Why Buhari’s FX Order Is Bad News For Manufacturers

Why Buhari’s FX Order Is Bad News For Manufacturers

President Muhammadu recently told the Central Bank of Nigeria (CBN) not to provide foreign exchange to importers of any form of food.

Buhari gave the orders because, as he put it, Nigeria has achieved food sufficiency.

“Don’t give a cent to anybody to import food into the country,” Buhari was quoted by Garba Shehu, his spokesman, as saying in a statement.

The 76-year-old president said it was in line with efforts to bring about a steady improvement in agricultural production, and attainment of full food security.

“The foreign reserve will be conserved and utilised strictly for diversification of the economy, and not for encouraging more dependence on foreign food import bills,” the statement said.

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For the man in the street and even manufacturers, any form of ban or restriction usually leads to high local productivity. Hence it is construed that such an order would increase the patronage of locally-produced goods. However, the road to hell is paved with good intentions.

The first challenge is that manufacturers use a number of food items as raw materials. Imagine what becomes of Olam, Flour Mills of Nigeria, Honeywell, and Charghoury, among others, if they are unable to import wheat flour. Many manufacturers do not use cassava or yam flour in manufacturing but wheat. The onslaught of Boko Haram insurgency has sacked many wheat farmers in the north who were not even producing enough for consumption and for inputs. For starters, wheat flour is used in making essential products such as bread.

The Food and Agricultural Organisation (FOA), quoting FAS Lagos, predicts that Nigeria’s wheat imports in 2019/20 is 5.6 million metric tons (MT), up almost four percent when compared to the 2018/19 figure. The rise is based on growing food, seed and industrial (FSI) usage.

Meanwhile, production is projected to reach 60,000 MT within the 2019/20 period. This means that within the same period, there will be about 5.54 million MT supply gap already.

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“Flour millers favour imports, indicating that local wheat has a higher protein content, lower moisture, and lower gluten; citing characteristics not well suited for bread production,” FOA said, in its latest report in June 2019.

To the economist, any form of restriction on wheat means scarcity, which in turn leads to high prices for the manufacturers and ultimately the consumers.

“To the smart businessman, it is an opportunity to smuggle and make money,” an industry player, who did not want his name in print, said.

“If you ban wheat and prices rise, our production cost skyrockets. We will transfer it to the consumers who are already squeezed. What you end up causing will be staglation, meaning high inflation and unemployment rates,” the wheat flour player said.

Imagine, for a moment, a ban on raw sugar. Currently, raw sugar, which is also classified as food, is imported in huge quantity.

Sugar production rose from 10,843 MT in 2012 to 30,000MT in 2018, according to the National Sugar Development Council (NSDC). Raw sugar import was 1.098 million MT in 2012 but rose to 1.216 million MT in 2018.

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The NSDC data show that importing 1.216 million MT of sugar last year cost Nigeria $337.312 million.

“You will put Dangote, Golden Sugar, BUA, Confluence and a number of others out of business if there is a restriction,” an industry source said.

The major challenge with sugar, wheat and other products is that banks could soon stop issuing Form M on the food items once the pronouncement comes into play.

Sadiq Usman, head corporate business development, Flour Mills, parent company of Golden Sugar Company, said in a telephone interview that various factors are hindering sugar production in the country.

“Documentation, planting issues, weak infrastructures and land rights pose big problems for us and these factors have continued to slow the pace of our development in boosting sugar production,” Usman said.

He disclosed that Flour Mills lost 75 percent of its sugarcane plantation owing to 2018 floods that ravaged the farmland.

“Last year, the floods wiped away a significant proportion of our sugarcane production. It affected close to 2,000 hectares of the 3,000 hectares we planted and now we are replanting again.”

Aliko Dangote, president of Dangote Group, recently complained that smuggling is hurting margins of sugar refiners in the country.

The argument for milk restriction is still on. The country currently has 600,000 MT gap but the CBN said it would stop selling FX to importers.

Though this could lead to backward integration projects across the country, it has its own downside risks.

“We currently do not have dairy cows in the country,” the Lagos Chamber of Commerce and Industry (LCCI), said in a recent statement.

“The dominant milk-producing system in Nigeria is the Fulani Nomadic System whose cows have a milk yield of less than two litres a day, whereas a good dairy cow will produce an average of 28 litres of milk per day over ten months. During peak lactation, a high yielding dairy cow can produce as high as 60 litres of milk per day,” the chamber said.

Babatunde Ruwase, President of LCCI, told BusinessDay that any restriction of FX on food items will cause scarcity and disruptions.

Nigeria is the world’s poverty capital. Brookings Institute said in 2018 that 87 million Nigerians, or around half of the country’s population, were extremely poor or lived on less than $1.90 a day.

Just recently, the United Nations Development Programme (UNDP), said slightly over 98 million Nigerians are living in multidimensional poverty.

The unemployment rate is 23 percent, according to the NBS, which adds that the consumption expenditure of households has been declining at varying pace since it rose by 1.5 per cent in 2015.

Final consumption of households has declined by 8 percent from N43.1 trillion in 2014 to N39.66 trillion in 2018. This has far-reaching implications for manufacturers.

Analysts believe restriction could worsen poverty levels which will further weaken the purchasing power of consumers, which manufacturers rely on survival.