheelbarrows; Head pans; Metal boxes and containers; Enamelware; Steel drums; Steel pipes, Wire rods (deformed and not deformed); Iron rods; Reinforcing bars; Wire mesh; Steel nails; Security and razor fencing and poles; Wood particle boards and panels; Wood fiber boards and panels; Plywood boards and panels; Wooden doors.
Others were toothpicks; Glass and glassware; Kitchen utensils, Tableware; Tiles-vitrified and ceramic; Gas cylinders; Woven fabrics; Clothes; Plastic and rubber products; Polypropylene granules; Cellophane wrappers and bags; Soap and cosmetics; Tomatoes/tomato pastes, and Eurobond/foreign currency bond/share purchases.
However, it is important to state that the ban was limited to importers having access to FOREX from the official market to import these items but not a ban on the importation of these products.
The question then is why has the CBN under the new administration decided to lift the restrictions at a time when access to FOREX has become scarce and thus led to devaluation of the local currency?
In response, the CBN in a statement offered the following reasons: “The restrictions pushed importers into the parallel market, contributing to the surplus demand for FOREX. This weakened the parallel-market exchange rate, pushing up prices; The CBN wants to promote orderliness and professional conduct by all Nigerian Foreign Exchange Market participants to ensure market forces determine exchange rates on a Willing Buyer – Willing Seller principle; The CBN wants a unified market for FOREX with flexible and transparent pricing; and The CBN wants to ensure price stability and is seeking to boost liquidity in the Nigerian Foreign Exchange Market. As liquidity improves, we expect the distortions to moderate.”
The apex bank also listed the implications of removing the FOREX restriction as follows: Monetary Policy tools become more effective with the attainment of a unified, well-functioning market for FOREX, where pricing is based on a willing-buyer and willing-seller system. With this, the CBN’s core functions and mandates become realisable; The willing-buyer and willing-seller system allows the exchange rate to adjust to clear the market and ensure that there is always supply.
“In recent months, the widening premium between the official rate and the parallel market indicates that the rate has not been setting a clearing price; Importers of these products rely on the parallel market to source FOREX for importing these goods. This puts additional demand pressures on the parallel market, thereby widening the gap with the official rate and permanently segmenting the market. Removing these restrictions eliminates the need for importers of these products to go to the parallel market, reducing the pressure on the naira; and the hitherto FOREX restrictions had implications on inflation, causing the prices of affected goods to increase.”
The CBN also offered explanations as to how the decision to remove the restriction will benefit local production which many economists have advocated as the solution to the nation’s economic quagmire and FOREX scarcity insisting that the action will among others that local producers will enjoy cheaper input import while consumers will benefit from cheaper retail products. The policy, according to the CBN, “is suitable for a unified FOREX market and positive as well for inflation.”
In addition, “It is expected that employment generation will be boosted as closed factories reopen. Price stability will benefit the economy and the standard of living in general,” the CBN stated.
Tinubu pulls FCTA out of TSA
Barely 24 hours after the CBN announced the reversal of its import policy on the 43 items, President Tinubu issued another key policy statement pulling the Federal Capital Territory Administration out of the Treasury Single Account.
A statement from the presidency said the move was to allow the FCT Minister, Nyesom Wike to use the territory’s Internally Generated Revenue for the development of the nation’s capital.
President Muhammadu Buhari’s administration had introduced the TSA to address irregularities, ensure accountability, curb the incessant number of accounts and enable the tracking of all government revenues.
“When we came into government, we found out that some institutions had hundreds of accounts. How can the Accountant General trace them?
“So, we introduced the Treasury Single Account so that all revenues will be followed and directed to it. This is a very positive way of making sure that revenues can be traced to Treasury Single Account and therefore be accounted for,” Buhari had said while commenting on the motive behind the policy.
The TSA, a Federal Government policy that requires all government revenue to be deposited into a single account, was introduced in 2015 to improve transparency and accountability in government finances.
In line with the TSA, all revenue receipts, and all payments by government, go through a Consolidated Revenue Account, at the CBN.
Tinubu also approved the creation of the FCT Civil Service Commission to allow for staff career progression.
The establishment of the Commission will give Wike greater control over civil servants’ appointment, promotion and discipline in the FCTA.
The removal of the FCTA from the TSA, as well as the creation of a Civil Service Commission for the FCT, will give Wike additional powers as a minister.
Experts differ on CBN’s move
Reacting to the CBN decision to lift the forex ban on 43 items, the chief executive officer, Centre for the Promotion of Private Enterprise, Muda Yusuf, said the move is welcome development.
“It is a move in the right direction. It is part of the policy normalisation process. The exclusion of the 43 items was one of the several drivers of distortions in the forex market. The exclusion of the items also contributed to the persistent divergence in rates between the official window and the parallel market.
“The exclusion was also in conflict with extant trade policy as the items were not under import prohibition in the first place. It was an example of lack of policy coordination under the previous administration.”
The new directive, he added, will also improve transparency and disclosures in foreign exchange transactions.
He, however, warned the apex bank to avoid market suppression tendencies, especially outside the I&E window, adding that all policy impediments to forex inflows should be removed.
The fiscal authorities should also continually monitor the economic landscape to shape the character of fiscal policy measures to regulate imports in line with comparative advantage principles.
“We need to worry about the risk of import surge. There is also a need to upscale the use of fiscal policy measures to boost domestic production and productivity,” he added.
Also, commenting on the lifting of foreign exchange restrictions on the 43 items, analysts at CardinalStone Research, in an emailed note, described it as a move to gradually improve confidence in the FOREX market, which had been weighed down by long-dragging illiquidity and unorthodox policies.
“We recall that the ban was instituted due to a material plunge in forex inflows. Thus, to forestall the re-occurrence of the underlying drivers of dollar demand management and unorthodox forex policies in Nigeria, the supply of forex will have to improve sooner rather than later.
“To improve forex supply, the CBN and fiscal authorities may have to evaluate the possibility of raising dollar facilities (via Diaspora bonds, Eurobonds or concessionary loans from bilateral/multilateral institutions), and asset sales (full or partial), among others.
“Curbing oil theft, enhancing domestic oil production efficiency, and issuing new oil mining licenses are potential short-to-medium solutions.”
On their part, financial analyst from Cowry Securities Limited said, “The decision by the CBN to lift FOREX restrictions on the banned 43 items is seen as a positive development for Nigeria’s economy and the FOREX market and it is expected to help stabilize the Naira by reducing demand pressure across markets.
“However, a key challenge to this change is the availability of FOREX supply,” they stated, describing the move as part of measures by the CBN to maintain price stability and enhance the functioning of the Nigerian Foreign Exchange Market.
The Cowry Securities financial analyst lauded the CBN plans to inject liquidity into the market with a gradual reduction in interventions as market conditions improve, while it finds ways to address the forex backlog and work towards establishing a unified FOREX market through consultations with various stakeholders.
Also commenting on the development, analysts from Cordros Securities Limited said, they expect a new middle ground between the parallel and official FOREX market as a result of policy reversal.
“At face value, I can say they are increasing the demand but I need to understand the motivation”
“Given the CBN’s recent circular stating that importers of all the 43 items previously restricted in 2015 can now purchase FOREX in the Nigerian Foreign Exchange Market (NFEM), we expect the official exchange rate to depreciate towards the parallel market while the parallel market rate appreciates towards the official market such that the two rates find a new middle ground in the near term based on current FOREX liquidity conditions.
“However, when the market realises that FOREX supply is still minimal at the official market, importers will return to the parallel market to fulfil their FOREX obligations. The preceding will lead to another round of FOREX pressures in the parallel market.”
However, the Director, Center for Economic Policy Analysis and Research, University of Lagos, Prof. Ndubisi Nwokoma said the decision may worsen the forex crisis.
According to him, what the government has done is to increase demand without a commensurate boost in supply.
“You know when you lift the ban, you are increasing the demand. At face value, I can say they are increasing the demand but I need to understand the motivation.
“What they should be focusing on primarily is to boost supply. Supply has to increase, oil theft should be minimised, money from oil revenue.”
On his part, a finance expert and President of the Association of Capital Market Academics of Nigeria, Prof. Uche Uwaleke said the policy is ill timed and will have a negative impact on local manufacturing.
“Its immediate impact will be to reduce the premium between the official and the parallel market.
“But it will have negative implications for import substitution and local manufacturing. The decision to readmit 43 items is ill timed in view of the current forex shortage.
“The official exchange rate will further rise to meet the parallel market rate,” he said
So far, there are indications that President Tinubu’s strategy of reversing government policies believed to be a hindrance to the economic advancement of the nation may just be the magic wand expected to ensure that the promise of renewed hope is actualized in no distant time.
