COLUMNS - 05 AUG 2019

Achieving Inclusive Growth in Nigeria

Achieving Inclusive Growth in Nigeria
Buhari and members of the administration pose with the Economic Recovery and Growth Plan at its inception

Large scale industrial development can help a country achieve economic growth that benefits the majority of citizens—what is termed inclusive growth.

Nigeria achieved rapid economic growth in the 2000—averaging 8%—but the fruits of this growth were not as widespread. In 1996, the national poverty rate was 64%; by 2009, it had only dropped to 54%. But perhaps the greatest example of inclusive growth is in China. Beginning from the late 1970s, China began its transformation to the world’s largest manufacturer and the leading export economy. Between 1978 and 2015, China’s growth averaged 10% while the number of people living in poverty fell from 66% to 0.7%.

 

The Federal Government’s industrialisation agenda

The Nigerian Government buys into the narrative that industrialisation can deliver shared prosperity through exports and job creation. The 2017-2020 Economic Recovery and Growth Plan (ERGP), the Buhari administration’s economic development plan for the country, states, “The promotion of industrialisation is a priority for economic recovery.”

The document also highlights priority (non-oil) sectors in achieving these goals, such as manufacturing and solid minerals. The government’s stance on these sectors is clear. They believe the manufacturing sector is “well-positioned to be a major driver of Nigeria’s economic growth” and the mining sub-sector “remains the key to industrial development”. And the government has chosen these two sectors because they can potentially create millions of job and produce commodities and products with high export value. 

However, despite a spate of returns, they remain insignificant parts of the economy. Moreover, several issues point to the challenge of these sectors delivering on the task.

The two sectors currently constitute an inadequate proportion of the Nigerian economy. The manufacturing sector accounts for just under 10% of Nigeria’s GDP, compared to 15% in Cameroon and 17% in Senegal, two countries that are not known for being industrialised. The solid minerals industry is even more pitiful, accounting for just 0.5% of national output. Meanwhile, the two sectors hire 7% and 0.2% of Nigeria’s employed workers respectively.

 

The unintended effects of government policy

Ironically, the sub-par contribution of manufacturing and solid minerals may be the result of government efforts to boost their capacity.

Policies that protect local businesses from foreign competition, such as import bans and managed exchange rates, have helped some industries in the short run. The 2017 import prohibition list, which contains items like spaghetti and cement, have profited entrepreneurs like Aliko Dangote, with Dangote Cement accounting for more than 60% of the country’s local cement demand. In addition, the Central Bank’s tight grip on the exchange rate fosters an artificially over-valued naira which makes imported inputs more affordable.

However, there is strong evidence that suggests that these anti-competitive policies are detrimental in the long run. A lack of competition hinders the growth potential of businesses as they are not pushed to deliver new products, design new processes, and improve productivity. As a matter of fact, estimates state that Nigeria’s manufacturing firms are 30% less efficient than South Africa’s. Of course, there are exceptions that the government will appeal to: for example, protectionist policies have aided the growth of countries like China.

Moreover, the negative impact of anti-competitive policies go beyond the sector; they affect the entire economy. Experts have examined the relationship between real exchange rate and macroeconomic performance in sub-Saharan Africa and found that overvaluation is associated with lower levels of national output per capita growth. In order words, the central bank’s insistence on keeping the naira strong could be impeding economic growth.

Government policy is not the only issue. The fact that these sectors do not export their output is another significant barrier as Nigerian firms that export their products tend to be more efficient. Openness to foreign competition provides the opportunity to learn better practices, innovate, and enhance performance. The long-awaited signing of the African Continental Free Trade Area agreement (AfCFTA) provides a platform to boost regional exports, but long-term non-tariff barriers like poor infrastructure, inconsistent border processes, and inadequate standard enforcement could limit the extent to which exports improve.

 

The challenges with mining in Nigeria

Perhaps the key issue that undermines the solid minerals sector is the absence of geological data to map the location of mineral deposits. According to the former Minister of Solid Minerals Development, Dr. Kayode Fayemi, Nigeria is not generating sufficient data, and the existing data is not made available to the market operators. In the absence of mechanisms for gathering, disseminating, and storing this data, the mining industry is stifled as investors walk blindly without information on the placement of mineral deposits and other important issues such as the amount of groundwater.

Moreover, illegal mining has led to significant illicit financial outflows from Nigeria’s extractive sector, undermining the sector’s contribution to the economy. There are suggestions that most of Nigeria’s gold reserves are traded in the black market while the country’s extractive sector lost $217 billion to illicit financial flows between 1970 and 2008. Finally, in 2018, the Economic and Financial Crimes Commission (EFCC) confiscated gold worth $3 million at the Nnamdi Azikiwe Airport. The opportunity cost of these diverted funds is the development of Nigeria’s mining sector and the economic benefits that it would bring.

The establishment of the Solid Minerals Development Fund by the Federal Government in 2013 is a step towards tackling some of these issues. The Fund was set up to address the lack of infrastructure in the sector, near-absence of geoscience data, and unavailability of finance for mining institutions and investors. However, there have been issues with accessing the funds. The majority of the fund is skewed towards recurrent expenditure with capital expenditure accounting for an average of 18% between 2014 and 2017, leaving very little for investors to access. Stakeholders opine that the purpose for which the Fund was established has not been met.

The potential of Nigeria’s manufacturing and mining sectors are seriously undermined. But the government is trying to nurture them to bring about inclusive growth. While some policies are misguided, others may struggle to overcome age-long issues. We ought to applaud the government’s clear intent in trying to develop these two industries, but commitments will not transform the Nigerian economy. Only real industrialisation will.

 

Mma Amara Ekeruche

Mma Amara Ekeruche

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