Central bank of Nigeria, the apex bank recently announced the restriction of importers of selected 41 items from accessing forex from the official foreign exchange market.
This means the importers of these items cannot get dollars and other foreign currencies at the official forex exchange rate from the recognized forex institutions such as the banks or the Bureau de change.
There are five major implications of this policy direction from CBN:
- There is increased pressure on the available forex in the system as there is a sudden increase in demand for forex from parallel sources. When demand is greater than supply, prices increase. This is one of the reasons for the devaluation of the naira .In simple English, you need more naira to get 1 dollar since demand for dollars is high and supply is lower.
- The cost of importation of these items will increase because any other legitimate source of forex will be more expensive than the official foreign exchange market.
- When cost of getting dollar/forex is high, the landed cost of the imported good increase and the price to the consumers increase also. So you can expect the prices of all the items in the list to increase.
- There could be scarcity of these imported items as the sourcing is more cumbersome and expensive.
- On a positive note, this should encourage local production to compete with the imported ones. However, for local production to work, the ease of doing business needs to improve. Currently, there is epileptic power supply in Nigeria, high bank interest rates on loans, poor transportation system amongst other issues; this means it is not automatic that local production can actually deliver lower cost of production and lower consumer prices than importation.
For any business person to make this decision to proceed to local production instead of importation, he/she must consider the following 1st.
- Understand the business plan – develop a detailed business plan to understand feasibility and profitability of the items to be produced locally. Will you be able to deliver a quality product that meets the consumer needs, better than competition and at a profit? Better than imported cost?
- Establish the supply for the items. For example if you want to start toothpick manufacturing, you need to know how to get constant supply of wood/bamboo.
- Know how you will sell: You must identify what channels are ready to buy your product immediately they are available. Unlike importation, you need to maximize your local production lines capacity to deliver lower cost of production.
- Have a good location: You must be located where you can easily assess your raw materials and can sell your finished goods to reduce unnecessary logistics and transportation cost.
- Get the right tools and equipment: With local production, you need machinery, you need tools, you need to ensure you can get this either fabricated located, assembled or imported as needed.
- Power: Manufacturing is mostly hinged strongly on power/energy sources. Be clear on how you will power your production lines and facility. Also, be sure the cost of power is factored into your financials.
- The right people: You need capable people that can operate and maintain your machines. Better still, ensure the suppliers of the machines can deliver the post-sale maintenance at a reasonable fee or for free.
- Funds: You may require a higher capital injection to start location production versus the capital you had for trading only. You need to be clear on how you will get the funds and the cost of the funds. Will your business still be profitable when you include the cost of funds?
So which of these will you consider local production for? What are the biggest barriers to local production in your opinion?
Items affected by the CBN’s policy include
- palm kernel/palm oil products,
- vegetable oils
- meat and processed meat products
- vegetables and processed vegetable products
- poultry-chicken, eggs, Turkey
- private airplanes/jets
- Indian Incense
- Tinned fish in sauce(Geisha)/Sardines
- cold rolled sheets
- Galvanized sheets
- roofing sheets
- head pans
- Metal boxes and containers.
- steel drums
- steel pipes
- wire rods(deformed and not deformed)
- iron rods and reinforcing bars
- Wire mesh
- Steel nails
- Security and razor wire
- Wood particle boards and panels
- Wood fiber boards and panels
- Plywood boards and panel and wooden doors.
- Glass and glassware
- Kitchen utensils
- tiles-vitrified and ceramic
- Textiles, Woven fabrics
- Plastic and rubber products
- Polypropylene granules
- Cellophane wrappers
- Soap and cosmetics
- Tomatoes/tomato pastes
- Euro bond/foreign currency bond/share purchases.
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