Naira struggles: The missing 42nd item


The 41 item exclusion list is no news. In June of 2015, in response to the collapse of foreign exchange inflows, thanks to the crude oil price crash, the central bank decided to change tactics in its quest to maintain a “stable” naira. It abandoned the policy of drawing down on the foreign reserves and opted to just ban certain market participants from the official foreign exchange markets. This, it argued, would reduce pressure on the exchange rate. Demand management they called it. In doing this it drafted a now infamous list of 41 items that were banned from buying foreign exchange from the official markets. The list included things like palm oil, rice, toothpicks and eurobonds.

The logic was simple. If foreign exchange is scarce then we have to prioritise what we spend it on. We can’t keep spending scarce foreign exchange importing things that we can produce locally. In the abridged words of the central bank governor; “why do we continue to import when our vast quantities of comparable quality products are being wasted or simply ignored”. I mean, why spend scarce foreign exchange importing palm oil when we have it in the South South. Why import rice when we can grow it locally. The tacit assumption was that if certain items were banned from the foreign exchange market then people would not import them, and we would produce them locally. And it all kind of makes sense, especially if you don’t know much about economics.

Now I’m not writing this to convince you that the policy works or not. I am here to tell you that there is one item missing from that list. There is a 42nd item that, for unknown reasons, was excluded. A product that Nigeria should be known for. A product that we have all the necessary ingredients to produce locally. A product that we really should not be importing but should even be producing a surplus and exporting. That product is premium motor spirit, popularly known as fuel.

The most important raw material for fuel is crude oil. Nigeria is the largest producer of crude oil in Africa, and eight largest in the world. So obviously we have the raw materials in abundance. What about the capacity and technical knowledge to produce fuel from crude oil? We have that in abundance as well. We have so many petroleum engineers that they can fill the national stadium, and they know how to produce fuel. A short walk, or swim, into the creeks in the Niger Delta should convince you if you don’t believe me. Try to avoid the crocodiles though. Of course all that refining is apparently illegal, but it demonstrates that we have the skill and technical knowledge.

Finally, we have the market for fuel. We consumed about 51.5 million litres of fuel per day on average in 2016. We consume so much fuel that it is has been the single largest imported item for decades. In terms of value, we spend 250 percent more foreign exchange importing fuel, not including diesel or kerosene, than we do for all food, including rice, palm oil, wheat and everything else. In fact, I would argue that if we somehow stopped importing fuel today, our foreign exchange crisis would be over, albeit temporarily.

So just to recap, we have the raw materials, the skills, and the market, and if we stopped importing fuel our foreign exchange crisis might be over. If the central bank really believed that banning products from the official markets really led to local production of that product, then why isn’t fuel on the list. Surely fuel should be the 42nd item.

Fortunately, discussing the crude oil industry is a national pastime. We talk about it every other day and we know, beyond the shadow of doubt, the challenges in moving from drilling oil to producing fuel. We know that in reality producing fuel is a lot more complicated than banning fuel imports or banning fuel importers from foreign exchange markets. We know that if we banned fuel importers from buying dollars then all that would happen is the pump price of fuel would go up. We will probably still import it and not produce it locally.

Now this is the real question: if we know, beyond the shadow of doubt, that banning fuel importers from buying foreign exchange will not lead to us producing fuel locally, why do we think the same policy will work for palm oil? Why do we think the same policy will work for rice, or for tomato paste? It won’t. The issues in palm oil productivity are so much more complicated than that. The issues in the rice value chain are so much more complicated than that.

If the central bank really believes that its 41 items exclusion list does anything other than create distortions in the foreign exchange market, then it should ban fuel importers so we know it’s real. Else it should be abandoned for causing more problems than it solves.

Nonso Obikili is an economist currently roaming somewhere between Nigeria and South Africa and tweets @nonso2. The opinions expressed in this article are the author’s and do not reflect the views of his employers.

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  • Eathony

    Nail on the head. Gbam!

  • Folake Vaughn

    Nonso Obikili’s articles are a gem! And the million dollar question remains: Why can’t the FGN and its surrogate CBN see this logic that everyone with a minimum knowledge of Economics can see? I believe the answer is the incapacity of the President to understand basic ideas.

  • Chukwuemeka Nnochiri

    With all the clear narrative and common sense reasoning along the path for “demand control” on FX,be it fuel or the other 41 items,are there any visible fiscal policies we can identify that has gone ahead to increase the llocal production of these items up to the point of meeting local consumption? what is our reform policy stays on land,industry and taxation?Aside government periodic interventions (which mostly favour urban/non career farmers,are there government subsidies/guarantees for funding and technical assistance to boost local production with measured evaluation and monitoring?

  • real

    This is a straight forward article that really touches on something very important. The banning of 41 item by the central bank was and still a good idea, however it needs to be refined to ensure that it actually only bans finished goods or item we really can and should be producing. Some raw material still needs to be continued until we develop the ability and capacity to those raw material. The problem with this policy is the pure lack of implementation and support to change the current activity. yes fuel should be among this items, however because of the government lack of support, investment and policy, we are not getting the desired result. for example, if we ban fuel importers from forex market. the government must be ready to invest in modular refineries, they must be ready to guarantee some investor loans for building refineries. they must be ready to guarantee crude oil supply. All these can be done if we had the government to implement a good policy properly. The 41 items banned have not be given the right kind of support to eventually end importation. we need to really roll up our selves and provide this items the complete and total support needed for it to grow.