Why we need better trade policies to boost Nigeria’s growth

At Stears, we believe that trade is instrumental to the growth of economies—particularly the Nigerian economy. The truth is Nigeria does not have the market to stimulate growth. The entire African consumer class comprises 300 million people, compared to Asia, which has 2.2 billion people. In Nigeria, the picture is grimmer. Ninety-five (95) million people—almost half of the entire population—live below the poverty line, and those above the line are very vulnerable to external shocks. This means only a few people belong to the Nigerian consumer class, which is insufficient to generate growth.

This is why trade is critical. It’s impossible to talk about China’s growth—and its ability to raise over 800 million people out of poverty—without talking about trade. For China and many other emerging economies, the idea is that the local economy does not have the consumption capacity to grow the economy.

Before liberalising trade in the 1980s, China’s employment was heavily skewed towards unproductive sectors like subsistence agriculture—about 60% of China's labour force was employed in the primary sector with low disposable income. But China eventually opened its borders to more prosperous countries which, increased employment and income for the Chinese.

By comparison, Nigeria has taken a different route. As the current administration rounds up, we must look back at how the federal government’s policies have influenced Nigeria’s trade performance over the past few years.
 

The state of trade

Let’s start by looking at how well Nigeria’s trade is performing. The success of a country’s trade balance is measured by how much more it can get in foreign exchange through exports compared to how much it spends on goods abroad; through its imports. 

For the analysis in this article, we’ll focus on just trade in goods.
 

Nigeria typically has a trade surplus due to our crude oil sales. However, when crude oil sales dip, so do our trade balances. Despite our stance that Nigeria is losing its title as an oil-producing economy, the trade statistics say otherwise. 

Nigeria’s export is still predominantly—at least 70%—made up of crude oil exports. Given how high crude oil prices are today, this might sound like an excellent place. However, following some of the articles we’ve written on the crude oil situation in the world, you’ll know that Nigeria is not exactly smiling to the bank to cash crude oil cheques. This is primarily because of our reduced production. Nigeria’s crude oil production is currently the lowest it has been since the 1980s, preventing the country from reaping the benefits of increased production. 

However, crude oil revenue can be very unpredictable because of price changes. Due to this unpredictability, the Nigerian economy has plunged into two recessions in five years because it was not earning enough foreign exchange revenue to meet its foreign obligations—and fund the government.

Another downside to over-relying on crude oil exports is that the sector is not a major employer of labour. Remember that one of the reasons why trade is critical is because it creates employment. Basically, with international trade, there is increased demand. As the demand increases, there is a need to employ more people and capital to increase supply, leading to increased employment. With crude oil production, even when demand increases, the increase in employment is not proportional to the demand. Crude oil mining currently employs less than 0.2% of the Nigerian labour force, according to the latest employment statistics by the National Bureau of Statistics (NBS).

It’s important to note that not all labour-intensive sectors generate significant growth. For instance, agriculture employs about 50% of the entire labour force but contributes less than 3% to total exports and less than 30% to non-oil exports. This is mainly because agriculture in Nigeria is primarily extractive, so we produce items that require further production and are not valued much. The trick is to create labour-intensive sectors which also provide high value.

Produce for the world

For example, sectors like manufacturing or technology, which can employ many people and generate a spillover effect to other sectors of the economy, are key to driving inclusive growth. Also, increased industrial capacity or manufacturing capacity is a good channel for investment inflows to the country. It also diversifies the economy since it cuts across several aspects, such that foreign revenue is not dependent solely on one sector.

To diversify Nigeria’s foreign trade, non-oil export has to increase. From the trend of the contribution of oil exports to total exports, we can deduce that non-oil export contribution has been pretty stable (and much lower than oil exports).

However, what will lead to a much higher contribution from the non-oil sector is the composition of the trade in the non-oil sector. Starting in 2018, Nigeria’s manufacturing trade began to witness fast-paced growth. 

The value of trade in non-oil sectors—particularly manufacturing, agriculture and raw materials increased drastically over the years. Although manufacturing exports declined due to the Covid-19 pandemic, they continued to perform well above pre-pandemic levels—mainly driven by the increase in vehicles and other manufactured goods exports to neighbouring countries like Ghana and Cameroon.

So far, we’ve seen that the Nigerian export basket is heavily skewed to crude oil exports, which has led to significant distortion in our foreign revenue. However, non-oil exports have also been increasing, with manufacturing surging, mainly driven by growth in vehicle exportation.
 

What’s going into imports?
 

On the imports side, petroleum and transportation make up the bulk of imported goods. However, one thing to note here is how these two product segments change over time. When the economy is doing well and there’s enough foreign exchange, a significant proportion of the import is driven by machinery and transport equipment—which is needed for manufacturing. However, mineral fuel takes the lead when the economy is in a crunch, like in 2016 and 2021. In 2020, machinery was still much higher because fuel prices were much lower—driven by the low crude oil prices globally.

This means that when the economy is in a crunch, imports of manufacturing equipment are stalled. This is another danger of dwindling foreign exchange revenue; because foreign revenue is low, the country has to decide on what is most important to spend on. This has been the theme of trade policies in the country—especially since the 2016 recession.

In 2016, crude oil prices crashed to about $50 from around $100 two years prior. This was the lowest crude oil price in about a decade, which meant that oil-producing countries couldn’t earn as much revenue from crude oil sales as they normally would.

This decline impacted Nigeria’s foreign exchange earnings, as crude oil made up over 80% of our exports at the time. As the foreign exchange reserves shrunk, the federal government and the Central Bank of Nigeria (CBN) had to make drastic policy changes due to the dip in foreign earnings. One of the CBN’s roles is to maintain the country’s foreign reserves and protect the international value of the Naira. Therefore, it is also the CBN’s responsibility to set policies it believes will help achieve that goal.

And from the previous import chart, we see that two product categories are critical to the government: fuel and machinery. However, when foreign exchange reserves decline, the proportion of forex spent on mineral fuel rises while that of machinery declines. This is mainly because of how critical fuel is to the economy—influencing key activities like transportation and power.

The government doesn’t just stop at shuffling its expenses but enacts key trade policies during a foreign reserve squeeze.
 

How has the government responded to this? 

Since 2015, when crude oil prices crashed, several protectionist trade policies were rolled out by the federal government and the Central Bank of Nigeria (CBN). These can be broken into three segments: CBN foreign exchange policies, the federal government’s border closures and customs’ banning commodities.

Let’s start with the CBN’s restriction on the use of foreign currency. At different times in the last five years, the CBN has restricted foreign exchange supply to import different items from rice to tomatoes and more. While these restrictions do not exactly prevent importers from bringing in these food items (except Customs also bans the item), they make importation more expensive. 

For example, in July 2020, the CBN stopped the release of foreign exchange for maize importation, which led to a surge in maize prices across the country. What made this worse is that maize is a significant input for the poultry sector. So, whatever happens to maize invariably happens to the poultry sector. With the price of maize rising significantly, so did the price of poultry products like eggs and chicken.

As stated by the CBN, one of the goals of the policy was to increase the local production of maize. This seems to be the route the Nigerian government has taken to stimulate economic production, and in some cases, it has yielded desired output. For instance, after FX was restricted for rice importation in 2015, Nigeria’s rice production increased from 4.5 million metric tonnes to five million metric tonnes. However, this increased production does not immediately mean Nigerians are more food secure, as rice is still being imported, and the domestic production is yet to meet domestic consumption levels. Hence the price of rice is still increasing. This is likely to be the same situation with maize. Even if we ramp up production, the prices won’t reduce if it is not directed to the market or if the quality of the locally produced rice is inferior to the imported category.

Another unintended consequence of the protectionist policy is that the domestic price hikes reduce the incentive to export the harvest out of the country because the price of locally produced rice is still too high to compete in the foreign market.

The foreign currency ban also created loopholes. The CBN’s restriction on forex meant that people could not access Form M, which gives the authorities an idea of how much tax to charge importers. With importers sourcing FX from the parallel market, they had an avenue to evade taxes. According to the World Bank, Nigeria lost $1.8 billion (6% of the overall tax estimate) every year from 2010 to 2019 due to trade tax evasion. Out of that, $1.4 billion is due to the foreign exchange ban.

Therefore, even with the seemingly good intention of the government to make the country self-sufficient, they have caused even more significant challenges for the consumers—through higher prices and themselves—through lower taxes.
 

Shutting the borders 

The second category of trade policies is the border closure policies. In August 2019, the federal government ordered that the land borders be around Benin, Chad, and Cameroon be closed, preventing the movement of goods across the countries. Among other reasons, the Federal government shut the borders to reduce the smuggling rate into the country. One prominent example was that of rice smuggling into the country through Benin.

The Benin Republic is a country of 11 million people—about half of the people in Lagos. Yet, in 2018, it was the sixth-largest importer of rice in the world and the largest importer from Thailand. Given that importing rice to Nigeria attracted a 70% import duty, while in Benin, it only cost 7%, there were reasons to believe that the rice going to Benin was headed to Nigeria eventually.

With the land borders shut, Nigerians had to source their rice elsewhere, and the supply was low. This hiked the price of food as well. When the government announces policies such as a border closure, the price increases don’t necessarily come from the increased cost of importation but the expectation of this increase. This led to substantial price increases. 

However, this increased performance of local production should not come at the detriment of the average consumer.

In general, the border closure was a huge mistake because it did not achieve the aim of reducing food smuggling. Interviews the World Bank conducted with border officials stated that importers have found new routes to smuggle goods into the country, aggravating the issue even more.

A recurring theme is that the trade policies implemented across the country were intended to stimulate economic growth by forcing Nigerians to buy local to grow the naira. However, when you have a population with highly vulnerable disposable incomes, even the producers you’re trying to protect suffer the brunt of the policies aimed to protect them. These trade policies were so detrimental that they led to families spending more of their income to maintain the same level of well-being. 

In summary, despite the vulnerability of crude oil, the Nigerian government still depends largely on crude for its foreign exchange revenue. The impact of this is that when the revenue is not flowing as much as desired, the government implements trade policies to retain its foreign exchange income while reducing its spending. 

The secret to Nigeria’s success is outside its borders. With unemployment at 33% and the bouquet of macroeconomic constraints the economy is plagued with, the country must unlock the economy to induce growth.