The opportunity to be heard is a remarkable difference from what happened few weeks back when we all dressed to our various offices only to be told by our employees that our businesses has been decreed out of existence by the CBN. Not only were the channels of communication wrong, the powers to technically ban those 41 items were highly questionable. Such is the impunity and hostility that has beclouded our business environment and inhibited its growth. Today we live in an economic environment of confusion, policy summersaults and inconsistencies. In most cases, you see yourself standing face to face with, and against the law. We have gotten to a level where our law and the constitution say one thing, and our operators say a different thing.
The Free Trade Zone is a creation of statute. Its activities are governed by Decree No 63 of 1992. Going by the provisions of this Decree, business enterprises within the zone enjoy some incentives and exemptions.
Some of these incentives include exemption from all federal, state and Local Government taxes, duties, levies, VAT and foreign exchange regulations. This is clearly written in Section 26A of the decree setting up the free trade zone. By law, the free trade zone and the CBN are institutions of coordinate jurisdiction. Free Trade Zone enterprises are in theory, regarded as a country within a country. The CBN therefore has no legislative authority over the zones. The CBN in realization of this had washed its hands off the fiscal responsibilities of the zones until this recent attempt on the annexation and colonization of the zone. The status confers and imposes certain restrictions as well as obligations on mode, module and medium of exchange. For instance, companies within the zone are incentivised to import foreign currency of any amount and export 100% of same. They are exempted from the buying of forex from the CBN, among others, thereby affirming their quasi autonomy. This suggests that the only avenue open to the operators for the sourcing and procurement of forex was the free funds, or the BDC’s. Depositing and withdrawal of dollar cash was a way of life and has never been under the sledgehammer of the CBN.
But the dollarization policy which is now being enforced across board and borders has laid comatose the operation of the Free Trade Zone, as the only foreign exchange window open to operators had been shut, padlocked and the key flung into the ocean.
The immediate dire consequence of this unfortunate, ill-conceived policy is the suffocation of investments within the zone leading to business closure by investors and foreclosures by banks and other lending institutions. The fall out of this would be litigations arising from breach of contracts, mass retrenchment of workers, loss of revenue by government and loss of face in the international community, and of course, the short circuiting of technology transfers – which is a cardinal factor for the setting up of the Free Trade Zone.
Why would CBN ban 41 items in the guise that they do not have sufficient dollar to fund their imports only to turn around to ban deposit of the same currency in our banks as a result of excess dollar?
As the CBN continues to reap from where they did not sow with regards to foreign exchange regulations within the Free Trade Zones, one needs to remind them of the ripple effect of their actions. Secondly they need to observe the thin line that separates the various organs of government as contained in the principles of separation of powers.
When the CBN cannot give long term loan to a young graduate to buy equipment and commence the production of toothpick, why would they stop the same boy from importing N10,000 toothpick from China where the investment climate is not only conducive but predictable? To do otherwise is impunity and starvation.
To put up an average cement plant of one million to two million metric tonnes one requires a capital outlay of about $300 – $400 million. This used to be an average of N50 billion to N60 billion. To accomplish this, using the current exchange rate, an intending investor needs an average of N80 billion. It does not stop there: The ugly side of it is that as long as this policy remains, no Nigerian can ever invest again in the cement sector. How, you would ask?
To put up an investment of this magnitude where banks’ lending is on short-term and double digit interest rate is practically impossible in an economy of today. Let us agree that you get a willing bank to help syndicate the financing, you would be required to put down an equity contribution of about 30%. This translates to about N24 billion. The implication is that you require 10 banks to syndicate your equity alone, and another 20 banks to syndicate the remaining 70%. This is impossible. In addition you need to have your market share and popularize your brand before any bank can take this huge risk on you. What is possible is what has been the practice where backward integration policy was designed for new entrants. These new entrants had attracted an investment of over $20 billion tied to various strategic trade partnerships. These investments are threatened by this dollarization policy.
As a member of the Presidential Committee that produced the 2009 cement policy, our recommendation was that new entrants should be encouraged to embark on backward integration with some government incentives. This was how Lafarge, Dangote, Unicem, Flour Mills etc started. They formed strategic trade partners who signed technical and business agreements towards local investments. This is how the near success story we have today in the sector
If we have a success story in cement, why are we buying a bag of cement at N2000 in 2015? In Asia, a bag of cement sells for as low as N350 a bag; in Europe it sells at N500 a bag; in neighbouring West African countries a bag of cement sells for between N1200 and N1400 a bag. When the lie of Nigeria being a net exporter of cement was told by several persons, in several quarters, including the former coordinating minister of the economy, some of us who know covered our faces in shame.
In a recent survey, the World Bank predicted Nigeria’s cement consumption to be 45 million metric tons. Mind you, consumption is different from demand and supply. With a total installed-not production capacity of cement at over 20 million, Nigeria still has a huge demand gap of between 15 – 20 million metric tons.
The reality of this deceitful situation will soon hit us when government solves the insurgency situation in the North-east and commences rehabilitation works; moves to fill the over 15 million housing deficit, tackles our huge infrastructural decay; and starts the cement – base road construction, by then, existing cement plants would have started growing old, I bet you, Cement may sell as high as N3000 in this country.
In my honest opinion, government needs to open the cement space for investors of all sizes to come in. Monopoly should be discouraged. A limit should be set as to maximum investment an individual can invest in any sector of the Nigeria economy to create room for others’ participation. This would also ease credit tension and whittle down risk appetite of banks and other lending institutions.
This what countries like China and India have done. In China, you have over 9000 functional cement plants and over 800 in India. China for instance, manufactures over 2.42 billion tons of cement per annum, representing 58.6% of global production. In reality Nigeria produces a little above 25 million. What the government of these countries did was to liberalize investment in the sector, encourage and incentivise investors.
What the CBN Governor has done with the recent foreign exchange restriction on cement and 41 items amounts to a ban and criminalization of businesses.
Governments world-over encourage investments; you don’t decree, you don’t frustrate, you don’t criminalize. A toothpick importer of today may be a Bill Gate or another Dangote of tomorrow.
Being a paper presented by Ochiagha Ufomba at the Focus Group Discussion on Impact of CBN Foreign Exchange Policy organized by the Lagos Chamber of Commerce at Oriental Hotel Lagos.
