Backward integration was a popular buzzword with the previous administration, now little heard, and is one element of import substitution. It conveys the simple message that, wherever possible, Nigeria should produce what it consumes. This creates jobs and savings on imports within a shift away from the rentier economic model. If the population can be persuaded to consume what it produces, such as cassava bread, the shift can become greater.
Over time, the savings on imports and the creation of jobs can be substantial. If we take the foreign trade data for Q3 2015 from the National Bureau of Statistics (NBS), we find that mineral products accounted for 15.3 per cent of merchandise imports cif. This category is predominantly petroleum products. Godwin Emefiele, the CBN governor, estimated after a recent tour of the Dangote Industries project site in Lagos State that petrochemicals and petroleum products constituted 35 to 40 per cent of Nigeria’s import needs. The estimate is high in our view but highlights the potential for savings.
Live animals and animal products made up another 7.0 per cent of the total, vegetable products 6.9 per cent, and prepared foodstuffs 5.1 per cent. The successful implementation of a new Operation Feed the Nation would reduce volumes of these imports. We offer two other import segments where some compression can be achieved. The plans to rebuild and deepen Nigeria’s automotive industry have their critics but it should be possible to make some savings from the 8.8 per cent of imports in the category of vehicles, aircraft and vessels. Finally, we note the 1.5 per cent share of textiles and textile products.
A conservative estimate on the basis of the NBS series points to savings of about 35 per cent on the merchandise import bill as a result of substitution. There are at least two additional elements to the challenge. Rice cultivation, for example, has to be developed to cover the current level of imports but also provide for a population said to be growing by 3.2 per cent per year. As well as the demographics, we have to allow for a preference for the imported over the Nigerian product, which is due in part to considerations of quality.
So if this is to be Nigeria’s journey and if this administration is to persevere where its predecessors have failed, what does the road look like? It is bumpy to say the least, which explains why earlier federal governments gave up en route. The cliché about pain and gain immediately springs to mind. The crashing oil price may have created, in the FGN’s words, “the window of opportunity” to effect the remodelling of the economy. It is only so, however, in the sense that the alternatives are very limited.
This becomes clear if we consider the CBN circular of 23 June, 2015 denying access to fx from official sources to 41 import items including rice, cement and textiles. The list consists of items which could be produced domestically. Consumers therefore only see the foreign rice if it is imported at higher cost with fx bought on the parallel market or smuggled from neighbouring countries. Otherwise they go without, which is unlikely in view of the universal entrepreneurial spirit.
If the FGN is to pursue substitution, it will have to ignore lobbying from trade and industry associations whose members are struggling to secure their regular supplies of imports. Anecdotal evidence and the commentary of listed consumer goods companies together point to diminishing supplies and, in the extreme case, the imminent closure of factories and redundancies.
The CBN’s press statement by the governor last Monday was a response to the lobbying. It noted and quantified the shortages of fx, and then listed the chosen priorities for allocation: matured letters of credit from banks, petroleum products, critical raw materials and a selection of expenses such as school fees. The clear message was that importers of other goods would not see much of what the statement termed the CBN’s current “monthly foreign earnings” of as little as US$1bn.
This brings us to the impact of any devaluation. There would be a boost for some non-oil exports such as agricultural produce and probably the re-entry of some unrecorded capital into the official fx system. There would be higher naira receipts for the budget and also some public relations gains for the FGN, which could present shortages as the direct result of factors beyond its control (the collapse of the oil price). However, devaluation would make little difference to the CBN’s monthly earnings.
Advocates of free market solutions should accept that the administration has chosen a different path. The sought-after shift in the economic model could make a dramatic and lasting impact on the unemployment and underemployment rates, as well as on the balance of payments. It would create discomfort for the undeserving rich (the beneficiaries of the rentier economy). If the administration perseveres and is not rescued by the oil price, there will be casualties on the road such as importers of finished and semi-finished goods (and their investors).
Gregory Kronsten
Join BusinessDay whatsapp Channel, to stay up to date
Open In Whatsapp
