Neil McCulloch | How not to diversify: Nigerian style

Dr. Neil McCulloch (Director, McCulloch Consulting Ltd.) @neilmcculloch64

15 November 2016

‘I am giving preference to those who are “Made in Nigeria,”’ announced the moderator at the Nigerian Economic Summit, which took place from 10 to 12 October in Abuja. His bias, echoing the theme of the summit, perfectly encapsulated Nigeria’s response to its current economic malaise… and the muddled economic thinking that is making it hard for the country to emerge from its current economic crisis.

As Africa’s largest economy, and with its largest population, of 170 million people, Nigeria should dominate the continent. But the country has long been one of the world’s prime examples of the resource curse: 60 years after discovering oil Nigeria still relies on it for over 90% of export revenue, and the government depends on it for 62% of its revenues. Overreliance on oil has caused Dutch Disease – overvaluation of the currency – which has made exports expensive and imports cheap, stifling diversification into other sectors. The collapse of the oil price has left a gaping hole in government finances, with a budget deficit of N3.5 trillion in 2015 (3.7% of GDP), while the drying-up of foreign exchange from oil has left a ballooning current account deficit.

Of course, the president and the government are facing other major challenges too: the military campaign in the north-east of the country against Boko Haram is absorbing significant resources and revealing an immense humanitarian crisis, with millions of people displaced and livelihoods destroyed. And a resurgence of militant activity in the Delta has blown up oil and gas pipelines, crippling revenues and power supplies. But the government’s response to the economic challenges it is facing has been slow and incoherent. President Buhari, who was inaugurated in May 2015, spent several months appointing a cabinet and many months more before taking action to address the collapsing currency and slowing growth. The delays in key decisions, as well as the strongly adverse external environment, have resulted in a dramatic shift from 6.3% growth in 2014 to a deep recession today, with rising inflation and widespread unemployment.

Faced with such a crisis, the Nigerian Economic Summit Group (NESG) – the country’s largest association of large private sector players that hosted the Summit – has been urging the government to use low oil prices as an opportunity to finally diversify the economy. And the government is trying. The economic team, led by the vice-president, spent two days at the Summit along with various ministers explaining the myriad initiatives that are being planned: investment in infrastructure, a new secretariat to ease doing business, a new set of Intervention Funds established within newly capitalised development banks and much more.

The audience of MDs and CEOs from Nigeria’s largest firms across all sectors were polite but clearly frustrated. Top among their concerns is the difficulty involved in obtaining foreign exchange. The president’s response to dwindling foreign reserves was to attempt to save forex by banning access to foreign exchange from the Central Bank for 41 items. The result was the decline, not only of the sectors affected but also of activities that relied on the outputs of those sectors. Indeed, the government’s exchange rate policy has been focused on doing all it can to avoid a slide in the currency – pushing against the one change most likely to stem the outflow of foreign exchange. As Doyin Salami, Professor at Lagos Business School, said, ‘A strong currency subsidises the middle class at the expense of everyone else.’

Yet the business community is also pushing in opposing directions. While a handful of speakers called for Nigeria to focus on becoming globally competitive, the Summit’s theme of ‘Made in Nigeria’ concentrated less on encouraging exports and more on discouraging the purchase of foreign goods. One of the final recommendations from the NESG at the end of the Summit was that the government require its departments to buy Nigerian – regardless of cost or quality. The language of self-sufficiency has returned; as President Buhari himself stated, ‘We should produce most of the things that we use.’ The idea is that Nigeria needs to import only what it does not produce, and so boosting production for domestic consumption can save foreign exchange.

Yet a shift inwards is the opposite of what Nigeria needs, as SET’s recent report shows. Devoting resources to high-cost production for domestic needs draws resources away from building globally competitive export businesses. It focuses energy on older, less productive and less diversified activities. When these activities struggle, the pressure for protection will grow, either through tariffs or, worse, through bans and quantitative restrictions that earn hefty rents for the institutions that administer them.

What Nigeria needs is to do the opposite. Not to stem the demand for foreign exchange but to stimulate the supply by welcoming investment from all over the world. But few foreign investors without privileged access to the echelons of power would invest in Nigeria today. With crumbling infrastructure, unreliable power, insecurity and endemic corruption, it is not surprising that Nigeria languishes at no. 169 on the World Bank’s Doing Business ranking. More than anything else, Nigeria needs a signal from the top – that foreign capital is welcome, that monopolised sectors will be liberalised, that the government is serious about slashing the thicket of rent-seeking regulations that, in the words of one businesswoman, makes every government department a ‘one more stop shop’.

Sadly, none of this is likely. In part, this is because it directly contradicts the interests of the political elite, whose machinery these rents oil. But, unusually for Nigeria, that is not the main problem today, as President Buhari’s key strength has been his courage in tackling corruption. Rather, the failure lies in a mindset that is against the idea that openness to the rest of the world would also benefit Nigeria and help it achieve the structural change that it seeks.

Can the business community help change this mindset? Perhaps. The NESG represents a national, cross-sectoral and non-partisan voice of the private sector. Its Policy Commissions – covering every sector of the economy – engage in dialogue with the government throughout the year in an attempt to fashion policies that will promote diversification and growth. It represents a relatively transparent and evidence-driven mechanism through which the government and the private sector can jointly search for effective solutions. Unfortunately, it is not clear whether this is the form of state–business relations that drives policy at the highest level, or whether Nigeria’s long tradition of non-transparent deals between politically connected actors will ultimately determine the future direction of structural change.


Photo credit: Flickr/Jeremy Weate