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9. Nigeria

Introduction
Textiles
Brewing
Food and beverages
Conclusions
Appendix: the incidence of leasing in Nigeria
Notes

Oluremi Ogun

Introduction

This report focuses on Nigeria, as a case study within the context of an Africa-wide analysis of new technologies and export-oriented growth. The introductory section provides information on the structural composition of the economy, the composition and destination of exports. the relationship between the economic environment and industrial policies and export incentives and institutions. This is followed by three sections giving the results of a survey of three major manufacturing sub-sectors which engage in exporting: textiles, brewing, and food and beverages.

Structure of the economy

Before the oil boom of the 1970s, the Nigerian economy could be described as predominantly agrarian, with agriculture accounting for an average of over 60 per cent of its national output between 1950 and 1965. The oil boom transformed the economy drastically: by 1985 agriculture was 26 per cent of GDP, while oil and mining, which had contributed only about 1 per cent of GDP in 1960, accounted for about 20 per cent. The detailed picture of the transformation which occurred in this period can be gauged from Table 9.1. In brief, manufacturing has experienced rather sluggish growth since around 1970, while infra-structure and services appear to have experienced persistent growth interrupted only by the economic recession of the 1980s. Another marked trend is the general improvement in agriculture's share of GDP since 1985, standing at about 40 per cent in 1990. Over the same period, oil and mining fell to about 14 per cent of GDP, while infrastructure and services appear to stabilize at lower levels of about 9 per cent and 28 per cent, respectively, between 1987 and 1990.

Table 9.1 Distribution of gross domestic product in Nigeria for selected years (%)

Source: Central Bank of Nigeria. Annual Report and Statement of Accounts, various issues
Note * The naira value of GDP since 1987 reflects a significant policy shift' with the adoption of an extensive liberalization policy.

Except for the 1980s, when the economy experienced zero average growth, the general growth in real output has been impressive, averaging 6 per cent and 5 per cent respectively in the 1960s and 1970s. Oil and mining grew the fastest between 1960 and 1990, at an average rate of 11 per cent, with manufacturing averaging about 6 per cent, agriculture and services about 3 per cent and infrastructure at 0.2 per cent. The oil boom of the 1970s tremendously influenced the growth of the oil sector, which achieved an unprecedented growth rate of about 47 per cent, at a time when agriculture was contracting by about 2 per cent annually.

Composition and destination of exports

Nigeria's exports have always been mostly unprocessed raw materials but their composition has by no means remained unaltered. As can be seen from Table 9.2, food and inedible crude materials dominated the export structure in the 1950s. Their shares of total exports declined markedly after 196O, and by 1985 their export shares had become virtually insignificant. The export share of animal and vegetable oils and fats followed a similar trend. In contrast, exports of mineral fuels and related materials rose from an insignificant level in the 1950s to dominate the export structure in the 1980s. Manufactured exports grew impressively in the 1960s after a stagnant period in the 1950s, but then fell persistently in the 1970s, recording only slight improvements in the 1980s.

A sharper picture of these changes is revealed by Table 9.3, which classifies exports according to economic sectors. Agriculture's share of total exports declined persistently between 1960 and 198O, with a somewhat sluggish recovery thereafter. On the other hand, oil and mining's share of total exports generally increased over the same period. Manufacturing's export share fluctuated widely but declined fairly constantly in the 1970s and the early 1980s.

A closer look at the composition of the manufacturing sector, as in Table 9.4, reveals changes over time. For example, manufactured and semi-manufactured agricultural products, principally cocoa butter. cake and powder, groundnut cake (until 1977), cocoa liquor and cocoa kernel explores (both in 1985 and 1986 only), palm kernel explores, oil and pallets (all three, only in 1985 and 1986) dominated the structure of manufactured exports until the late 1980s when a new entry, textiles, temporarily took the lead, after which another new entry' chemicals, took over in the 1990s.

Table 9.2 Exports by commodity groups in selected years

Source: Federal Office of Statistics, Digest of Statistics. various issues
Note: - Negligible amount. * Zero entry.

Table 9.5 shows that the developed countries of the West and Japan bought over 90 per cent of Nigeria's total exports in 1989. The European Community's (now EU's) importance has been falling, and that of the US and the ECOWAS (Economic Community of West African States) countries rising, since the late 1980s.

The economic environment and industrial policies

Two major economic problems confronted Nigeria at the time of independence in 1960. These are (1) the near absence of industrial structures in the economy and (2) a deteriorating balance of payments position which had emerged from the continuous imbalance between the rate of growth of imports and the rate of growth of exports. Nigeria explicitly adopted an import-substitution industrialization strategy in 1961, in line with its economic objectives.¹ The assumption behind this policy appears to have been that import substitution (IS) would reduce the amount of imports necessary to maintain output at any given level and thereby help to conserve foreign exchange. Import substitution was also expected to speed up industrialization as more industrial activities would be performed domestically.

The main instrument employed under the policy was tariff protection variously combined with quantitative restrictions and industrial incentives. Before independence, tariffs had been used mainly as a means of generating revenue. They now became the main instrument for solving the balance of payments problem and protecting domestic industry. Tariff rates were raised substantially on increasing numbers of finished goods, while duties on imported raw materials and capital equipment were reduced (Ogun, 1987).² Import licensing requirements, which were already in place at the time of independence' were used to restrict further the importation of some finished goods. By the end of the 1960s, imports of capital equipment and raw materials constituted over 70 per cent of the country's total imports' as compared to less than 50 per cent in 1960.

As a result' the rate of growth of imports actually fell towards the end of the 1960s. The number of industrial activities performed domestically witnessed an impressive growth. However, one major failing of this industrialization strategy was already becoming evident. It had been hoped that import substitution would reduce the volume of imports' thereby conserving foreign exchange. This, however, did not come to pass. The newly established import substituting industries (ISIs) were making increasing demands on foreign reserves.

Table 9.3 Exports by economic sectors in selected years (%)

Sources: Federal Office of Statistics, Digest of Statistics various issues: Central Bank of Nigeria, Annual Report and Statement of Accounts. various issues; International Financial Statistics, various issues

Table 9.4 Composition of manufactured exports (%)

Source: Central Bank of Nigeria Annual Report and Statement of Accounts. various issues
Note: * Rounding error.

Table 9.5 Total exports by destination, 1980-89 (%)

Source: Nigerian Export-Import Bank, 1991 Annual Report & Statement of Accounts

The problem was compounded by the inefficiency inherent in tariff protection, which made it difficult for domestic industries to acquire the capability needed for competition in foreign markets.

In addition, the exchange rate policy had by the late 1960s become protectionist and by the early 1970s the domestic currency was overvalued. The country twice refused to devalue in tandem with the devaluations of the British pound and the US dollar, to which its currency had been tied.³ These protectionist policies led to an outflow of foreign exchange. As a result, the balance of payments was negative for the greater part of the 1960s.

The main lesson that emerged from the economic policies implemented in this period was the need for an ample supply of foreign exchange in order to prosecute a programme of import substitution successfully. The negative effects of these policies were, however, effectively cushioned by the oil boom that was to commence in 1973.

The primary effect of the boom of 1973-80 was the flow of huge foreign exchange resources (over US$100 billion) into the country. Naturally, the government hoped to quicken the pace of economic development on the one hand and achieve a reasonable degree of economic independence on the other hand. Accordingly, overly ambitious economic programmes. were designed and implemented. An indigenization programme was carried out in 1974 and, together with further phases which were implemented before 1980, it resulted in Nigerians taking over the control of several businesses hitherto controlled by foreigners.

It would appear that the policy-makers overlooked the economic side-effects of the indigenization programme, especially its possible negation of the goal of economic independence. The (ISIs) which had been established were acquiring the capability to manufacture for export, but this development was thwarted by the manpower dislocation caused by the indigenization programme. Several of the newly established activities experienced manpower problems and several of them failed as a result.

The expanded oil exports allowed the government to reduce its reliance on tariff imposition to generate revenue and solve its balance of payments problems. In this period, the principal purpose of tariffs appeared to be the need to protect domestic industries. Even the emergence of a serious balance of payments disequilibrium in 1976 (which persisted till 1978) did not alter this policy. Rather than impose higher tariff rates, the government opted for quantitative restrictions in the form of import licensing and import bans. However, whatever benefits might have resulted from the lower nominal tariff rates of the period were effectively reversed by the gross over-valuation of the currency. Net effective rates of protection for all activities (except those processing imported raw materials) were negative in the period.⁴ Worse still, export-oriented industries were the most adversely affected.

The end of the oil boom around 1980 led to a significant moderation in the economic environment and hence in industrial policy. The basic policy of import substitution was still in place but the extent of use of tariffs and quantitative restrictions was unprecedented. Rather than aiming at industrial growth, the targets were the deepening balance of payments crisis, falling foreign exchange receipts and trade payments problems. The various foreign exchange conservation measures implemented in the period 1982-85 led to several of the industries dependent on imported inputs having to operate considerably below capacity, hence reduced growth and worsening unemployment.

The adoption of the structural adjustment programme (SAP) in 1986 introduced yet another industrial policy regime. The programme represented a fundamental shift in the basic philosophy of economic management at the national level. The SAP was continued in a three-year Economic Consolidation and Expansion Programme (ECEP). Under the new dispensation, export promotion was a major policy focus. And, as a major aim of the new management philosophy was to eliminate, or at least reduce, economic distortions and the bias against traceable goods, intervention has been reduced and import protection lowered. The reforms include the adoption of a largely market-determined exchange rate and the removal or relaxation of quantitative restrictions on many tradable goods. An exchange rate auction market was established in 1986, a period which also witnessed the abolition of the import licensing requirement. In 1987, a preliminary import tariff and excise taxes review led to the establishment of an interim customs tariff and excise tax systems. These efforts created a substantially more liberal trading environment. Exchange rate over-valuation seems to have been checked, import tariffs are generally lower than the country has experienced since independence and, while quantitative restrictions are still in place, their scope has been considerably narrowed.

It is clear from the foregoing that export promotion, as a policy focus in Nigeria, is a relatively recent phenomenon. Hence, most firms operating in the export market have relatively short export histories.

Export incentives and institutions

Export incentives

Following the explicit adoption of export promotion as the industrialization policy in l 986, a significant number of incentives for exports were introduced and incentives already in existence but not operative were reactivated. All are described in the Export Incentives and Miscellaneous Provision Decree No. 18 of 1986. The relevant incentive structures are as outlined below:

• Currency retention scheme: Exporters are allowed to operate special foreign currency domiciliary accounts for export receipts and payments. However, transfers out of the account for whatever purpose are subject to prescribed documentation requirements. The scheme allows for proper monitoring of non-oil export proceeds and easier funding of export-oriented business trips, trade missions, trade fairs, export market research and test marketing. Up to 10 per cent of export proceeds in the case of manufactured goods (5 per cent for primary and semi-processed products) can be readily utilized for such purposes.

• Export licence waiver: No export licence is required for the export of manufactured or processed products. Also, exports have been exempted from tax.

• Export Development Fund (EDF): This is a special fund provided by the government to give financial assistance to exporting companies to cover part of their initial expenses for export promotion activities.

• Export Expansion Grant Fund (EEGF): The fund is to provide cash inducements for exporters who have exported a minimum of N50 000 worth of semi-manufactured or manufactured products. The incentive element lies in the graduation of the grant according to their volume of export sales.

• Duty Draw Back Duty Suspension and Manufacture in Bond Schemes: The Duty Draw Back Scheme provides for the refund of duties on raw materials including packaging and packing materials. The Duty Suspension Scheme provides exemption from duty on such imports. The Manufacture in Bond Scheme allows imported raw materials to be held in a bonded warehouse for export production.

• Export Adjustment Scheme Fund: This serves as a supplementary export subsidy to compensate exporters for:

(a) high costs of production arising from infrastructural deficiencies;

(b) purchasing commodities at prices higher than prevailing world market prices but fixed by government;

(c) other factors beyond the control of the exporter.

• Pioneer status: Any manufacturer who exports at least 50 per cent of annual turnover qualifies for pioneer status and accordingly enjoys generous tax holidays and concessions.

• Tax relief on interest income: Interest accruing from loans granted by hanks for export activities is exempt from tax. With respect to foreign loans, tax exemption on the interest is scaled according to the duration of the loan.

• Export credit guarantee and insurance scheme: This helps Nigerian products compete effectively in the international market and insures genuine exporters against some political and other risks including default in payment. Also, under the scheme, exporters can grant their customers some credit facilities.

• Capital assets depreciation allowances: This is an additional annual capital allowance of 5 per cent on plant and machinery for manufacturing exporters who export at least 50 per cent of their annual turnover, provided that the product has at least 4 per cent local raw material content or 35 per cent value added.

• Rediscounting of short-term bills: This schemes makes provision for exporters of any product to discount their bills of exchange and promissory notes with their banks in order to increase their liquidity and minimize cash flow problems before the realization of export proceeds from the overseas importer. This facility applies to all export products.

In addition to the incentives discussed above, government abolished export licensing in 1987 to remove some of the administrative bottlenecks. An export processing zone was established in 1991 and an export-import bank began operations in the same year.

The incentives, laudable though they may be, do not seem to be totally effective. The reason appears to be the usual bureaucratic and administrative bottlenecks which have tended to delay the implementation of some, while reducing the extent of usage of others. For example' the Manufacture in Bond Scheme did not take off in 1991 as planned although it had been drawn up two years previously. Similarly, the Duty Draw Back Scheme, though it paid about N11 million to about 67 beneficiaries in 1991, is marked by long delays in effecting refunds. The Manufacturers' Association of Nigeria (MAN) has claimed that the scheme has no positive effect on the costing of export products. It appears that the best utilized of the direct incentives is the Export Credit Refinancing and Rediscounting Facility (RRF), under which over N2 billion was disbursed in 1991.

Export institutions

Many institutions had been concerned with export activities in the past. However, the most active are currently the Nigerian Export Promotion Council, the Manufacturers' Export Group and the Nigerian Export-Import Bank:

• The Nigerian Export Promotion Council (NEPC): The NEPC was established in 1976 and formally inaugurated in 1977. Its enabling Act was amended in 1979 and later reorganized into the NEPC Decree of 1988. The Decree was aimed at giving the Council both structural and functional responsibilities for spearheading and sustaining a dynamic export drive and implementing various incentive packages contained in the Export Incentives and Miscellaneous Decree No. 18 of 1986. Essentially, the operations of the Council were restructured to reduce bureaucratic red tape. The activities of the Council in promoting Nigerian exports abroad can be summarized as follows:

(a) It interacts closely with exporters at the level of education and advice. It organizes seminars, conferences and workshops to create awareness of facilities, support services and procedures in the export field.

(b) It helps to expose exporters to international markets through exhibitions and surveys of export market potential and the export markets in communities such as ECOWAS, the EU and countries such as Kenya, Zambia, Zimbabwe and Uganda.

(c) In conjunction with relevant government agencies such as the Central Bank (CBN), the Standard Organization of Nigeria (SON) and the Ministry of Industry, Budget and Planning, it administers facilities such as the Duty Draw Back Scheme, the EDF and the EEGF.

(d) It influences policy through recommendations to the government. Such recommendations are usually informed by the experience and knowledge acquired through interaction with exporters and international markets.

(e) It presently cooperates with the Raw Materials Research and Development Council (RMRDC) to see how the manufacturing sector can process primary products such as cocoa and rubber locally, in order to ensure that they have improved value added on international markets.

The Manufacturers' Export Croup (MEG): MEG is an arm of the MAN and operates purely as a pressure group seeking to influence policy impinging on manufactured exports. Its recommendations (to the government) in this regard usually derive from the experience of its members. Recently, it issued a position paper on export-related issues in which it calls for the abolition of the Export Price Clearance Scheme because it is a disincentive to export growth. It also recommends restructuring the Duty Draw Back Scheme so that it can positively influence exporters' costs. It suggests that, instead of the present practice of refunding the cost of imported inputs to export manufacturers (which invariably takes an unusually long period), the draw back should be treated at each year-end as a tax exemption. In its opinion, this would ensure that exporters push for quick repatriation of proceeds and many more will be encouraged to export through the banking system so as to qualify for this rebate. The refund can then have a positive impact on the costing of the manufactured product, thereby making the product more competitive.

• The Nigerian Export-Import Bank (NEXIM): NEXIM began operation in 1991. Its objective is to provide export credit guarantees and insurance to exporters. With less than two years of operation, it has managed to become the most important and perhaps the most active export institution in the country. As at December 1991 it operates the following schemes and facilities: the RRF, a foreign input facility (FIF), raw materials stocking facility, two reserve facilities and export advisory and education services. Apart from the RRF and FIF, which were carry-overs from the activities of its precursor, the Nigerian Export Credit Guarantee Corporation, the rest were newly introduced in 1991. The Bank appears to have had a successful 1991, as total disbursement under its various facilities were: RRF N 2 billion; FJFN 99 million; Repurchase Facility US$4 million. Total operating profit in 1991 was in the region of N 133 million. Its funds are principally from its shareholders, the Federal Government and the CBN, as well as multilateral agencies such as the African Development Bank.

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