​DEALING WITH THE CHALLENGE OF FOREIGN EXCHANGE RATE: AN ALTERNATIVE DEVELOPMENT STRATEGY FOR DEVELOPING NATIONS LIKE NIGERIA.

​DEALING WITH THE CHALLENGE OF FOREIGN EXCHANGE RATE: AN ALTERNATIVE DEVELOPMENT STRATEGY FOR DEVELOPING NATIONS LIKE NIGERIA.

Recently I read about the Zimbabwean Dollar, there is in print The $100 trillion Zimbabwean dollar banknote, with the Zimbabwean Dollar Worthing only USD $1 = 30,000.00 ZD. I couldn’t stop wondering what must have led to that HYPERINFLATION!
Nigerian financial institutions CBN, particularly must learn from the U.S Federal Reserve way. The US Dollar $ hegemony did not result naturally someone must’ve acted…

It wouldn’t be a catastrophic experience with Nigeria if something is not done by the right people.

For instance, the following impacts of the CBN’s extremely restrictive foreign exchange policy is a concern as raised by: #Proshare

• A significant reduction in manufacturing output given that many of the products on the list of the 41 items with forex allocation restrictions are intermediate goods, which are critical inputs to several manufactured products;
• Lower profitability and higher production and operating costs;
• Higher crdevelopment.lts with foreign suppliers due to the lack of forex to settle obligations;
• Increased inflationary pressures;
• Higher unemployment due to the closure of several manufacturing companies; and
• Negative perceptions of the country as an investment destination.
What the Nigerian government is trying to do is to pursue an import substitution strategy/policy. This was widely advocated by Third World Writers (Dependency school of thought) import substitution industrialization, the idea behind ISI is that countries that have been reliant on importing products (usually by more economically developed Global North countries) will instead decide to focus on their own production of products that they formally imported. This will not only make these countries less reliant on outside states’ finished products, but the goal is for them to also build their economy through industrialization.

They are policies that attempt to reduce foreign dependency of a country’s economy through local production of food and industrial products. Import substitution policies advocate replacing imports with domestic production. It is based on the premise that a country should attempt to reduce its foreign dependency through local production of goods, mainly industrial products. Many Latin American countries implemented import substitution policies with the intention of becoming more self-sufficient and less vulnerable to adverse terms of trade.
Import substitution industrialization is “measured” by a change in the ratio of imports to the total availability (imports plus domestic output) of a single product or category of products. If this ratio falls over time, then import substitution is said to take place in that particular sector” (Bruton, 1989).
While there are arguments for the benefits of import substitution industrialization, there have also been criticisms related to state-adopted ISI policies. For example, one of the biggest critiques is that with ISI, the state often nationalizes companies, and then protects them from the international markets. While this can be seen as a positive as it pertains to allowing those companies to grow and develop, one drawback is that “import substitution industries create inefficient and obsolete products as they are not exposed to international competition” (Sanderatne, 2011). With governments protecting domestic products, their willingness, or need to ensure a top quality product are not necessarily ensured, given that they no longer have to keep on an even playing field. By being protected with high import tariffs into the country, local products will have an easier time being sold, even though the same products might be inferior to international products.
Thus, government authorities restrict imports to certain essential goods while the currency is devalued to make imports more expensive and exports attractive. The economy faces budget deficits due to government spending on industrial investments outpacing its revenue.

More money is printed to cover the budget deficit, thereby stoking inflation, making domestic goods more expensive and reducing exports further.

One example is India’s import substitution strategy between the 1950s and 1980s. The Indian authorities were pessimistic of the country’s ability to boost its export earnings and decided to embark on an import substitution policy.2 It implemented a range of import bans, quotas, high customs duties (sometimes as high as 200%), and harsh foreign exchange restrictions.

These protectionist policies led to a decline in India’s share of world export markets from 2% in the early 1950s to 0.53% 40 years later due to loss of export opportunities. India also faced balance of payment problems due to the growth of its import substituting industries, which required large quantities of imported raw materials, machinery and capital goods.

Another consequence of import substitution was the creation of inefficient and obsolete products that could not compete in the international market.

There were also instances when import substitution worked well in a country. Sri Lanka’s agricultural sector recorded increased production due to import substitution policies.

Protectionist policies led to the increase in production of rice and several food crops . However, it is important to note that import substitution sup-ported by input subsidies, effective marketing plans, guaranteed prices and research. 

These policies become viable if it is complemented with government support and adequate infra-structural investments.

Import Substitution in Nigeria: Import substitution is not new in Nigeria as several past administrations have attempted various import substitution strategies. Some of these include the 1972 Indigenization Decree, which led to the development of the petrochemical plants, the iron, steel, textile, breweries, agriculture and cottage industries, and the establishment of assembly plants that used imported processed materials in the automobile and cement industries.

Though these at-tempts met some degree of success, it is mainly the cement industry that has been able to fully actualize the benefits of import substitution. Nigerian cement companies not only meet local demand for cement, they also export cement to neighbouring African countries.

In 2012, the Jonathan Administration introduced the Nigeria Industrial Revolution Plan (NIRP) in order to enhance local production of goods that were imported as well as chart a comprehensive course for turning Nigeria from a country that only exports raw materials (crude oil) to one that has a solid manufacturing base.

The current Buhari Administration has repeatedly stated its intention to revolutionize agriculture, manufacturing and overall infrastructure. The decision by the current administration to implement this highly comprehensive and strategic NIRP, developed by the past administration, should help reposition the country’s manufacturing industry in the medium term.

The case for import substitution is strong given data from the National Bureau of Statistics (NBS). In 2015, Nigeria spent approximately N1.6 trillion on importing “boiler, machinery, appliances”, N1.3 trillion on “mineral products” and over N600 billion on “vehicles, aircrafts and associated parts”. Spending such huge amounts to import has led to a dearth in local manufacturing and a steep decline in the foreign exchange earnings conserved.

Though import substitution has the benefit of increasing domestic employment, enhancing resilience against global shocks, conserving foreign exchange and protecting domestic infant industries, it is not without its drawbacks.
Nigeria’s protectionist and import substitution strategy of import bans, quotas, and the restriction of foreign exchange allocation to the importation of select items are reminiscent of India’s import substitution blueprint. The blanket policy approach of banning or restricting the importation of a wide range of intermediate goods and finished products without ascertaining the feasibility of producing such items has led to increased production costs and rising inflation.

Given the need for Nigeria to reduce its over reliance on imports and improve its global trade competitiveness, it is imperative for the country to have a feasible plan to lower its import content and develop its export potential.
Despite the merits of import substitution and protectionism of local industries, choosing such an economic approach underscores a lack of clear economic vision. The current import substitution strategy in Nigeria seems to be borne out of fear and capricious thinking rather than clear economic rationalization. For instance, the CBN’s shutting official access to forex for the importation of selected items uses import substitution as a smokescreen for the real exchange rate issue of currency misalignment and forex scarcity facing the country.
In addition, rather than have a blanket policy towards import substitution and trade controls, a case by case approach that limits the importation of goods based on a comparative advantage analysis should be used. In essence, a temporary import substitution for select commodities in which Nigeria has potential comparative advantage should be pursued.

The country should also have an export-oriented economic vision to spur growth and development while also reducing dependence on imports. Countries such as Japan, South Korea and China that have used an export promotion approach attained a fast rate of economic growth despite beginning from a state of underdevelopment. This outward-looking strategy to development has led to growth not just in primary products and raw materials segment, but also in manufacturing.

Additionally, incentives and governmental support are required for successful reduction in import content and export development. The success in the development of the cement industry to its cur-rent state, where it is dominated by local cement manufacturers that also export, can be replicated in other sectors.

This is especially necessary in agriculture where government can provide subsidized financing, inputs and machinery. There could also be incentives to attract foreign investors as they respond positively to favourable trade and forex policies. It is critical to make the business environment attractive to foreign investors so that they can bring their capital, technology, managerial and technical experience to the country.

A combination of temporary selective protectionist restrictions, innovation, governmental support, human capital development and an effective export-driven master plan is required to catalyze Nigeria’s economic and industrial development. This will save Nigeria from the claws of import dependency.
Pat Utomi argued, We need more education of the people to understand these things and good representatives from the government side are needed.

“The political parties have an important role to play. They have failed in their duties to educate Nigerians on policy direction, on basic discipline for achieving sustainable development. 
Utomi challenged the nation’s leadership to urgently embrace PPP for the interest and development.

It is important to heed to all calls as it will afford government the opportunity and knowledge needed for better decisions making.

Published by

MSN

Nungkop Mishael S. (Peace Ambassador) was born in Jos, Plateau State 1986, He is from Pankshin LGA, From the Fier peoples group. Attended ECWA Transfered Primary School, Government Secondary School McAllen, and ABU pivotal Grade II Teachers College at the Jos Center. Taught in various schools for the period of 6 years as a Class Teacher before attending the Plateau State University Bokkos, graduated with a Bachelor's Degree (B.Sc) Political Science in 2014. Participated in the “Make We Talk” Programme One (1) Year Peer Facilitator/Educators and Project Management Training of the Society for Family Health (SFH) and Action Aid International, Nigeria in the year 2005. Also attended a Leadership Training Course (Course SH978) March 2016. At the Citizenship and Leadership Training Centre (Mountain School) Where Hills Jos. Participated in the Institute of Governance and Social Research (IGSR) Peace in Jos Project Early Warning Reporting and Response System Training, May 2016. Founder/C.E.O Spectroom Political & Social Advisory Consultancy, His. Business Manager @Max-Ray Communication and Computers School (MRCCS) 2007 – Date. Graphic Editor @WeJosRock™ Currently the Vice President and Project Manager of the Plateau Youth Peace Ambassadors Network (PYPAN) Camp 7, Course SH978, March 2016 to date. Worked with the Institute of Governance and Social Research (IGSR) – as a Research Assistant, Monitoring & Evaluation Task Force, of the Peace in Jos Project. May to July 2016. Interest: Teaching, Writing, graphics and Books too. Loves political & Social analysis. Very easy to get along with, enthusiastic, friendly. Enjoys public speaking, other passions and aspirations include Political journalism, photography, Fashion stylist...

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s