The Central Bank of Nigeria (CBN) is investing efforts in managing Nigeria’s foreign exchange (FX) crisis to prevent the economy from plunging into abyss.
But Nigeria’s problem is bigger than managing the foreign exchange crunch every now and again. In 2016, the FX crisis led to the death of 54 manufacturing firms, according to the Manufacturers Association of Nigeria (MAN). This year, nobody has recorded the number of businesses that have gone under as a result of coronavirus-induced FX crisis, but analysts say the damage is much worse.
The truth is that Africa’s biggest economy is not exporting much, and the federal government is still doing little to improve non-oil exports, despite its promises of restoring Nigeria to an exporting nation.
Crude oil and minerals have continued to occupy a prominent place in Nigeria’s export chart. In the first quarter of 2020, crude oil accounted for 72.12 percent of total exports, while other non-oil export products made up the rest (27.9 percent). During this period, COVID-19 had no impact on exports or the Nigerian economy. In the second quarter, crude oil and minerals accounted for 84.3 percent (N1.87 trillion) of total exports while the non-oil exports comprised the rest, the National Bureau of Statistics (NBS) data show.
Total amount of money received by Nigeria from both exports of crude oil and non-oil products was N2.219 trillion within the quarter, which was just $6.16 billion as of that time. Other non-oil exports earned N347 billion, which was less than $1 billion. Nigeria’s annual earnings from non-oil exports in recent times have hovered around $2 billion to $4 billion. This is not good enough for an economy that is highly volatile and susceptible to internal and external shocks.
Bangladesh, though still a relatively poor country, earned $3.52 billion in December 2019 from exporting of garment alone as against $3.05 billion earned in November of the same year. The interpretation is that Bangladesh earns in a month what Nigeria gets in one year from non-oil exports. And Bangladeshi’s earnings have always come from one product- garment- while Nigeria’s receipts are usually from more than 25 products.
In 2018, Nigeria’s total non-oil export earnings from more than 25 commodities amounted to $3.3 billion, according to the NBS, but Bangladesh earned 10 times that amount ($33 billion) from exporting only one product.
Similarly, between January and December 2018, Vietnam earned $244.72 billion from export of finished products from garments and shoes to smart phones, according to General Department of Vietnam Customs.
Giant phone makers such as Samsung, Intel and LG produce smart phones in Vietnam today and export from there.
In 2018, Vietnam fetched over $50 billion from export of phones and their components— the biggest turnover among export items— according to the country’s General Statistics Office. It earned $27.3 billion from phones between January and July 2019.
The Southeast Asian country attracted Foreign Direct Investment of $16.74 billion between January and July 2019, according to the country’s Foreign Investment Agency. One of the key things Nigeria must from Bangladesh or Vietnam is the need to initiate reforms that will attract deep-pocket investors.
According to Vo Tri Thanh, a Vietnamese economist, key to Vietnam’s growth was market reforms.
The country worked on private business right; and macroeconomic and social stability, while opening and integrating its economy into the regional and world economy, especially in the areas of trade and FDI.
In an article entitled ‘Vietnam’s manufacturing miracle: Lessons for developing countries’, three economists Sebastian Eckardt, Deepak Mishra, and Viet Tuan Dinh said Vietnam has numerous bilateral and multilateral free trade agreements, which dramatically cut tariffs, anchor difficult domestic reforms, and open up the economy to foreign investment.
“Vietnam has achieved its success the hard
way. First, it has embraced trade liberalisation with gusto. Second, it has complemented external liberalisation with domestic reforms through deregulation and lowering the cost of doing business. Finally, Vietnam has invested heavily in human and physical capital, predominantly through public investments,” they said.
The World Bank said in its 2019 Doing Business report that Vietnam made paying taxes less costly for companies by reducing the corporate income and value added tax rates while eliminating the surtax on income from the transfer of land use rights.
Nigeria has achieved some improvement in doing business, but the states and the federal government are always not in the same tune. Local governments in many states still harass businesses with multiple taxes and levies, with government agencies now in revenue drive.
One of the major reforms that must be pursued by the Federal Government of Nigeria is to provide the enabling environment that will encourage value addition. Value addition is expensive to embark upon, and many small and medium firms in Nigeria cannot afford it, even though they understand its merits.
Brazil, a country with 2019 million people, is a typical example to mimic. The South American country turns its sugarcane into raw sugar and exports to Nigeria, while Nigeria sells its own cocoa to the United States and in turn buys chocolates from the world’s biggest economy. As a result, Brazil’s GDP is $1.85 trillion while Nigeria’s is $397 billion—nearly five times bigger. It earned over $8 billion from sugar alone in 2018/19, even with 24 percent decrease in production. But their firms are supported in terms of funding and infrastructure.
Secondly, though Nigeria is facing fiscal challenges, it must find a way of plucking leakages and then investing same to the export sector through a transparent Export Expansion Grant (EEG) scheme. For over four years now, the scheme has not been very active. Available data show that the EEG was able to raise non-oil export from $600 million in early 2000 to nearly $3 billion in 2013. One of the 10 principles of economics propounded by Gregory Makiw, a professor of economics at Harvard University, is that people respond to incentives. Any moment incentives are transparently given, there is always a positive reaction from economic agents, which translate into economic growth.
Another critical area is funding the value chain. While it is good to fund rice and beans, it is better to put more funding in commodities with high value chain. Food crops such as rice have smaller value chains than palm oil and cocoa. In palm oil, for example, there are oil palm plantations, palm oil milling, palm olein, vegetable oil, among others. And all these mean jobs for an economy with 27 percent unemployment rate. Nigeria must begin to look at the bigger picture rather than short-termistic projects that end with a particular administration.
Think about this: Nigeria had a 45 percent share of world’s palm oil market in 1960, which should have given the country access to over $15 billion annually had it maintained that spot today. Nigeria’s share is just 1.7 percent currently, having relinquished that position to Malaysia and Indonesia. In the chase for oil wealth, Nigeria has abandoned everything from palm oil mills to rubber and there is no better time to go back to the glory days than now.
Furthermore, infrastructure is a key element in boosting the non-oil exports and the competitiveness of Nigeria’s products in the global market. When moving raw materials from Apapa in Lagos to Ikeja in Lagos costs the same as shipping out products to China or Europe, local manufacturers cannot be competitive even if they wish to export. The roads, broadband and logistics must be in the right order for Nigeria to begin to compete.
Finally, barriers to trade must be removed. One of the key impediments to export is the closure of Nigeria-Benin border which has been on for over one year. Many exporters are out of business already because they cannot export to West and Central Africa due to the closure. Should this linger, the economy will be in deeper mess and the country’s seriousness and commitment to the African Continental Free Trade Area, starting in January 2021, will be questioned.