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Facelift required to grow the economy and shore up the naira

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Naira notes: Photographer: George Osodi/Bloomberg via Getty Images

Besides cost-cutting, diversification of revenue sources should be at the front burner of any struggling economy. The lingering macro challenges caused by the current global oil price regime should stimulate economic activity around segments of the economy which are largely untapped. First, this will assist with trimming the country’s heavy import bill. Second, it will help generate jobs, thereby enhancing household pockets. Finally, it will boost exports.

The “Grow the economy: support the naira” anthem has become familiar. Despite operational challenges, there are a few “cash cows” that stick out. These include agriculture, manufacturing, human capital, petroleum and petrochemicals.

Petroleum and petrochemicals is an industry that is severely under-utilised. Despite being a leading producer of crude oil, Nigeria is import dependent on plastics, paint and textile which are derivatives of petrochemicals. Industry sources suggest that the country’s petrochemical market is worth US$30bn annually.

To put this in better context, the bottled drinking water industry continues to maintain its rapid momentum due to high water consumption across the country. However, the bottles are largely imported. One reason is the underdeveloped plastics industry. Plastics contribute only 3% to manufacturing GDP.

In Saudi Arabia, the development of its plastics industry can be attributed to the 1987 low price regime which awakened the need to implement an economic diversification program away from hydrocarbons. Through supportive policies, the Saudi government has encouraged the industry to shift from import dependence to actual growth in domestically manufactured plastic products. Perhaps, Nigeria should adopt this template and modify it to suit its economy.

As for refined petroleum, Premium Motor Spirit (PMS) accounts for 70% of total fuels consumed in Nigeria on a daily basis. CBN data show that fuel related products account for as high as 30% of FX utilisation on a quarterly basis.

It is also worth noting that the FGN has taken a cautious approach towards deregulation within this industry to avoid encountering similar errors made by the past administration with regards to diesel deregulation.

The petrochemical industry offers some hope. The NNPC has set out to resuscitate the refineries and have adopted a new three step approach (preparation, financing and execution). The corporation is close to completing the first phase which requires securing expressions of interests from potential partners with technical and funding capacity. The NNPC’s target is to ensure a refining capacity utilisation of 90% by 2019; capacity utilisation is currently around 14%.

The Dangote refinery and petrochemical plant which is currently underway should also assist the FGN in achieving its target within the stated timeframe. When full operations begin, Nigeria could become an exporter of gasoline and other petroleum products.

Modular refineries are also being considered by the FGN; apart from providing refined output, this will boost local content, create wealth as well as employment. It was announced in Q4 2015 that the FGN had awarded licences to 23 modular refineries; with refining capacity ranging from 4000 bpd to 30,000bpd.

Another critical sector which is often neglected but pivotal in the import substitution context is human capital. Its definition within the national accounts by the NBS is ‘Professional, Scientific and Technical services’. The sector contributed 4.4% to total GDP in 2016 and grew by 0.8% y/y in the same year.

Nigeria’s huge and vibrant working population should be used to its advantage. For the FGN, the remit is to collaborate with the private sector to provide and implement solutions geared towards reducing illiteracy in the country. Given that a sizeable number of workers are unskilled, resulting in low productivity, Nigeria is not adequately positioned in terms of manpower to handle the manufacturing or service provision for some of these locally substituted products.

A strong human capital base is dependent on the country’s educational system. Formal education for blue collar jobs should be included in the curricula (secondary and tertiary) while institutes focused solely on the development of such skills should be developed and maintained accordingly.

In most developed countries, these blue collar jobs create wealth for its citizens as well as contribute significantly to economic output. In the Philippines, its biggest export is from its human capital. It is estimated that more than 2.3 million Filipinos work abroad and these jobs fall under blue collar roles. One of such is nanny services for which Nigeria is a recipient. Some households, particularly in Lagos, employ Filipino nannies. The World Bank estimates that in the Philippines, personal remittances are approximately 10% of total GDP.
The World Economic Forum (WEF) Human Capital Index ranked Nigeria 127 out of 139 in its 2016 survey.

The next highlighted sector is manufacturing, which is at the crux of any industrialised economy. For Nigeria, the sector contributed 9% to the economy last year. In Q4 last year, there was a slowdown in contraction for the sector. The textiles, apparel and footwear segment grew; this could be evidence of a rise in import substitution. However, there is still room for significant improvement.

For industries that fall within this sector and have their products heavily consumed by Nigerians, a ramp up in domestic production is essential. For instance, edibles from bakery such as biscuits (or cookies) are consumed on a daily basis. Industry sources suggest that biscuit consumption in Nigeria is estimated to be between 450,000mt and 500,000mt annually. Most of this is imported.

A segment within manufacturing which has improved is the garment industry. The made-in-Nigeria initiative is gradually being embraced as patronage for locally made clothes has increased. Given that ready-to-wear garments have contributed significantly to the country’s import bill, the progress is laudable. However, the textile industry itself is still suffering. Thus, tailors (or designers) still depend on imported textile. According to the Nigerian Textile Manufacturers Association of Nigeria, Nigerians spend N1.3trn annually importing textiles and ready-to-wear clothing.

Ethiopia and Rwanda have both adopted a highly successful and distinctive model for industrial development. Light manufacturing has assisted both countries to become more export-oriented; it also serves as a revenue source. For both countries, their government’s ability to create policies that encourage a more business-friendly environment for the private sector has been very helpful.

Of course, agriculture cannot be left out from conversations revolving around import substitution. The sector contributes c.20% to the economy and should be performing significantly better given that Nigeria is rich in agricultural resources.

Rice farming seems to be showing signs of success. The federal minister of agriculture and rural development, Audu Ogbeh, has disclosed that by mid-2018, rice production will hit 7 million metric tonnes.

Due to the fx illiquidity issues, the price of imported rice skyrocketed (particularly during the festive season last year). However, the quantity and sale of locally produced bags of rice in the markets increased also.

The FGN has made efforts towards boosting rice farming in the past several months. For instance, the FGN has secured 100 rice mills for distribution to rice-producing states in the country. Additionally, there are intervention programmes led by the CBN to assist local rice farmers with better access to credit; the Anchor Borrowers’ Scheme is one of them.

Another agricultural product worth exploring for substitution purposes is dairy. A dominant player within the milk industry revealed that Nigeria produces 12 million litres of milk per day; consumption is slightly lower at 10 million litres per day. Notwithstanding, milk features on the country’s import list thus most of what is produced in Nigeria is wasted. The ministry of agriculture and rural development has previously stated that Nigeria’s annual import bill for milk is worth is US$1.3bn.

In Sri Lanka, the import of dairy milk is highly levied. This is not the case in Nigeria.In terms of local agricultural substitution, Brazil is a good case study for Nigeria. Following its successful import substitution strategy implementation, the Brazilian economy experienced rapid growth and considerable diversification. Trade barriers were set up for imports that competed with domestic production; this resulted in an increase in manufacturing.

Although a plausible route to follow, if emulated exactly in Nigeria, the country’s structural issues (such as epileptic power supply) could result in supply constraints. Furthermore, poor access to credit makes it difficult for local businesses to thrive in a high-cost business environment.
The private sector is capable of pushing the import substation strategy forward. However, the FGN has to put more effort into eliminating these structural issues which pose as major roadblocks.

Essentially, import substitution is underway but not at the desired pace. Over time, if Nigeria achieves its target with local substitutes, this will significantly cut the country’s import bill and assist in easing pressure on the naira.
• Chinwe Egwim
Macro Economist & Fixed Income Analyst at FBN Capital
(The Investment & Asset Management arm of FBN Holdings)


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