Economic diversification: From raw materials to processed goods

The president of the Africa Development Bank (AfDB), Mr. Akinwumi Adesina, at the recent Mid-Term Ministerial Performance Review Retreat of the President Muhammadu Buhari administration, which held in October 2021, presented what he proposed as a roadmap for Nigeria’s economic recovery.

Economic diversification: From raw materials to processed goods

Among the many recommendations, the need for the Federal Government to significantly boost productivity and revenues from its non-oil sector, with appropriate fiscal and macroeconomic policies that will enhance international competitiveness was particularly instructive.

He stated further that “Significant support should be directed toward boosting industrial manufacturing capacities.” Nigeria, he opined, should also move rapidly to the top of selected value chains, such as automobiles, computers and electronics, textile and garments, and food manufacturing, transport, and logistics.

According to data from the Nigerian Export Promotion Council (NEPC), some of Nigeria’s major non-oil export products include cocoa beans, sesame seeds, cigarettes, cashew nuts, finished leather, soya bean meal, cocoa butter, among others.

A critical look at the above list, which aligns with similar data from the National Bureau of Statistics (NBS) and the Central Bank of Nigeria (CBN), shows that Nigeria’s major non oil exports comprise mostly of raw agricultural produce.

In the last three years, only one manufacturer and exporter of finished goods has consistently remained among the top three non-oil exporters in Nigeria. This company, British American Tobacco (BAT) Nigeria, manufactures and exports cigarettes from Nigeria to Liberia, Guinea, Ghana, Côte d’Ivoire, Niger Republic and other countries in the West Africa Sub Region.

Consequently, this company has been chosen as a reference company to demonstrate the benefits that accrue to a country when it establishes manufacturing capacities for the export of finished goods.

An assessment of the additional benefits that have accrued to Nigeria on account of BAT's investments in a manufacturing plant in Nigeria, as elucidated herewith, evidently substantiates the position that the success of Nigeria's economic diversification and growth are pivoted on integration to the production and export of finished goods.

The investment in manufacturing for the production and export of finished goods drives economic development and opens up a nation’s economy in several ways. Such investment is also a major driver of foreign direct investment (FDI) and also engenders the activation of idle local capital into more productive use.

Our reference company, BAT Nigeria, has fetched Nigeria about $185 million to date (including the initial investment of $150m in 2001) by the building and expansion a state-of-the-art-factory in Ibadan.

More so, the establishment of manufacturing/processing facilities attracts further investments and capital inflows as other industries are often established at different stages of the value chain to provide inputs to the manufacturer.

In the case of BAT’s factory in Ibadan, this has attracted further FDI of over $30million through A.R Packaging Nigeria Limited (formerly NAMPAK Cartons), established essentially to provide packaging services to BAT. This company too has created new jobs and built capacities on its own right, for the benefit of Nigeria.

The job creation opportunities that result from the establishment of value adding industries are immense. These occur simultaneously with development of new competencies and capacities among citizens of the polity including both technical and managerial skills

Expansion of the value chain also means that indirect jobs are also created when a country transitions to the production of finished goods. BATN has so far created over 350,000 direct and indirect jobs, since the establishment of its manufacturing plant and subsequent upgrade to the manufacturing hub for the West Africa Sub Region.

The contrast is stark when it is imagined that only the raw material inputs were aggregated from local farmers and then exported by a trading company.

Governments earn revenues through various taxes, duties and levies that corporations pay into their coffers. But the amounts paid are in turn dependent on the revenues that accrue to the taxpaying entities. Companies that produce value added products earn far higher revenues than those at the primary raw material stages.

Such companies are able to earn a premium for their expertise along with earnings that accrue from processing operations. Therefore, a country’s earnings from taxes and levies are bolstered by the level of industrialization and the volume of value added products it produces and very importantly, exports.

Our reference company demonstrates this as Nigeria has earned over $900million in direct and indirect taxes from BATN since the company began manufacturing and exporting finished goods from Nigeria. The earnings would be just a minute fraction of this if BATN exported only tobacco leaves.

Industrialised economies are also able to compete better in international trade. A country like Nigeria in dire need of foreign exchange earnings will only achieve it through improved returns from repatriated export earnings.

Our reference company again proves this as on the average, BAT repatriates over $110 million yearly to Nigeria from exports of its products to the West African sub-region.

This alludes to how much more Nigeria’s foreign exchange earnings would be if the major non-oil exports such as cash crops were processed into finished goods before export. It also speaks to how many more jobs would be created and the technical competences that will be bolstered in the process.

The crux of this discussion is to show that when value is added to primary products before export, the benefits to the nation increase geometrically. However, it must also be noted that the challenges to manufacturers are legion and stifling.

From inadequate power supply, lack of infrastructure (roads, rail, etc) to suboptimal port services, the list is endless. They drive up the costs of exports and make them less competitive. The Federal Government needs do a lot more in the quest to improve the ease of doing business in Nigeria. An enabling business environment will make the country a haven for investors and manufacturing businesses.

The Federal Government though, has previously set up initiatives to accelerate Nigeria’s export performance. A prime example is the Export Expansion Grant, (EEG), which is managed by the Nigerian Export Promotion Council (NEPC).

The EEG aims to support active exporters in expanding their international businesses. It is meant to incentivise Nigerian exporters to expand export volume, value and improve global competitiveness of Nigerian products.

While successes were recorded initially with its implementation, the Chairman, Non-oil Export Group, (NEG), Ede Dafinone, in a public forum, last year, lamented that government had not funded the EEG for the past seven years.

The Federal Government also, recently, set up a N50bn Export Expansion Facility Programme (EEFP), which is a major component of the government’s economic sustainability plan. The EEFP aims to drive economic growth through exports.

The EEFP focuses on cushioning the effects of the COVID-19 pandemic on non-oil export businesses thereby safeguarding jobs and creating new jobs, as well as accelerating growth of non-oil sector to effectively diversify the Nigerian economy. The EEFP is also being implemented by the NEPC.

A reactivation of the EEG would facilitate the acceleration of Nigeria’s export performance. Effective implementation of the EEFP will do likewise. The EEFP should not suffer the problems that dogged the EEG; its implementation should be more efficient; and very importantly, pay critical attention to manufacturers and exporters of finished products.

The urgency for Nigeria to expand the exports of finished products cannot be over emphasized. Every effort to increase the volumes, quality and competitiveness of the country’s finished goods exports should be given the significance it deserves and pursued with vigour and determination.

Elujoba is of the Centre for the Promotion of Enterprise and Business Best Practices

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