Achieving a Stouter Nigerian Economy with 30% Export Value Addition

The National Bureau of Statistics (NBS) report shows that processed goods imports accounted for nearly 50% of total merchandised imports in 2024, indicating our local manufacturers’ inability to meet local demand for processed products. According to the Manufacturers Association of Nigeria (MAN), over 700 manufacturing firms shut down in 2023, with an additional 300 facing distress due to economic shocks. Manufacturers contribution to the Gross Domestic Product (GDP) averaged a mere 12% over the last decade, with capacity utilization hovering between 50% and 55% over the same period. The sector’s contribution also fell from 16.04% in the fourth quarter of 2023 to 12.68% in the second quarter of 2024, representing a 20.95% decline over six months. In the second quarter of 2024, the manufacturing sector’s capacity utilization was around 56.70%, a slight increase from the previous quarter but still far below historical highs. This performance starkly contrasts with the 1970s, when capacity utilization was between 70-80%.

Nigeria’s manufacturing sector performance is particularly underwhelming compared to other African economies. For instance, Egypt’s manufacturing capacity utilization is 70.5%, and South Africa’s is 78.2%, highlighting the significant gap between Nigeria and its peers. The average annual growth rate of the manufacturing sector in Nigeria has been weak, averaging 3.4% in 2021 and 2.5% in 2022, compared to countries like China, Japan, Malaysia, and Singapore, which have experienced significant growth through their manufactured product exports.

The Raw Materials Research and Development Council (RMRDC) is working with the National Assembly on a legislative bill to protect and develop Nigeria’s manufacturing and processing industries. This bill proposes mandatory value addition of at least 30% to all raw materials before export and prohibits importing raw materials available in Nigeria in abundance. The bill has passed its first reading at the National Assembly and is poised to have far-reaching effects on the Nigerian Economy.

Nigeria’s non-oil exports primarily comprise agricultural raw materials, predominately among the top ten. However, these raw materials are exported with little or no value addition, contributing to low productivity and significant job losses in the country. Raw materials dominate the structure of non-oil exports, with manufactured goods accounting for less than 20% of total merchandise exports in the first quarter of 2024. In contrast, manufactured goods imported into the country accounted for nearly 50% of total merchandise imports during the same period.

Nigeria’s manufacturing sector heavily depends on raw materials and finished goods imports. The import dependency has exacerbated the sector’s challenges, particularly with the current unfavourable exchange rate and high inflation. The cost of imported raw materials and machinery has increased significantly, leading to higher borrowing costs and escalating production costs for manufacturers. The country’s reliance on imports has also led to a substantial portion of its foreign exchange spent importing raw materials and finished goods. For instance, in the first quarter of 2024, raw materials imported into Nigeria amounted to 11.61% of total imports. The country generally exports cheap raw materials and imports more expensive finished and semi-finished products. This undesirable situation leads to the associated imported inflation and pressure on the Naira. This cycle inextricably results in low productivity, low capacity utilization, and significant job losses.

The proposed bill mandating a 30% value addition to raw materials before export aims to break this cycle by enhancing technology transfer, product innovation, and the production of internationally competitive products. This approach should attract investment into Nigeria’s raw materials value chain, stabilize foreign exchange, create jobs, and ultimately lead to economic growth.

Nigeria could save billions of dollars in foreign exchange by mandating a 30% value addition on the top 10 non-oil exports. Again, applying this policy to all raw materials exported in the first quarter of 2024, the Naira could appreciate by approximately 50% against the US dollar within the first year of implementation. This appreciation should bring the exchange rate from its current level of N1670/$1 to around N835/$1. The policy, therefore, will reduce the high demand for dollars needed for imports of finished and semi-finished goods while increasing the dollar supply by exporting value-added raw materials. If it succeeds, this bill will undeniably help solve Nigeria’s current exchange rate challenges and contribute to the stability of the Naira.

The employment generation potential of the 30% value addition bill is substantial, with projections indicating the creation of approximately 10 million direct and indirect jobs in the agro-processing industries within 5 to 10 years. This job creation will be driven by increased investment in the sector, as the mandatory value-addition requirement will attract domestic and foreign investors. A compelling example is Olam International, a leading agribusiness firm operating in Nigeria since 1989. The company has invested over $1 billion in Nigeria’s agricultural sector, particularly in establishing processing facilities for cashew nuts, sesame seeds, and cocoa. Olam’s operations have created more than 450,000 direct and indirect jobs across its value chain, including 6,000 direct employees and over 444,000 smallholder farmers who supply raw materials to the company’s processing facilities. With the mandatory 30% value addition, we anticipate that hundreds more firms across the raw material processing chain would make significant investments, potentially creating 2 million jobs in the first two years.

The sectoral growth will also be phenomenal. The agricultural sector will benefit from enhanced farm gate prices, improved productivity, and the development of agro-processing clusters. The manufacturing sector will experience increased capacity utilization, technology adoption and innovation, and enhanced competitiveness. The services sector will also grow, with expansion in logistics and distribution, financial services, and technical support services. Additionally, the policy should catalyze foreign direct and domestic investments. With the potential attraction of significant processing companies, Nigeria could see an investment of at least US$5 billion in processing facilities, along with technology transfer opportunities. The policy also expects to stimulate local enterprise development, value chain integration, and infrastructure development.

The policy’s potential impact is substantial from a foreign exchange conservation perspective. In the first quarter of 2024, raw materials imported into Nigeria amounted to N1,467.41 billion. By locally sourcing these raw materials, the Economy could save this import value in foreign exchange. The sugar cane industry provides a compelling case study of the policy’s potential effectiveness. Nigeria imports cane sugar worth N235.85 billion from Brazil despite being able to produce sugar domestically, particularly in the southwest and northeastern geopolitical zones of the country. The government could save significant foreign exchange and stimulate local production by prohibiting such imports.

The domestic production stimulation aspect of the policy opens up significant investment opportunities across various sectors. The bill encourages domestic and foreign investors to explore manufacturing and agricultural processing opportunities by creating a protective environment for local producers. This approach addresses the current low capacity utilization in Nigerian industries.

The policy’s potential for production capacity enhancement extends beyond immediate economic gains. It presents a strategic opportunity for technology transfer and industrial development. By creating a favourable environment for local production, the bill encourages the adoption of modern technologies, improved production techniques, and innovation in manufacturing processes. This approach can help bridge the technological gap that has historically hindering Nigeria’s industrial development. The policy encourages introducing advanced technologies and production methods by compelling local production. International companies looking to enter the Nigerian market will be motivated to establish local production facilities, bringing advanced technologies, management practices, and skills transfer.

Implementation challenges are inevitable in a policy of this magnitude. One of the primary challenges is ensuring compliance among exporters. Given the significant financial implications, there may be resistance from companies that have traditionally exported raw materials without adding value. Successfully addressing this challenge will require the implementation framework to include stringent enforcement measures, such as regular inspections, documentation requirements, and penalties for non-compliance. Additionally, the framework will incentivize companies to comply, such as tax benefits, subsidies, or preferential financing access for those investing in value-added facilities.

Monitoring mechanisms are crucial for the policy’s success. Effective monitoring requires establishing robust systems to track the processing and export of raw materials. Initiatives would include setting up databases to record the quantity and quality of raw materials processed and the export transactions. Regular audits and inspections by regulatory bodies will ensure that companies comply with the 30% value addition requirement. Additionally, the monitoring framework should include mechanisms for reporting and addressing non-compliance, with clear guidelines on enforcement actions. Transparency in monitoring will also build trust among stakeholders and enhance the credibility of the policy.

Stakeholder engagement is a critical component of the implementation framework. The success of the 30% value addition bill depends on the cooperation and active participation of various stakeholders, including exporters, manufacturers, government agencies, and the general public. Engaging stakeholders from the outset is essential to build consensus and garner support for the policy. Public consultations, workshops, and awareness campaigns to educate stakeholders on the benefits and requirements of the policy are desiderata. Creating platforms for ongoing dialogue and feedback will also ensure the effective address of stakeholders’ concerns and that the policy remains adaptable to changing circumstances.

Incentivizing compliance through supporting measures is another crucial aspect of the implementation framework. The government can introduce various incentives to encourage exporters to comply with the 30% value addition requirement. For instance, providing tax exemptions or reduced tariffs for companies investing in processing facilities can make the transition more financially viable. Additionally, offering technical assistance and training programs to help companies upgrade their facilities and adopt new technologies can enhance their capacity to comply with the policy. Financial support, such as low-interest loans or grants, can also be provided to small and medium-sized enterprises (SMEs) to enable them to invest in value addition activities.

The implementation framework must also address the potential impact on the informal sector. Many small-scale exporters may be unable to comply with the 30% value addition requirement. The framework should include provisions to support these exporters, such as providing access to shared processing facilities or offering technical and financial assistance. Ensuring the policy does not disproportionately affect small-scale exporters is crucial for maintaining inclusivity and preventing potential social unrest.