By Omodele Adigun and Uche Usim
The need to establish appropriate structures that support production of Nigerian made goods, local consumption and eventual import substitution came into focus last week as the Central Bank of Nigeria(CBN) gave itself a pat on the back for pulling the economy out of recession.
According to the CBN Governor, Godwin Emefiele, the realization that it was unsustainable to fully depend on importation of goods, particularly food items, to meet domestic consumption was what propelled the apex bank into providing cheap financing to the critical sectors of the economy in recent times.
While exploring the theme: “Import Substitution and the Dynamics of Interest and Exchange Rates Management in Nigeria” at the seminar organized by the bank for finance correspondents and business editors, in Awka, Emefiele said the major thrust of CBN’s ongoing developmental efforts is geared towards import substitution of what could be produced locally.
He stated : “Strategies to increase domestic production, especially of basic commodities, are necessarily accompanied by industrialization. These measures intensified by the late-1970s when international oil prices began to fluctuate and high importation of basic food commodities became unsustainable. The government of the day instituted a program to boost domestic agricultural production, boost food sufficiency and curtail imports.
“ I would like to note that fundamentals of the domestic environment need to be promoted to support domestic production and invariably curtail imports. The CBN recognizes these challenges in its role to provide economic advice and support the Federal Government’s aspirations of economic growth and development. Within the core remit of formulating and implementing monetary policy, the interest and exchange rates serve as major instruments for CBN’s support for import substitution.
“First, interest rates are a major incentive (or disincentive) to carry on industrial production activities. They are the key price for capital and largely determine the ability to engage in profitable domestic economic ventures. “Economic theory dictates that low interest rate will boost incentives to procure loans to engage in production, and vice versa. It is, therefore, imperative that authorities endeavour to keep interest rates at reasonably low levels. More also, the rate of inflation is a major determinant of the level of interest rates. Inflation erodes the real returns on financial assets (denominated by interest rates) and it is necessarily required that such rates should be above the price index in order to guarantee real positive returns. The lower the monetary authority is able to keep inflations rates using monetary policy, therefore, the lower it can force down interest rates and make it more attractive for users of funds to access credit. “The exchange rate is also another essential determinant that may support local production efforts. Most domestically-produced goods have foreign substitutes, and the exchange rate serves to allocate the comparative prices of domestic and foreign goods. It, therefore, determines the attractiveness of domestic production to support import substitution.
“Indeed, the CBN has embarked on massive monetary stimulus through direct interventions in sectors that hold immense benefits for the broader economy. Such interventions have been in agriculture, micro, medium and small scale enterprises (MSMEs), power sector, aviation and youth entrepreneurship, among others. These measures were necessitated by the liquidity (and credit) crunch that followed the global financial crises. he CBN recently introduced the flexible foreign exchange regime, with forex restrictions placed on the importation of 41 items. This became inevitable in order to curtail fast depleting foreign reserves, occasioned by the significant demand for imports in Nigeria.
“The Bank has consistently supported the economy with robust supply of foreign exchange to deposit money banks (DMBs) particularly to meet demands for invisibles such as school fees, medical tourism and personal travelling allowance. This has led to stability in the Naira exchange rate against the US Dollar.
“ Furthermore, the Anchor Borrowers’ Programme (ABP) was established to boost local production of rice, wheat and other agricultural products. It serves to create economic linkage between smallholder farmers and reputable large scale processors, with a view to increasing agricultural output and significantly improving capacity utilization of processors. The ABP was initiated as a policy option to create an ecosystem that connects smallholder farmers to big processors, thereby creating increased income for the farer, jobs for the unemployed, and steady input supply for agro-businesses. I am happy to note that the scheme has already boosted agricultural production and non-oil exports in the face of unpredictable crude oil prices and its resultant effect on the revenue profile of Nigeria. These have also helped to moderate volatility in the foreign exchange rate from anticipated decreases to demand for FOREX from increased domestic production of such hitherto imported commodities.
“The CBN will continue to explore further avenues to ensure that interest rates are supportive of domestic production needs. The Bank will continually fine tune measures to ensure and guarantee a stable exchange rate regime. With on-going recovery in economic performance, I am hugely optimistic that improved outcomes will be recorded in our work towards taming inflation, bringing down interest rates and guaranteeing exchange rate stability. We are consistently devising ingenious approaches to solve our peculiar challenges and will continue to learn from the experiences of other countries, particularly developing nations.’
Earlier, the Anambra State governor, Willie Obiano, represented by his Commissioner of Information, Tony Nnaechetta, said security could not be divorced from the business of import substitution; the ability of the citizens to invest in agriculture and export the produce, adding that Anambra is the safest state in the country.
He said “security is the first enablement for growth”. He explained that foreign direct investment (FDI) into Anambra is in excess of $6billion over the past 40 months. “This increment in FDI was hinged on four pillars of Agriculture, Industrialization, Trade and Investment and Oil & Gas.”
The governor said Anambra is proud of efforts taken so far as the gross domestic product (GDP) of the state has been raised by 150 per cent. Obiano disclosed that the state has put in place Economic Stimulus Package which relieved Keke NAPEP operators and citizens from paying tolls at markets and hospitals.
In his remarks about how import substitution will lift Nigeria’s economy, the former Managing Director, Unity Bank Plc, Mr Rislanudeen Muhammad, said: “in Nigeria’s case, it will help in reducing import dependency, lesser demand for forex for imports, implying increased savings and accretion to foreign exchange reserve. It will also support GDP growth by improved activities in import substituted items especially SMEs and Agro-allied industries. It will also enhance employment generation and domestic self sufficiency. Care should however be taken not to allow the increased foreign exchange reserve ginger new round of imports of goods that can be produced locally due to over valuation of the naira leading to so called ‘Dutch disease’ problem”, he said.