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Agro-processing To Drive Nigeria’s Economy

By Roberts Orya
21 June 2015   |   3:08 am
NIGERIA is in a transition from supreme oil-dependency to a more diversified economy. Susceptibility of the domestic economy to external revenue shocks, when oil prices fall, well informs this transition. But if oil prices were to stabilise at the $147 per barrel peak, there would still be very strong reasons Nigeria must broaden the base…


NIGERIA is in a transition from supreme oil-dependency to a more diversified economy. Susceptibility of the domestic economy to external revenue shocks, when oil prices fall, well informs this transition. But if oil prices were to stabilise at the $147 per barrel peak, there would still be very strong reasons Nigeria must broaden the base of formal economic activities.

One of the reasons economic diversification is an imperative for Nigeria is because the country is too richly endowed with natural assets for us to concentrate on tapping just one. The one we have concentrated on – oil – is a depleting asset. And then, the production of hydrocarbon resources employs too few labour for Nigeria’s fast-growing population and huge workforce. Therefore, the economic diversification model that the country needs is one that can help absorb fiscal shocks, fend off monetary instability, provide employment for the teeming work-age population as well as generate more revenue for the government to meet its commitments to the people.

Prospects of global agriculture
Agriculture represents the low hanging fruit in the quest to structurally transform the Nigerian economy. The outlook of global agriculture support this assertion. Since the global spike in food prices in 2008, food security has remained at the front burners of the international policy agenda. Even the downward trending of food commodities in the past few months only further raises concerns about global food security. If lower food prices stifle new investments in agricultural production, the downward pressure on prices can only continue for so long before it stirs a sharp reversal as a consequence of ensuing supply shortfall.

Beyond this, global agriculture itself is undergoing multiple layers of transition. Population growth and changing consumption habits have started to drive up demand for food in multiple varieties. By year 2050, the world population will reach nine billion. That means additional two billion people would require food in 35 years’ time, compared with now. But the upward projection of demand for food is met with constraints to expansion of supply by the traditional international producers. Climate change and other constraints have continued to shrink the hectarage of the world’s arable land. Latin America and sub-Saharan Africa are now the last bastion of sizeable arable land. The MENA region (Middle East and North Africa), Europe, Central America and the swath of Asia now have little room to upwardly adjust food production because of limits to available arable land.

This means that sub Saharan Africa and Latin America will be the food baskets of the world in the future. According to World Bank data, Nigeria’s arable land continued to expand between 2000 and 2014. In this period, the available arable land as a percentage of Nigeria’s total land mass increased from 36.2% to 38.4%. It is a trend that is unique to only a few countries. However, low level utilisation, in which Nigeria became dependent on a number of imported food items – including mostly those that can be grown in the country –  might have exerted the greatest influence on supply of arable land in Nigeria.
The interplay of current domestic demand and supply scenarios also supports a buoyant outlook for agriculture and the agro-industry in Nigeria. On the demand side, Nigeria is a growing market. Although we currently profile the over $10 billion we spend yearly on food importation as negative, it actually also paints the picture of an aspect of effective demand which can be served locally, and which can help conserve our foreign exchange and make the local currency less volatile in value. This, therefore, provides a strong-financial-returns impetus for additional local investments in agro-food processing. More success with poverty reduction and strengthening of the middle class will further boost food demand growth.

On the supply side, the country is blessed with a wide range of agricultural resources including a favourable climate. We also have the benefit of the knowledge of once being a predominantly agric-economy, before commercial production of crude oil began in the country in the early 1970s. Even now, annualised Nigerian agricultural output tops $122 billion. Therefore, some of the key factors for a successful transition to an industrialized economy in which agriculture and agro-industrialisation play important roles including providing domestic food security, contributing to export revenues and supporting strong employment numbers, are present with us. In the last four years, we actually saw a strong momentum to the transition, under the Agriculture Transformation Agenda of former President Goodluck Jonathan.

Agro-processing virtuous cycle
In line with the statutory mandate of Nigerian Export-Import Bank as the Trade Policy Bank of the Federal Government, we see Nigerian agriculture from the prism of agro-processing. This is because agro-processing inspires the virtuous cycle of increased agricultural productivity, industrialisation in the value chain, sustainable growth in the export of secondary agricultural products, creation of domestic employment, and poverty reduction. For this reason, NEXIM Bank in the past five years has put forward agro-processing, with other three sectors, as the major frontiers of economic transformation in Nigeria. The other three sectors are manufacturing, solid minerals and services. The sum of these sectoral focus constitute the MASS Agenda of NEXIM Bank.

Policy intervention to increase agro-processing will, no doubt, prove revolutionary for the country. Africa-level statistics, which sit well with the Nigerian reality, put post-harvest losses for fruits and vegetables at 35-50% of total production. The level of loss for grains is at 15-25%. These high levels of losses weigh down production; and ultimately deny farmers the needed revenue to facilitate expansion of their farms. Little wonder then that, for a region that produces much less food than it needs, the share of agro-industry to total manufacturing declined over the period of 1995 to 2006, according to a UNIDO 2013 report.

To unlock potential for agricultural production, expansion of agro-industries is an essential pre-condition. With the fertiliser subsidy conundrum already solved, government can deploy fiscal tools to provide massive support for farmers in the acquisition of equipment. NEXIM Bank’s credit guarantee instrument could be strengthened to provide much stronger support for industrialists in the post-harvest value chain to acquire equipment and tools.
he business savvy that is required to attract funding interests from commercial banks into agriculture can best be initially provided in the post-harvest production segment. Food processors, agro-traders and packaging businesses can then, either through backward integration or by providing more liquidity to farmers, bring financial buoyancy into farming. Ahead of the provision of the needed elaborate infrastructure by the government, food manufacturers can bring technology and improved haulage hardware that will ameliorate post-harvest losses. Similar solution has propelled Nigeria to being one of the world’s top cement producing countries.

Policy considerations
Food processing industries have been dominant in Africa’s manufacturing for a few decades. Depending on the individual country, the share of food and beverage ranges from 15-40% of total manufacturing capacity in Africa. Local and multinational conglomerates in food and beverage are some of the most valued stocks on the Nigerian Stock Exchange. With the stimuli of positive demand projection for food locally, combined with opportunities to tap food export markets, the economy can get a strong nudge with increased support for food processing.

Nigeria can launch an era of food diplomacy with her trading partners. In a number of situations, lack of access to export markets by existing Nigerian agro-manufacturers are down to competition from other exporting countries. Although Nigerian exports of food and semi-processed produce are often denied access in some foreign markets based on issues of standards and safety concerns, without diplomatic efforts, it is unlikely that the putative technical requirements can be met. As such, and without seeking to circumvent the technical standards, the country can use bilateral agreements as a trade tool for providing Nigerian food products access to foreign markets.

In addition to financing solutions, broad fiscal tools are required to raise the scale of production and processing of agricultural commodities in Nigeria. As a matter of principle, fiscal tools including tax breaks and waivers on tariffs should be directed at production. They should be completely biased against importation of consumer food products. The food security objective of the government cannot be altogether served by foreign multinational companies. As such, it is important that foreign capital is not allowed to crowd out indigenous agric-food companies. Existing PPP frameworks to bring financing to agriculture should be strengthened. Public institutions involved must be subjected to stern performance metrics.

Special consideration
With the weakening of the Boko Haram insurgency in the Northeast by the Nigerian military, a grand programme to close the productivity gap in northern agriculture is an imperative. Over the last few months, food prices had inched up marginally on the Consumer Price Index of the Nigerian Bureau of Statistics, of which agricultural produce are a significant component. Under the scenario of the displacement of the local population including agric communities in the northeast, it is beyond question that supply growth would have become much weaker, whereas demand projections have remained very positive in the country. Determined efforts should therefore be made to close the existing productivity gap by expanding capacity through strong intervention in the North generally, since the region occupies a vital position in the nation’s food production.

New economic structure
Following the GDP rebasing in 2014, a new (but changing) structure of the economy emerged. We saw the decline of oil as a percentage of the GDP and the rise of services as the largest sector of the Nigerian economy. In 2013, agriculture constituted 26% of the GDP – a percentage only exceeded by Ghana’s 29%, amongst Africa’s main frontier markets. Over the coming decades, the transition in the Nigerian economy will gain more traction. But transitions within industries should also be under watch. Agro-processing will define the changes in the agriculture sector, even as it will drive wider industrialisation and therefore catalyse further adjustment in the structure of the Nigerian economy.

Roberts Orya is Managing Director/Chief Executive Officer, Nigerian Export-Import Bank