Cost of forex restrictions on triple concentrate tomato paste

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The Central Bank of Nigeria (CBN) had earlier in the year, restricted 41 items including triple concentrate tomato paste, as part of efforts to defend the naira and salvage dwindling foreign exchange earnings.

The apex bank had explained that the move became necessary to “encourage local production of these items”, adding that the implementation of the policy will help conserve foreign reserves as well as facilitate the resuscitation of domestic industries and improve employment generation.”

Therefore, as part of a plan to conserve dwindling foreign exchange reserves, Nigeria’s central bank denied the use of foreign exchange from the local market for importers seeking to purchase certain goods, including ‘raw materials’ such as triple concentrate tomato paste.

The Government through the policy intends to force manufacturers to develop a local supply chain. It is important to recognize triple concentrate tomato paste imports are estimated to be in range of USD50 million per annum.

Looking at the government policy, the Federal Government may have to do more to convince Nigerians and key stakeholders that its economic policies are not crafted to sink the country’s manufacturing sector as not all stakeholders appear to be on the same page with the government as far as this is concerned.

There are more negatives than positives. If we look at outcomes we have had in the past months, they are quite drastic on the negative side. Gross Domestic Product (GDP) is declining; underemployment and unemployment are on the increase, the general level of economic activities is getting weaker by the day and also the capital market is quite unstable.

Considering the position the nation was able to attain after the elections, there came a heightened level of goodwill from both the local and international arena which we had all the opportunity to tap into. Unfortunately, foreign investment has stayed flat from the level we had last year.

In using import prohibition as a major trade policy instrument, Nigeria has hoped that its balance-of-payments problems would be alleviated, and that the protection offered would induce increased output and employment of the domestic industry.

Against these postulated positive outcomes must be set several possible negative consequences of import prohibition, including raising the domestic prices of CBN restricted products, disrupting other sectors which use the CBN restricted products as raw materials, depriving government of tariff revenue and creating vested interests among domestic producers of prohibited products and among smugglers.

Nigeria’s balance-of-payments situation is determined primarily by developments in the world oil market; hence it has not been amenable to changes induced by import restrictions. In any case, it seems clear that protection of domestic producers is the real force behind the use of this policy instrument. But there is little evidence that it has produced the desired result here either.

For instance, a survey of manufacturing-sector performance conducted by the Manufacturers’ Association of Nigeria does not support the view that the level of capacity utilization was positively related to the degree of local sourcing of raw materials — one of the major channels through which import prohibition was expected to promote increased output and employment.

There appears to be recognition both within government and among producers that the CBN led import restriction policy is rendered virtually impotent by large-scale smuggling and that this has continued in spite of stiff penalties imposed on those involved with the importation, transportation, storage, display or sale of prohibited items.

This recognition has not, however, led to the abandonment of the policy; rather, pressure has mounted to enhance its stricter implementation.

For example, the tomato paste Industry has a total market of 150,000 MT of tomato paste per annum (GTIS 2014) as triple concentrate is not produced in Nigeria, these have to be imported as raw materials to meet the market demand.

Presently, the total value of this imported tomato paste is 170 million USD. Out of this, the imported triple concentrate of Tomato paste which is used as raw material by the packers is around 50 million USD (as per Industry source), as there are no company as of now producing triple concentrate in the country.

Hence this raw material is not available at all in Nigeria and there is a huge vacuum of 150, 000 MT which will take years to fill in a progressive and sustainable manner.

The consumption of Tomato paste in Nigeria is huge and Nigerians love tomatoes! Fresh tomatoes and tomato paste form a major component in almost every Nigerian dish – from delicious red stew to spicy jollof rice/ spaghetti etc. Majority of the farmers in Nigeria specialized in the plantation of fresh pepper, tomatoes etc, face a tough time nurturing & growing this farm produce to a ready-for-consumption stage.

However, the effort to effectively preserve the harvests while preventing colossal wastage in the absence of the triple concentrate Tomato paste poses a serious economic challenge never to be ignored. It is important to realize that this is an area where Nigeria has little or no strength in preservation of tomato without the use of concentrate.

As enormously blessed as the country Nigeria in the area of adequate fertile land bringing forth healthy agricultural produce; however, there still lies a huge gap in the area of processing the fresh produce into a finished product to meet the culinary needs of the end consumers. A typical example in the tomato paste industry is the unavailability of the triple concentrate tomato paste in Nigeria, which is the major composition essential in the production of a tomato paste asides the use of fresh tomatoes which can easily sourced locally.

As a result of the unavailability of this major component (triple concentrate Tomato paste), manufacturers are left with no other choice than resorting to importation in order to fill the gap.

Presently, there is not a single company in Nigeria producing triple concentrate tomato paste for use. Hence this raw material needs to be imported for reprocessing and pack for retail sales.

This is why members of the Organised Private Sector (OPS) and the manufacturers differ with the apex bank on the classification and definition of some of the products restricted from access to forex market, stating that some of them are raw materials used in the course of production in their factories.

The private sector operators, under the aegis of Lagos Chamber of Commerce and Industry (LCCI), raised the alarm at different occasions that many companies are on the brink of collapse because of inability to access foreign exchange for raw materials and other critical inputs. They claimed that many small businesses have moved to neighbouring countries to affect transfers to their suppliers abroad, a situation that encourages operation of offshore bank accounts to the detriment of the Nigerian economy.

Presenting an impact assessment report on CBN forex policies, LCCI President, Remi Bello, noted that the real sector has been battling some challenges since the implementation of the forex policy as several investments are at risk, with possible job loss. According to him, the policy has negatively affected the financial services sector, manufacturing sector, tyre and rubber industry, pharmaceutical sector, the free trade zones, and furniture and foam manufacturers, among others.

“The Lagos Chamber of Commerce and Industry (LCCI) and the business community are concerned about the consequences of the CBN approach to the management of foreign exchange market over the last few months. We appreciate the challenge of scarcity of foreign exchange. Tough choices have to be made.

“But we have serious reservations over the policy choices of the CBN in managing the current crises. Significant disruptions, distortions and dislocations have been created in the business environment by the CBN. Nigeria is under pressure, but you cannot shut all the doors and windows”

The total investment in tomato paste sector is about 25 Billion Naira in tomato paste packing manufacturing companies, and also more than 10 Billion Naira is under further stages of investment with direct and indirect (in allied industries) impact on more than 80000 livelihoods. This includes those directly employed in the industry and indirect stakeholders such as suppliers, logistics, sales and distribution etc.

Since the announcement of the new policy, a few have wondered why triple concentrate tomato paste was included in the list while many commentators have also passionately intoned on why the country continues to import concentrate when our vast quantities of tomato produced by our hardworking farmers across the belts of the country are being wasted or simply ignored.

Nigerian farmers are working hard to meet up the consumption and raw material demands of tomatoes but the major issue is the fresh tomato yield in Nigeria. The yield presently is about 5.7 MT/Hectare which is too low compared to China’s 51 MT/Hectare and USA’s 80 MT/Hectare.

It is pertinent to note that because of increased costs of farmer, primarily driven by low yields, costs of fresh tomatoes remain high as farmers expect better returns because of inefficiency in the farming process. This is going to remain the biggest challenge for any out-growers scheme even in a normal scenario.

Just imagine how much increased pressure will come when there are restrictions for tomato paste in Nigeria. The shortage will increase market prices for fresh, creating further gap and upward pressure on out growers selling price. Ultimately consumers will suffer and inflation will go up.

Of course, the Federal Government is striving to sustain the tomato industry in the country but the country needs to have a stable economy and survival in the tomato industry as the local production is currently unable to meet the quantity as well as quality requirements of the industry, which may lead to scarcity of raw materials and inflation.

Also, the economy is feeling the impact as there is inadequate supply of tomato, and desperate food producers’ will use non qualified tomato concentrate thereby jeopardizing public health and safety. The future industrial growth is being threatened because tomato was and is one of the widely used raw materials and migration of industries and investments in Nigeria to other neighboring countries will surely affect the economy.

Renowned Economist, Bismarck Rewane observed that the decision by the apex bank sends a signal that there is a cash flow problem adding that it could however affect the level of inflows and outflows in the country.

Dr. Chiken Obidigbo, former chairman of the Manufacturers Association of Nigeria (MAN) in Enugu, Ebonyi and Anambra states, was of the opinion that the CBN’s measure was a mere scratch of the problems besetting the real sector of the economy.

According to the President of Lagos Chambers of Commerce and Industry (LCCI), Alhaji Bello, expressed concern that many of the products on the list of the 41 products are intermediate goods for example triple Concentrate tomato paste which is a critical input for tomato manufacturing firms as well as other raw materials critical for other sectors of the economy.

He revealed that the development will put several investments at risk with implications of job losses, quality of loan access in the banking system and the welfare of citizens.
He said the list is prone to multiple definitions and discretionary interpretations by agencies and institutions responsible for implementation.

He said the alternative foreign exchange markets are not deep enough to meet the demand of the essential intermediate products on the exclusion list, saying the exclusion of the items from the forex market is as good as import prohibition.

He said the policy measure will lead to a widening of exchange differentials between the interbank markets and the parallel markets, adding that the immediate consequence will be rampant round tripping of foreign exchange which the apex bank has limited capacity to nip in the bud.

He also said the policy has far reaching implications for investors in fabrication, construction and real sector. He said facilities granted to investors affected by the shock of this policy are also at the risk of going bad.

In an interactive session with the media, Director, African Department of International Monetary Fund, (IMF), Ms Antoinette Sayer recently on the restriction for forex, she said: “The central bank has introduced administrative measures that limit access to foreign exchange and ban certain imports as a way of restricting the demand for foreign exchange.

“Those are measures that are quite detrimental, we think. It has certainly led to a lot of unhappiness in the private sector, as far as we’ve been aware, and understands that private investors see this as very detrimental to their economic activities.

“It is not something we think is sustainable or advisable. We hope that there will be an opportunity to review those restrictions and permit the exchange rate to continue to adjust.”

Forex is required for the enhancement of the nation’s capacity to process raw materials into finished goods, such as factory production lines which help in the economic growth of the country.

When these and many more segments of the nation’s economy need the scarce foreign exchange to acquire items and equipment that will result in value creation and a concomitant accelerated growth of the overall Nigerian economy, it is therefore foolhardy to jump to policy making without consultation.

For importers of some raw materials needed for the production of some of the prohibited commodities, the apex bank’s decision is prone to multiple definitions and discretionary interpretations by agencies and institutions responsible for implementation.

Due to the resultant effect of the forex policy, Nigeria today is losing investments worth billions of naira. So as the low production and high demand for the product both domestic and industrial needs continue to generate much agitation, importation is inevitable for the sustenance of the country’s industrial image.

For now, importation of the triple concentrate tomato paste concentrate serves, as the best alternative to the non availability of the raw material produced in the country. There should be a progressive building of local capacities to ensure a steady and robust transition to substitute importation in long term.

This shall motivate serious and organized manufactures who have got impacted by CBN policy to survive and create more employment in times to come. Government should let tomato paste manufacturers to survive and bring about fiscal changes to motivate the industry to participate in backward industry in a structured manner.

Source: The Nation