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Wednesday, May 3, 2017

Explaining our Journey into Recession: Nigeria's Trade with the rest of the World I

     No country in the world can be defined as an island to itself, as every country in the world trades with others through selling commodities or services to them and buying other commodities and services from them. Nigeria can be described as a mono-economy that depends solely on the exportation of crude oil to the rest of the world for most of its foreign exchange, while at the same time importing everything from car to cotton underwear. Thus, contribution of Nigeria to globalization virtually amount to its position as a consumer nation that supply raw materials to more serious economies around the world. From this vintage point one can see some of the causes of Nigeria's  current predicament i.e. when you consumed more than you produced. This is to me what Buhari government has being battling to correct  through it recent emphasis on reduction in importation and localization of productions. The collapse of crude oil price clearly exposed our precarious balance of payment position and the subsequent deflation in our foreign reserve position. Thus, we have negative balance or rather we operate with a trade deficit. Unlike the  Gulf oil producing nations who have very large savings which they fall on when oil price collapsed, Nigeria as at the time Buhari came to power has no such luxury, but depended on borrowing from other nations in order to balance the deficit in its trade with the rest of the world. As many commentators have observed, it was the spending spree of the PDP years in power that brought us to where we are today. Had it been previous PDP governments have saved for period like the one we found ourselves today, we would not be in the present mess.

    I do not know what happens to Nigeria priorities in term of its foreign relations which previously have Africa as it focus? Do we have its foreign trade equivalence today? Figures from NBS show that Nigeria trade more with countries outside Africa than with African countries; if we can remedy this and focus on Africa it will go along way in changing our current economic fundamentals from consumer nation to a producer nation. Because with our relatively low industrial base we can be able to supply African countries with some of the things they need. If China, which is today the second largest economy in the world, started this way by producing first for it Asian neighbors before others, why not us. Our real interest rate is today higher than the average real interest rate in our main trading partners which means that Nigeria is a net importer of capital from these countries. But, international capital do not move freely as domestic capital does, it takes time and come with stringent conditions attached. Thus, when the Chinese said they would lend Nigeria some ten billion dollars to finance railways and energy infrastructure, you shall remember that there are conditions attached that includes buying the equipments needed for the projects from Chinese manufacturers, using Chinese companies for the project, employing Chinese labour and the interest rate charged on the loan is higher than what Chinese banks charged their domestic borrowers back home in china. In short, China is using its foreign loans to find markets for its exports. Another negative side of our precarious position is that nations that agree to lend us money do so charging premium for the risk of default doing that taking into consideration our international credit rating as provided by rating agencies such as S&P, Fitch and others.

    With current high domestic interest rate in Nigeria, it is difficult for any  domestic investor to borrow and invest profitably without some assistance from the federal government in, say, imposing higher tariffs on imported commodities from abroad that compete with locally produced goods. But, this also come with its negative side effect in term of higher inflation; thus, more worries for domestic consumers of the same commodities who are used to cheaper alternatives from China and other low cost countries. Another incentive for local producers is where government reduce the amount of tax paid by certain industries that are considered strategic in our economy. Specifically, tariff policy should be used by the Buhari government to attract foreign producers into Nigeria in order to establish local production plants to replace those being imported. Nigeria has failed to take advantage of it abundant cheap labour and lunch itself as Africa's cheap labour alternative to Asian producers, but instead continue to depend on oil which is not sustainable, more especially with increased agitations from oil producing states in the Niger Delta. Everywhere around the world, oil producing nations from Saudi Arabia to Russia have come to the conclusion that their future do not depend on oil.This explain Saudi authorities current change of direction through emphasis industrialization, tourism, and service industries. In this kind of atmosphere such as we are in here in Nigeria, the best thing for the government to do is to put things in place for possible attraction of foreign investors in order to bridge the gap created by low investment in the domestic economy. But, central in that arrangement is getting our foreign exchange right first, which as we are now the foreign exchange position is not in a good shape to perform that function. No foreign investor invest his money where he is not certain about the country's foreign exchange regime.

To be continued...