By Babajide Komolafe

RECENT developments in the crude oil market have reinforced the need for policies that will enhance exchange rate stability in Nigeria by promoting   and accelerating   local production     to reduce consumption of imported goods and hence reduce demand for dollars, as well as boost revenue from non oil exports.

After rising to a peak of $87.66 per barrel in October, the price of Bonny Light  crude oil price dropped by $28.44 to $59.22 per barrel on November 30th.

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In its report for November 2018, the United State’s   Energy Information Administration (EIA) Short-Term Energy Outlook (STEO) noted that crude oil prices declined in October at a faster rate than in any month since July 2016.

Given that revenue from crude oil accounts for majority   of Nigeria’s foreign exchange earnings, and 55.2 percent of   total federally collected revenue, the steep decline in price of crude oil in October portends great danger to macroeconomic stability in the country.

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According to analysts at FSDH Merchant Bank, “a significant drop in either the price of crude oil or production will directly have a negative impact of the fiscal position of the country. It will also cause major macroeconomic instability, particularly in the exchange rate and inflation rate.”

Consequently, they advised: “We are aware that the crude oil market is very volatile, therefore it is crucial to learn from the events that happened in 2014 through to 2017 in order to take proactive measures against unwarranted economic crisis in Nigeria. Government at all levels must intensify efforts to implement policies that will grow the non-oil sectors of the economy.”

Forex Restriction on 41 items

One of such policies, which helped the country navigate the challenges of the crude oil price decline between 2014 and 2016, and also assisted the recovery from economic recession is the foreign exchange restriction imposed by the Central Bank of Nigeria (CBN) on 41 items, including rice, cement, margarine, poultry, canned fish, vegetable oil and others.

Faced with rapid decline in external reserves triggered by decline in foreign exchange inflow courtesy of steady decline in crude oil price which started in July 2014 when prices peaked at $114 per barrel, the CBN moved to curtail   demand for foreign exchange and also encourage domestic production of some imported items.

Thus on June 23rd 2015, it imposed foreign exchange restriction on 41 items. In the circular announcing the policy, which is also known as ’41 items policy’, the CBN stated: “The implementation of the policy will help conserve foreign exchange as well as facilitate the resuscitation of domestic industries and improve employment generation”.

According to the CBN, the policy helped Nigeria saved $21 billion from food imports between 2015 and October 2018.

CBN Governor, Mr. Godwin Emefiele disclosed this while highlighting the economic impact of the 41 items policy in his keynote address delivered at the annual Bankers Dinner of the Chartered Institute of Bankers of Nigeria (CIBN).

He said: “Many entrepreneurs are taking advantage of this policy to venture into the domestic production of the restricted items with remarkable successes and great positive impact on employment. The dramatic decline in our import bill and the increase in domestic production of these items attest to the efficacy of this policy. Noticeable declines were steadily recorded in our monthly food import bill from $665.4 million in January 2015 to $160.4 million as at October 2018; a cumulative fall of 75.9 percent and an implied savings of over $21 billion on food imports alone over that period. Most evident were the 97.3 percent cumulative reduction in monthly rice import bills, 99.6 percent in fish, 81.3 percent in milk, 63.7 percent in sugar, and 60.5 percent in wheat.”

Combating threats to forex stability

The 41 items policy combined with the introduction of the Investors and Exporters (I&E) window helped the country rebuild its external reserves and achieve stable exchange rate as well as record 18 months decline in inflation rate between 2017 and July this year. However, these macroeconomic gains can be wiped out should the decline in crude oil price witnessed in October reoccur and persist.

To avoid this, Emefiele stressed that Nigeria needs to intensify policies that facilitates domestic production and job creation such as the 41 items policy and the Anchor Borrowers Programme, which he noted has generated 2.5 million jobs across the country and ensured that Nigeria emerged from being a net importer of rice to becoming a major producer of rice, supplying key markets in neighbouring countries. Canvassing the support of the banking community in this regard, Emefiele said: “Given the global and domestic headwinds we face as a nation, and the volatility that is being experienced in the crude oil market, we have no other option, as leaders interested in the progress of our nation, but to work very hard to spur job creation by reviving agricultural and industrial activities in the country.

“If we continue to support the growth of small holders farmers, as well as help to revive palm oil refineries, rice mills,   cassava and tomato processing factories, you can only imagine the amount of wealth and jobs that will be created in the country; These could include new set of small holders farmers that will be engaged in productive activities; new logistics companies that will transport raw materials to factories, and finished goods to the market; new storage centres that will be built to store locally produced goods; additional growth for our banks and financial institutions as they will be able to provide financial services to support these new businesses; and finally, the millions of Nigerians that will be employed in factories to support processing of goods.

“If we turn a blind eye to the opportunities that are being created as a result of our policy on 41 items, we will be spelling doom for our nation. We can no longer afford to depend solely on imports given the size of our population, and the need to create jobs for our people. This is precisely the purpose behind our intention to restrict access to forex on 41 items, and I urge all stakeholders to come onboard, as we intend to be vigorous in our pursuit of this objective.”