The manufacturing sector in Nigeria accounts for 5% of GDP, which is relatively tiny compared with agriculture (35%) and the oil and gas sector (40%). This marks Nigeria out as one the least industrialised countries in sub-Saharan African, and is a severe structural weakness of the economy.
The government has made developing the manufacturing sector a priority as way to diversify the economy away from oil dependence, to create employment and to build up the capacity to efficiently add value to the abundant natural resources. Targets for the sector are to increase annual growth to at least 7% a year, to increase capacity utilisation to about 70% by 2007, and to increase the private sector’s share of investment in the sector to 70% by 2007.
With 130 million consumers and millions more in neighbouring countries, Nigeria is an attention-grabbing market. Private consumption expenditure is growing by 15%-20% per year.
The constraining factors that historically have impeded manufacturing sector growth are well-known: insecurity, political instability, market-distorting state-owned monopolies, weak infrastructure, unavailability of finance, excessive red tape and rampant corruption.
By 1999, when President Olusegun Obasanjo was first elected to office, capacity utilisation was down to just 29%. The return to a semblance of sensible, private-sector-friendly policies is reflected in capacity utilisation bouncing back to about 50%.
Specific measures to boost investment in the manufacturing sector include power sector reform to improve the reliability of the electricity supply, port concessions to private sector operators, and improvements to road and rail infrastructure. The government also intends to embark on customs reform in the near future, another blockage in the system.
However, despite the government’s eagerness to create a business-friendly environment in the manufacturing sector, investors still have to contend with the legacy of past misguided polices. The IMF describes Nigeria’s trade policy as “one of the most restrictive” in the world. The average tariff across all imports is almost 30%; in practice the tariff schedule has 19 bands ranging from 2.5% to 150%.
Nigeria also has a long list of import bans and added to the list in 2001, 2003 and 2004. In January 2004, bans were introduced on most types of textiles, men’s footwear, plastic and leather bags, soaps and detergents, furniture, bicycles, flowers (plastic and fresh), fresh fruit, wheelbarrows, various meat products, toothpaste, pencils, and corrugated boards and cartons.
Most import bans were introduced to trigger import substitution or to protect existing domestic manufacturing interests. In practice, the ban raises input costs for downstream producers. Exemptions are provided on a case-by-case basis, and some import bans are partially lifted from time to time – all of which increases confusion among investors.
Finance minister Ngozi Okonjo-Iweala concedes that the system is cumbersome and inefficient but adds that the obligation to achieve tariff harmonisation within the Economic Community of West African States bloc will compel trade reform, beginning this October. She envisages a much simpler, five-band scheme, at a lower average tariff, and she anticipates import bans gradually being phased out from January 2007.
The government has tried to offset the higher input costs that manufacturers face by implementing a number of counteracting export promotion policies. These include:
- the establishment of free trade zones;
- an export-expansion grant scheme that entitles eligible firms to a 4% grant on their export receipts;
- a duty-drawback scheme providing a 60% refund to qualified importers;
- an export-adjustment fund scheme compensating companies for the cost disadvantages of infrastructure deficiencies and other factors beyond the companies’ control;
- an export development fund providing financial assistance to private sector export companies to cover part of their initial expenses related to export promotion.
The manufactures-in-bond scheme allows for the duty-free import of raw materials – whether prohibited or not – for the production of export goods by companies posting bonds to guarantee the payment of duties in case the exports do not materialise.
Manufacturers are also entitled to other investment incentive schemes.
Navigating through the maze of polices, regulations and laws can be daunting to investors. However, in its quest to attract foreign investment, the government does go to great lengths to smooth the way for investors.