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Saturday, May 6, 2017

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

     Foreign Direct investment (FDI) has played important role in the growth and development of developed and emerging economies of today. US itself could not be where it is today without the contribution of businessmen from Europe during its early history. The same thing goes  with China in the 1980s and 1990 after opening its doors to the world, substantial foreign direct investment came from Chinese residing in Taiwan, Hong Kong, Philippines, Indonesia, Malaysia as well as from Japan and South Korea. Every country has at one time or the other protected certain sectors of it economy from competition abroad. Before now, Nigeria virtually have no any active policy in place to protect it local industries apart from the localisation policies of the 1970s and early 80s. This turn of event become worst after return to democracy in 1999, as elected leaders fear backlash from their citizens for putting protectionist policy that would lead to increase in price and reduction in welfare. While over the last three decades, we have failed to established ourselves as an exporting country; but we have become very good at exporting one commodity, i.e. Labour. It is estimated that there are hundred thousands of Nigerian expatriates working in North America, Europe and Middle East. While the remittances they have been sending home serve as important source of foreign exchange in this period of scarcity of Forex in Nigeria, on the other hand their absence has deprived Nigeria of needed human resources to achieve rapid economic growth and development. This particular issue has been the genesis of now growing market in medicine tourism, foreign education, and capital exportation out of the country that have contributed to deterioration in the value of Naira against world major currencies.

       Our rate of inflation is not sustainable as it erodes gains this government want to achieve in term of encouraging domestic production and exportation. The simple true here is that higher inflation means foreign countries who want to purchase made in Nigeria goods find it expensive relative to that of other countries like China. While  domestic consumers find Nigerian goods expensive compare to those imported from abroad. This is why it is important for Nigeria to be careful in fixing its foreign exchange rate to avoid scenario where it achieves opposite effect of what it intends to achieve. There are empirical evidences that linked higher inflation with depreciating currencies around the world. Hence, CBN shall watch over inflation as at the same time it tries to stabilizes Naira. At this point one is forced to ask the question what happen to our previous priorities of focusing on agro-allied industry as our export base? A simple visit to Bompai, Sharada and Challawa industrial estates in Kano state left one stun. There are hundreds of closed plants in the three locations that (before they stopped production) specialised in production of agro-allied products for Nigeria markets and neighbouring countries. But today they are closed down because they cannot compete with imported commodities that flooded our markets. Like i have made mention before, with our high interest rate, poor roads, lack of power and unfavourable government policies of the last three decades there is no way these industries would have survived. Thus, as Buhari government tries to build roads, power plants, railways and new airports, it must have these industries in mind. Particularly, how current reforms connect to the issue of reviving our manufacturing?

    The point i have been trying to make shall be clear by now. That Nigeria as exporter of primary products, with declining international price relative to final output they are processed into, will continue falling behind those countries who purchase raw materials from her and turned them into finished output. Raw materials, in themselves, constitute small part of total monetary value of inputs into production of  outputs.  At the end, the amount of money Nigeria receives from selling her primary products will be lower than the amount she pays for her imports. under this scenario, Nigeria has no other alternative than to start producing those imported products herself as it is cheaper to produce locally than import, taking into consideration the deterioration in her term of trade i have made mention of earlier. This is how countries like China, South Korea and Brazil moved away from being primary producers to manufacturing power houses with active government support to private sector producers. These countries put local companies first before firms from other countries. In Nigeria, if not of recent, foreign companies were given preferential treatment over their domestic rivals. Look at our West African neighbour Ghana which in recent years was able to attract manufacturers away from Nigeria despite small size  of her domestic market compare with Nigeria. At the heart of the attraction of Ghana to manufacturers over Nigeria is combine impact of business friendly policies, constant power supply, good infrastructures, and political stability. These factors persuaded many foreign firms to move their head offices from Nigeria to Ghana from where they export their finish goods to back to Nigeria. The size of Nigerian market in Africa is enough to give Nigerian government bargaining power over any foreign investor coming to Africa who want to enter Nigeria market. One such condition must be that before any foreign businessman is allowed access into the Nigerian market she/he must establish plants in Nigeria.

Watch out for the concluding part of this series.....