Nigeria might have sleep-walked into a path leading to a bleak economic future. With the economy experiencing a downward lurch in the commodity cycle, Nigeria’s economic managers need to come out with bold and realistic measures to save the national currency from rock bottom devaluation, reverse the depletion of foreign reserves and rescue the economy from complete ruin.
In its March 4, 2015 report, the International Monetary Fund once again drew the attention of the Nigerian government to this dire economic situation and concluded, among other recommendations, that Nigeria’s longer term prospects rested on lowering oil dependency and strengthening private sector’s participation in economic activities.
In 2015, according to the IMF, oil exports are projected to decline by six per cent of Gross Domestic Product from the 2014 level and oil revenue by two per cent. A sharp contraction of public investment and domestic demand is projected to reduce growth to 4.75 per cent in 2015 from 6.3 per cent in 2014. Inflation is projected to rise to 11.5 per cent by the end of 2015 from eight per cent at the end of 2014.
But Nigeria can only substantially expand its trade and boost non-oil exports by first creating an enabling environment for investment and exports.After the Central Bank of Nigeria had officially devalued the national currency on November 25, 2014 and February 19, 2015, the Fund has again suggested “greater exchange rate flexibility,” meaning further devaluation. None of these measures will work until the weak productive base of export products is overhauled. While a country whose currency is devalued could benefit from the lower cost of its export of goods, which now are cheaper to buy by customers in countries whose currencies are stronger, sadly, Nigeria has nothing serious to export.
As the National Bureau of Statistics noted, secondary activities, comprising manufacturing and building and construction, which traditionally have greater potential for broadening the productive base of the economy and generating sustainable foreign exchange earnings and government revenues, account for a mere 4.14 per cent and 2.0 per cent of gross output respectively.
Nigeria’s export structure remains fragile, reflecting a narrow productive base and neglect of alternative sources of foreign exchange earnings, in particular, from manufacturing. A deeper analysis of the composition of non-oil exports showed the dominance of agricultural exports to the tune of over 60 per cent of total non-oil exports. Manufactured exports accounted for less than two per cent of total merchandise exports in 2009.
Nigeria remains an export laggard largely because it has done many things wrong. But late last year, the Industry, Trade and Investment Ministry claimed that, for the first time in Nigeria’s history, it had formulated a trade policy that would facilitate job creation and boost exports of non-oil products to new markets. Some objectives of the trade agenda, according to the ministry, include increasing non-oil exports to ECOWAS from the present nine per cent to 20 per cent by 2015 ($276.5 million in 2011 to $706.1 million in 2015); increasing recorded non-oil export to other African countries from the current three per cent of global export to 10 per cent by 2015, and increasing Nigeria’s non-oil as a proportion of total export from current five per cent in 2011 to 20 per cent by 2015, and 40 per cent in 2020. The framework is fantastic on paper.
But it will take a government imbued with critical thinking and strong political will, not the present haphazard approach, to work out an escape route. No economy can grow by relying on commodity exports and the promotion of simple products the way Nigeria has done over the decades. Rightly captured by the Nigeria Export Promotion Council’s Framework for Export Strategy, the era of national economic dependence on raw commodity exports has passed. Even though there is still scope for increasing export earnings and employment opportunities in this sector, the bulk of the wealth is in value-added downstream product diversification.
As the study states, the best export performers on the international market scene are high-technology products, skill-intensive products and services. And this can only be achieved by creating an environment where a greater diversity of productive activities can thrive, paying particular attention to activities that are relatively more complex or that open up more opportunities. According to experts, prosperous societies are those that have the knowledge to make a larger variety of more complex products.
Yet, the country’s education system and the economy are structurally deficient in supporting “high-technology products, skill-intensive products and services.” This is why most economic development indices, including those that focus on government and institutions, human capital development, global competitiveness, financial depth and export sophistication annually return woeful verdicts on Nigeria.
What can be done? IMF warns that with limited fiscal and external buffers ($2 billion in the excess crude account and $34.25 billion in gross international reserves, respectively at the end of 2014), the sharp decline of oil prices in the second half of 2014 underscores the urgent but compelling need to address remaining development challenges.
To make funds available for infrastructure, especially development of transport, water and sanitation, power, telecommunications, and irrigation, corruption must be tamed. Export-led growth, first, of light industrial goods and, later, of heavier materials,is inevitable. But laying the foundations of robust export trade development requires structural changes in so many areas. While state institutions need to be strengthened, our education policy requires a complete overhauling. The present education system that celebrates years of schooling must be transformed to one that is anchored on productive knowledge that can create complex products for export.
Therein lies the main challenge.
