Most African countries, and even some non-African countries currently have a significant level of forex crisis. In an increasingly globalised world typified by Netflix, Starlinks, Elite Western University post-graduate education and global grocery brands, it appears that the rate at which citizens of developing countries demand Forex is much higher than the rate at which these countries earn it.
Over the past 40 years, Nigeria’s annual population growth rate has been about 2.4-2.8%; between 1980 and 2023, we’ve added more than 140 Million persons with a taste for global commodities. Within the same period, the rate of oil production has gone from 752Million barrels to 748 Million in 2014 (NBS Data), in 2022, it will be 502Million barrels (NUPRC, 2023); with attending cycles of boom and bursts.
Considering that oil still accounts for Nigeria’s major forex revenue, one can clearly see that the Forex earning capacity per capita has been on a steady decline while global forex demand (not supply) per capita is probably rising faster; the only significant buffer has been diaspora remittance and FDIs; however, FDIs do need to be eventually repatriated with profits.
Considering that oil still accounts for Nigeria’s major forex revenue, one can clearly see that the Forex earning capacity per capita has been on a steady decline while global forex demand (not supply) per capita is probably rising faster; the only significant buffer has been diaspora remittance and FDIs; however, FDIs do need to be eventually repatriated with profits.
Therefore, the fact that the Naira has depreciated by an average of 9.9% yearly between 2003 and 2023 is not a surprise. What is surprising is that it appears that we’re yet to clearly see the nature of aggressiveness required to beat the odds.
Other Elements of the Challenge
It takes significant time and learning curves for a new local industry to navigate inefficient production systems and achieve comparable global competitiveness.
Another compounding factor is the status of currencies in themselves. Even though they do not have intrinsic worth, they do not all behave like this. CBN can print Naira just the same way the United States of America and the European Union can print their currencies; the difference is that the demand for these currencies is not the same. Developed countries (by virtue of superior product competitiveness) have a significant monetary policy advantage.
For example, if China or the USA printed more currencies to support a thriving local industry that exports manufactured products, it would not cause as much inflation as that of Nigeria with minimal global products. Unlike developed countries, developing countries often need to get new capital injections in forex (debts and FDI) that are guaranteed mostly by the future earnings of their already poorly situated commodity markets (extractives). Worse, when these investments are poorly managed, you have just the forex depletion to show for it.
The Urgent Path
Nigeria needs to develop globally competitive industries or the situation will progressively worsen, and they need to do it fast. We have to figure out how best to quickly transform local assets (human and material) into globally competitive assets.
Why Market Forces Need Some Help
To get Nigeria’s light manufacturing and agro-processing industries to work, for example, the simple laws of demand and supply, and of price discovery will be insufficient, provided that constraints like internal state of inefficiencies remain. Protectionist policies that demand/compel that such industries work are necessary and then an institutionalization of a market-led mechanism within that protected milieu is required.
The key consideration why this author is convinced of the insufficiency of simple “fair trade” is found not only in the history of the development of nations but also in basic economics. Core local light manufacturing industries like apparel food processing, plastic manufacturing and steel that are needed to drive competitiveness of the local economy require a technological learning curve to match the efficiency levels of competing firms in other nations. Until they become as efficient as their peers, import levies and in-country logistics costs are often insufficient to confer comparative advantage for local producers.
The key question is “How long should we suffer such inefficiencies?” This then should be the task of policymakers, to delineate the industries we would like to focus on and to agree with stakeholders on the number of years that we must all suffer from their inefficiencies till they gain mastery. In other words, protectionism should be phased out gradually and within a carefully determined timeline.
This we could achieve with our rice, cement, automobile, steel, wheat, textile, plastic, furniture, ceramic, electronic and pharmaceutical industries. No doubt, it would be suicidal to go at all of them all at once.
A study of leading economies that have to achieve this, particularly Asian economies and the industries where this has been achieved (India’s pharmaceutical industry, Chinese manufacturing, South Korean smartphone market etc.) indicates that significant sophistication is needed to make this happen and that both protectionism and market forces are required.
Nelson Okwonna is the CEO of Octoville Development Company, a management advisory and development company based in Abuja, Nigeria ([email protected])
