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Import Substitution as Panacea for Current Forex Challenges

A manufacturing plant

At the Nigerian Summit organised by The Economist Magazine to seek solutions to the country’s economic challenges and ease of doing business, key stakeholders among them, foremost industrialist, Aliko Dangote canvass import substitution amidst the nation’s lingering forex challenges, writes Olaseni Durojaiye

Nigeria’s economic challenges, largely caused by the slump in the nation’s earnings from oil which is its mainstay, returned to the front burner again at the 11th edition of the Nigeria Summit, which was put together by the Economist magazine of London. Besides the discussion theme of the two-day conference, “The dawn of a new day?”, which aptly captured the mood of many operators in the economy, the line up of high profile speakers including Vice President Yemi Osinbajo under whose charge is the economy, ministers and captains of industry like Aliko Dangote and Herbert Wigwe foretold the importance that the organisers attached to the survival of the nation’s economy.

Expectedly, discussants were not short of ideas and suggestions on how to recover the economy from its present unimpressive state. However, besides the familiar calls for improved access to electricity and deregulation of the foreign exchange market, stakeholders were in agreement on the need to diversify the economy and the need to give import substitution a serious consideration.

A Case for Import Substitution

The organised private sector has repeatedly lamented the effect of the current forex challenge on the real sector as many players in the sector insist that manufacturing concerns are daily closing shops due to inability to procure foreign exchange, particularly the green back to purchase raw materials needed for production. Not unexpected, the forex issue has led to calls for a deregulation of the forex market and, whether to devalue the naira or not.

While complaints from the real sector continue, capital market operators also lent their voices to the call to deregulate the currency market. Speaking to THISDAY in an interview, Chief Executive officer of Heritage Capital Markets Limited, Chidi Ajaegbu, had stated: “The continued hold on the value of the naira in the forex market, particularly against the greenback, in my view, is unsustainable; it is doing a terrible harm to foreign direct investment to this country. It is actually a policy that must be revisited immediately,” he stated, adding that “because the capital market is made up largely of foreign investors, they are exiting the market.”

While acknowledging the tough times economically, key speakers at the Nigeria Summit insist that the challenges of the time require that the country embraces import substitution and the need to embrace export business especially with the duty free nature of trade between ECOWAS countries.

Speaking at the summit, Executive Chairman of Dangote Group, Aliko Dangote, noted that with the business model being practiced by his companies, the group is poised to play key role in the country’s match towards economic recovery.

“We are looking at a situation that by 2020, we will be the one selling FX to the CBN. Our projects are mainly import substitution. We are working to be self sufficient to grow about 1 million tonnes of rice in the next five years.

“Our gas project would have our gas pipelines on the seabed. The output should be able to provide about 12, 000 mega watts of power. We see a lot of transformation when we are done with most of our projects in 2018,” he stated.

Continuing, he harped on the need to diversify and embrace export saying “We have 15 countries in the ECOWAS country that are duty free. The export market is big and profitable if you have the capacity. Players in the manufacturing sector must be encouraged to export if they have the capacity. We must also meet local consumption.

Insisting that the fall in oil price is not all negative, he argued that the situation present an opportunity for government to diversify the economy away from the age -long overreliance on oil and shift attention to other sector.

Group Managing Director of Access Bank Plc, Herbert Wigwe, aligned with the call even as he called for a deregulation of the forex market while lamenting the plight of some players in the manufacturing sector.

Incidentally, the call to diversify also found apostles in some of the governors who attended the forum as all three of them played up agriculture as a viable sector worth a look-in in the quest to diversify away from oil.

Making a case for import substitution, Wigwe noted that a lot of manufacturers were facing hard times due to their inability to access forex to buy raw materials adding that there is a need to explore import substitution while efforts are being made to boost forex supply in the country.

“We have a lot of manufacturers who have to rely on forex to buy their raw materials but who are going through tough times. However, are there opportunities? I believe there are. I think it is time for us to move towards import substitution. But I think we need to support the supply side of forex and liberalise the market.

“Even for those who have to source their raw materials locally, there is a value chain effect. If the entire value chain in a production process is not sorted out, there is a problem. So access to foreign currencies for raw materials is important. However, it is important that people start looking at how to use local raw materials to produce,” Wigwe argued.

Buttressing Wigwe, Dangote who is regular speaker at similar high profile economic summits including the World Economic Summit Africa maintained that, “there are some areas where we are facing serious challenges and there are some where we are not. It depends on your business model. If your business model is to import 100 per cent, definitely you will be facing challenges because the inflow of foreign exchange is not where it was a year and half ago.”

Meanwhile, a Port Harcourt, Rivers State based economist, Ezeh Wordu, argued for import substitution policy supported with policy that supports non-oil export. While arguing that import substitution may reduce demand for foreign exchange by local manufacturers, he stated that “I cannot see how import substitution will directly impact our foreign reserve” adding that the need to fix the country’s forex challenges has reinforced the need to rev up the country’s exports.

Wordu insisted that, “we need to look the way of export and increase our capacity to export. Export expansion is important; it is a necessary condition for sustained growth and development over any length of time. Exports are viewed as an “engine of growth;” increases in exports stimulate domestic investment through an accelerator effect. The increase in investment has the consequence of increasing the internal demand while at the same time expanding productive capacity and productivity. If wages are assumed to increase at the same rate in other trading countries, then the rise in productivity will result in relative price stability and an improvement in international competitiveness. So long as exports keep increasing there will be a self-reinforcing tendency for a country to maintain its competitive position and to continue its economic growth. Exports then make possible the benefits from trade, pay for the imports required in development both directly and indirectly. Many Latin American countries adopted import substitution policies from the 1930s until around the 1980s. Some Asian countries, especially India and Sri Lanka, pursued such policies from the 1950s.” he concluded.

This post was syndicated from THISDAYLIVE. Click here to read the full text on the original website.

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