Bitter-sweet tale of Nigeria’s manufacturing sector
It has been a bittersweet story for Nigeria’s manufacturing sector in the last 60 years. After Independence in 1960, the then Nigerian government came up with the Import Substitution Policy, with a view to reducing over-dependence on imports, creating a high number of local jobs and saving the foreign exchange. This was seen as a diametrically superb policy that was targeted at transforming the country from an agrarian to an industrial economy. But the policy failed because the British did not prepare Nigeria for industrialisation, according to a paper written by two researchers, Gabriel Aza Nyor and Dodo Ayuba Chinge. Economic historians say that the British colonialists merely paid attention to agriculture, which was supplying them with essential raw materials needed in their overseas factories. But on the flip side, this launched Nigeria into the global market as a strong agro nation. As of 1960s, Nigeria was world’s biggest producer of palm oil, accounting for 45 percent of global output. The country was also a major exporter of cocoa and rubber to the rest of the world.
However, the Import Substitution Policy crashed because early policy makers, like the current ones, believed that protectionism was a cure-all for the country’s fledgling economy. An apparently young country pursuing an industrialisation mission thought it wise to start barring importation even when some of its industries would need foreign raw materials. Inevitably, this policy died a natural death and was replaced with the indigenisation policy. This later policy, also known as the Nigerian Enterprises Promotion Decree, was meant to transfer ownership of firms operated by foreigners to Nigerians. Foreign firms were limited to certain businesses to allow locals to thrive and set up industries. More so, it was pursued as part of the then government’s development plan of 1970-1974. More than 1,000 hitherto foreign-owned firms were handed over to the locals. This policy attracted a lot of criticisms and was marred by corruption. Many Nigerians became suddenly rich and bought shares of several enterprises through the back door. Some fronted for foreigners who were still silently controlling the businesses. However, it was a major set-back because of poor management and obvious lack of local skills to run those enterprises. Chibuzo Ogbuagu, a former assistant professor of Political Science at the University of Pennsylvania, Philadelphia, the United States, postulated that the policy was merely predicated upon the feeling of economic and political nationalism and that economic efficiency might have been compromised because of a strong surge of nationalism.
It was later amended in 1977 to limit the number of companies an individual could have control over and streamline the type of businesses that would be done by foreigners. It must be admitted, however, that these two policies, which coincided with Nigeria’s first and second development plans, raised a bar for Nigerians and encouraged the rise of several industries and supporting infrastructure. Such industries like Ajaokuta Steel Complex, Aluminium Smelter, Delta Steel and many textile and palm oil firms sprang up within this period, making Nigeria an industrial giant. Kainji Dam and Ughelli Thermal Plant, among other infrastructure projects, also sprang up during this period.
Two development plans preceded the Structural Adjustment Programme (SAP) introduced by the self-acclaimed civilian president, Ibrahim Babangida. But before SAP, the foundation laid earlier had been shaking, as crude oil had become the new darling. Even with oil glut and fluctuations in the crude oil market, policy makers and leaders had committed less money to research and development, while allowing companies to die due to high production costs and interest rate.
The SAP liberalised trade, and encouraged privatisation and exports. But it also ushered in unbridled importation of cheap and sub-standard products. In a liberal market, players must be fair. But this was lacking as local manufacturers could not compete partly because of high cost of production and influx of cheap goods. Also, there was no protection for infant industries which, like children, needed protection.
The result of an off and on policy flip-flops was that manufacturing growth rate fell from 11 to 3.5 percent in 2009 while capacity utilisation in industries followed the same trajectory, falling from 70 to 34 percent, according to the Central Bank of Nigeria Bulletin. As the cost of production was rising, the government introduced Cargo Tracking Note, raising production costs higher. The Manufacturers Association of Nigeria (MAN) said in 2009 that 839 firms shut down that year. Within this period, policies on automotive industry, palm oil, rubber, cocoa and other nonoil export products were never implemented religiously.
However, the 2006 cement industry revolution was a big step in the right direction. The then President Olusegun Obasanjo assembled the bourgeoisie and cement importers and encouraged them to set up local plants. As long as an entrepreneur was willing to set up a local plant, they would be entitled to import quotas. This helped to shore up local production of cement, making Nigeria a net exporter today. Fourteen years down the line, Nigeria produces over 40 million metric tonnes of cement, with Dangote Cement, BUA, and Lafarge as the major players. This policy was, however, tested against rice by the Goodluck Jonathan administration, but it failed because it was abused, according to the then administration.
But here is the policy part. Many firms have shut down because governments after governments had fluctuating import and export policies. Import duties were unilaterally relaxed or lowered by some regimes without due consultations with all the stakeholders. Export policies were inconsistent. The Export Expansion Grant (EEG), which was targeted at raising the competitiveness of Nigerian products at the global market, had been suspended five times by 2009. By 2013, it was suspended again, putting a lot of firms who borrowed from banks in jeopardy. Firms had borrowed from banks to process their exports on the hope that the government would, as promised, give them incentives. But the government in 2013 suddenly suspended it. The EEG is not a Nigerian thing. It is the tool used by China to dominate the export world. Several other countries are providing it to their exporters to make them competitive. But up till now, it is yet to be reinstated, though a lot of processes have been undergone by exporters, including approval by both houses of the National Assembly.
The level of policy failures in recent times has been worrisome. Think about the cassava bread policy, which has now died a natural death. The Goodluck Jonathan administration, which promoted it, did not follow it through and those who invested money into cassava production with an eye on that policy might have lost a lot of money.
Then came the Automotive Policy, which was sincerely meant to enable Nigeria make its own cars at cheaper rates. Today, the policy is not implemented, though government officials make it seem otherwise. The 2013 National Automotive Policy imposed 35 percent levy and 35 percent duty on imported vehicles, amounting to a total of 70 percent.
Even with 70 percent fees paid on imported vehicles, importers of damaged or ‘accidented’ vehicles officially enjoy a rebate of 30 percent. What this has done is to encourage the importation of rickety vehicles, which make up 70 percent of imported cars today.
The age of most imported used cars in Nigeria is 15 years, whereas that of Algeria, Angola, Chad, Mauritius and Seychelles is three, according to a research done by Pwc’s Andrew Nevin, partner and chief economist at PWC Nigeria.
This has kept most car assemblers out of business. The prohibitive levy and duty paid on imported cars have encouraged smuggling of vehicles into Nigeria. Officially, market for cars in the country is just 6,999 as against 555,716 in South Africa; 181,001 in Egypt; 168,913 in Morocco, and 94,408 in Algeria.
But hundreds of thousands of vehicles come into the country each year. So, of what merit is the policy?
Also, the Goodluck Jonathan administration had genuine technocrats willing to industrialise Nigeria, though some players took advantage of loopholes in the policies to make money. But the 2013 National Industrial Revolution Plan (NIRP) represents Nigeria’s most comprehensive industrial policy since Independence. Where is that policy, prepared by experts from reputable global and local institutions, including UNIDO? Like others before it, major sections of that policy have been abandoned and left in the shelves by the current Muhammadu Buhari administration. Assuming that investors banked their investments on that policy, what happens to those humongous investments? Many companies today are investing billions in backward integration and they need clear policies, funding and good business environment to operate efficiently.
More so, the rise of retail stores has such as Shoprite, Spa, Grocery Bazaar, among others, has helped to market made-inNigeria products better, making them competitive. However, the major challenge hurting Nigerian manufacturers is that they are producing for a majorly poor population that cannot afford to buy their products. Poverty is about 45 to 50 percent, with inflation at 13.2 percent. The economy shrank 6 percent in the second quarter (Q2) of 2020m according to the National Bureau of Statistics (NBS).
The manufacturing sector has been worse. Growth was -8.78 percent in the second quarter of 2020, as against -0.13 percent in the second quarter of 2019. In the last five Q2 quarters, manufacturing has only seen growth twice in Q2 of 2017and Q2 of 2018. Manufacturers say their key challenges are high cost of energy and poor infrastructure.
Four hundred CEOS of major manufacturing companies in Lagos said in the first quarter of 2020 that Apapa and Tin Can were threatening to shut down their companies.
In an interview conducted by the Manufacturers Association of Nigeria (MAN) on critical challenges facing the sector in Q1 2020, 94 percent of the CEOS said that congestion at the ports had a significantly negative effect on their productivity and cost of production.
“Most worrisome are the issues of deliberate delay in cargo clearing time, raising of technical barriers, rejection of relevant documents by officers of the agency that approved import documents, multiple agencies with duplicated functions and other rent-seeking activities of vested interests at the port that excessively fleece operators,” they said.
Nigerian leaders must choose between the options of building a strong and resilient economy, and running a rent-seeking import-dependent system that breed poverty. The choice is theirs.
...the Import Substitution Policy crashed because early policy makers, like the current ones, believed that protectionism was a cure-all for the country’s fledgling economy