Import substitution, and then export diversification
One arm of the diversification agenda is to broaden the export base. As ever, we open with a few statistics. The balance-of-payments series from the CBN shows that products other than crude oil and gas represented just 7.7 per cent of merchandise exports in 2017. We should, however, extend the net to include all current-account receipts. On this basis, oil and gas provided 61.1 per cent of the total, current transfers (principally remittances) 30.0 per cent and non-oil/gas products just 4.7 per cent.
The top five exports in this last group by value in descending order may come as surprise: petroleum products, cocoa beans, urea, sesame seeds and tobacco. The same source has a table with the leading exporting companies by value: this is headed by British American Tobacco, Olam, and Indorama Eleme Fertiliser and Chemicals.
The authorities could do more to promote export diversification. A starting point would be the settlement of arrears on promissory notes due under the export expansion grant (EEG). The claims have been subjected to an independent audit, and amount to N1.2trn according to the local media. The exporting sector, as the rest of the economy, would benefit from faster turnaround at Nigeria’s ports, improved roads, increased power supplies and much more. It is more likely to invest where the soft and hard infrastructure for its needs is in place, a good example being companies established in theLekki Free Trade Zone in Lagos State.
The poor infrastructure cannot be the only obstacle. If it was, why have other leading oil producers in the developing world struggled to diversify their economies? The government targets and plans are in place yet delivery has lagged. The cases of Russia and Saudi Arabia, and, closer to home, Algeria and Angola spring to mind. Historically, the tendency for such governments has been to collect the large tax revenues from the oil industry, make a few spending cuts when the crude price plummets and import what the country does not produce.
This is no longer a viable option because of rapid population and unemployment growth, and rising popular expectations (fuelled in part by the internet and social media).
Export diversification should involve the processing of raw materials wherever possible. The Ghanaian president, Nana Akufo-Addo, likes to make this point with the following observation: Côte d’Ivoire and Ghana together account for 65 per cent of global cocoa output but together earn about US$6bn from sales of the product per year when the international chocolate industry turns over about US$100bn annually. The comparable figures for sesame seeds, which have developed into an important employer in northern Nigeria, are not available but the benefits from a boost to value added are clear.
The gains in employment, incomes,skills transfer and government revenues as a result of processing are obvious. Exporting unprocessed goods also runs the risk of falling foul of non-tariff barriers. Earlier this year the FGN was trumpeting the growth in exports of hibiscus flowers to the US but more recently we have read that trade in the crop with Mexico has been halted due to some shipments of poor quality goods. Palm oil producers in Nigeria are serving the domestic market above all but will be aware of the EU’s stance on sustainable production and related import policy.
We support export diversification where Nigeria enjoys comparative advantage, particularly when products are processed. However, it should not detract in the allocation of government time, incentives and resources from import substitution. Trade data on a customs basis from the National Bureau of Statistics support the argument. Imports of agricultural goods and other oil products amounted to N890bn and N2.67trn respectively in 2017 out of a total of N9.56trn. In passing, we note that officials have been known to cite much higher figures for agricultural imports. (On the export side, goods other than oil, gas and related oil products totalled just N630bn out of N13.60trn.)
The Dangote refinery in Lagos State, when completed in 2020 according to the Group’s founder, will transform the trade in oil and related products. There are the additional benefits for employment and the infrastructure, as well as the possibility that other investors will build their own refineries. Once it has met domestic demand, Dangote intends to become an exporter of petroleum products and fertilizer to the sub-region over time.
The challenge in making savings on imports of agricultural goods is far greater than on oil products. There has been substantial investment in rice growing and milling, supported by the CBN’s anchor borrowers’ programme. New local brands have been developed and imports from Thailand have crashed. Yet estimates from the US Department of Agriculture suggest that Nigeria will again be the second largest rice importer globally in 2019. Smuggling from Benin and other neighbouring countries have soared, and the product is cheaper than the local brands. The domestic fish industry has a similar story to share. This underpins out argument about the allocation of government resources and incentives.
Nigeria is not alone in its struggle to diversify away from oil. Years of official indifference to the non-oil economy have created many hurdles. It is in a worse position to meet the challenges than the other oil producers we cited(other than Angola) because its budget is much smaller. This brings us back to another subject of our columns, the paucity of its non-oil revenue collection.
Gregory Kronsten
Head, Macroeconomic & Fixed Income Research
FBNQuest