Nigeria’s Import Substitution Policies: Mixed Results

08 July 2016

Import substitution has been a prevailing strategy for spurring economic growth in developing countries since it was first theorized in the 18th century by Alexander Hamilton. By protecting a developing country from cheap imports—for example with production subsidies or import tariffs—domestic industry can be developed and its products gradually introduced to world markets when globally competitive. 

Protectionist measures are not unique to developing nations, of course. In places like Europe and North America, agricultural protectionist policies are highly prevalent and arguably responsible for a major part of the success of many countries’ agricultural sectors. But for developing countries, protectionism under the banner of import substitution becomes doubly important in the discussion of food products, since what’s at stake is not just economic stability but food security as well. 

Nigeria, once agriculturally robust, has since the 1970s become a net food importer as its food production sector failed to keep up with its rapid, petroleum export–fueled economic growth. Also since the 1970s, Nigeria has instituted various import substitution policies in the form of import prohibitions on food products to no effect. However, a new set of initiatives that focus on boosting agricultural productivity from within the sector have shown to be more effective policy tools. The country therefore provides an interesting case study of what works and what doesn’t in building a developing country’s food production sector.

Nigeria’s agricultural past

Nigeria’s current need to import agricultural products is relatively new in the scope of the country’s history. As a colony of the British Empire in the early 20th century, Nigeria’s main function was to supply raw materials to the United Kingdom for processing as well as to provide a destination for British manufactured products. In the colonial era, cocoa, palm products, and groundnuts comprised 70 percent of all exports coming out Nigeria. Even after independence in 1960, Nigeria’s predominance as an agricultural powerhouse continued. Between 1962 and 1968, export crops were the country’s main foreign exchange earner. Furthermore, the country was first in global palm oil exports and ahead of both the United States and Argentina in the exportation of groundnuts. More than just a major exporter, Nigeria provided 95 percent of its own food needs despite relying on subsistence farming techniques during this time. 

Investment could have continued this agricultural dominance but instead disproportionately moved to oil during the 1970s. With the Nigerian Civil War incurring massive costs and world oil prices surging, extracting and exporting crude oil became Nigeria’s dominant economic activity and its primary source of revenue that would allow for reconstruction in the aftermath of its civil war. 

The oil boom caused labor distortions as more people found working in the oil fields to be economically more attractive than farming. Furthermore, the government paid farmers low prices for domestic food crops to ensure affordable food prices in urban areas, which discouraged agricultural production of not only cash crops but also basic foodstuffs. Throughout the 1970s, as farmers moved to urban areas to work in the oil sector, the percentage of land used for agriculture in Nigeria kept falling, bottoming at 51.8 percent in 1980, down from 70.1 percent in 1969, before picking back up (today the figure is above 75 percent). 

Despite possessing immense agricultural potential, Nigeria has instead become highly dependent on oil. In 2014, 91.2 percent of the country’s exports came from petroleum. This dependence leads to extreme economic instability in response to changes in the price of oil. Furthermore, few Nigerians directly benefit from oil profits. Despite a rapidly growing economy and reputation as one of the richest countries in Africa, 60.9 percent of Nigerians live under the $1.25-a-day poverty line, according to a 2010 government survey, up from 54.7 percent in 2004. 

The deterioration of the agricultural sector and growing population has forced Nigeria to be a net food importer since 1974. Once able to feed its population, Nigeria now ranks as the 90th most food secure country in the world, according to the Economist Intelligence Unit, and spends billions on food imports every year, especially of staples like wheat, rice, sugar and fish. Yet with two-thirds of Nigeria’s workforce employed in farming, agriculture could very well be the key to both economic stability and poverty alleviation. 

Nevertheless, agriculture in Nigeria still has some modernizing to do. Nigerian farmers face a litany of challenges that hamper productivity in the sector, such as an over reliance on rainfed irrigation, limitations on farm holdings, and poor infrastructure preventing access to markets. Theoretically, policies supporting import substitution would allow both private and public sectors to resolve these issues. However, such policies have had adverse effects on Nigerian agriculture in the past.  

Food import bans

Nigeria’s consistent failure to revive its agricultural sector would seem to suggest that import substitution policies have been faulty. However, when examining the Nigerian government’s implementation of these policies, it becomes clear that the motivations and intentions of Nigeria’s import bans—the country’s preferred policy tool—were primarily not intended to stimulate growth in the sector. 

An evaluation of the World Trade Organization’s (WTO) reviews on Nigeria’s trade policies suggest that there have been wide ranging motivations for import prohibitions that do not match the justifications offered by the Nigerian government. While the government claims its import bans have been aimed at boosting local agriculture and manufacturing economies, the timing of various import bans over the past several decades has coincided with falls in oil prices. The pattern suggests that the intentions for prohibiting the importation of agricultural products are mixed. At times, these restrictions seem to safeguard foreign currency reserves when oil prices fall rather than stimulate domestic production. 

During Nigeria’s first major economic crisis of the oil era in 1982, Nigeria curtailed its imports, invoking a clause of the General Agreement on Tariffs and Trade (a 1947 multilateral trade agreement that lasted until the WTO was formed) that allows a country experiencing balance of payments difficulties to restrict its imports.

By the end of 1983, the restrictive policy was extended by placing all imports under licensing and closing Nigeria’s border. The next governmental regime, which began in 1985, lifted the previous restrictions but continued this protectionist trend by imposing 30 percent levies on all imports. Relief finally came when President Sani Abacha took power in 1993 and introduced new trade regulations and controls, alleviating some quantitative import restrictions. The country broadly sustained a trend of reducing import prohibitions in the 1990s. However, in late 2001, following oil price falls as a result of 9/11, the trend was reversed with an upsurge in import restrictions which was maintained until 2004. 

Since mid-2014, oil prices have declined by nearly 60 percent causing a significant drop in oil revenues, which account for the vast majority of the country’s export revenues (91.2 percent in 2014). As a result, the oil dependent country has struggled to control the collapse of its currency's exchange rate and to maintain high enough foreign currency reserves for the purchase of imports. Following the trend, new import prohibitions were implemented in June 2015, a year after the beginning of the oil crisis. The government placed import bans on 41 products, eliminating the need to deplete foreign currencies to import such goods. 

Recently, Nigeria has demonstrated an ongoing commitment to existing import ban strategies. In October 2015, Nigeria’s Comptroller General of Customs, Ahmed Ali, ordered an immediate suspension of the country’s rice import ban. The ban was immediately met with intense query and skepticism by policy makers and governing boards, including the Senate. Senator Adamu Aliero argued Comptroller Ali did not have the authority to unilaterally suspend this import ban. In March 2016, this decision was reversed, and rice importation bans were reinstated. The Comptroller’s Office conceded that revenue had fallen sharply below projections, and importers cited access to forex as the cause of underperformance. Smuggling across land borders also increased substantially following the October lift of the ban. Subsequently, Nigeria instituted an import ban on foreign beans in February 2016, expanding the list of imported goods. 

Over the course of these short-sighted import prohibitions to correct its balance of payments, for which Nigeria has been rebuffed by fellow WTO members, the country’s domestic food production has not increased dramatically, and its food import bill has only grown.

A more holistic approach: the Agricultural Transformation Agenda

Spurred in part by the volatility of oil markets after the financial crisis, Nigeria’s policy makers eventually began to take to heart the idea that they direly needed to address the country’s food import dependency and began to change their strategy for feeding the country. 

The Agriculture Transformation Agenda, launched by president Goodluck Jonathan in 2011, forms the bulk of this dramatic change in policy. The Agenda was designed to address the nation’s agricultural inefficiencies on a larger scale. The broad aims of the Agenda are to promote agribusiness, attract private sector investment in agriculture, reduce post-harvest losses, and add value to local agriculture produce. The Agenda prioritized job creation and enhanced efficiency in the growth and production of Nigeria’s key staple foods, especially rice and cassava, often by placing reciprocal import bans on other imported staples such as wheat. More specifically, the Agenda was launched with the aim of adding 20 million tonnes of food to the domestic supply by 2015 and creating 3.5 million jobs in the process, “driving import substitution by accelerating the production of local food staples, to reduce dependence on food imports and turn Nigeria into a net exporter of food.” 

Policies under the Agenda tackle a wide array of issues among a variety of agricultural value chains. For example, the Growth Enhancement Support Scheme (GESS) is aimed at the deregulation of the seed and fertilizer sectors which would allow farmers unprecedented access to fertilizers to increase yields. Within a year, 880,000 farmers in 34 of Nigeria’s 36 states had registered for the GESS. Farmers enrolled in the program receive a 50 percent subsidy on fertilizers and other inputs, with the expectation that subsidizing farming inputs will increase crop yields. These inputs are distributed by the government via an electronic wallet system which helps to reduce opportunities for fraud in subsidy disbursement. There has also been a significant response in the market for seeds: The number of seed suppliers increased from 11 before the reform to 77 in 2013. 

Other examples of progress that has been made under GESS include the establishment of a joint venture between Notore, a Nigerian fertilizer company, and Mitsubishi to expand the country's fertilizer production capacity; the increase in the country’s rice production capacity by 210,000 tonnes (this represented 10 percent of rice import quantities at the time); and the attraction of over $8 billion in investment commitments from 17 local and foreign investors, including Cargill, Dangote and Belstar. 

The Nigeria Incentive Based Risk Sharing System (NIRSAL), another program advanced by the Agenda, is an agricultural financing scheme that aims to de-risk lending to the agricultural sector. Under NIRSAL, the federal government provides banks with a Credit Risk Guarantee (CRG) as an incentive to lend money to farmers. The program also incentivizes farmers to borrow money from banks by enrolling them in an Interest Drawback Program (IDP), whereby interest rebates are provided on a quarterly basis to reduce the burden on farmers that interest payments present. The CRG ranges between 30 and 50 percent, and the IDP ranges between 20 and 40 percent, depending on the part of the agricultural value chain involved. NIRSAL, in combination with the Commercial Agricultural Credit Scheme, the Agricultural Credit Guarantee Scheme, the Agricultural Credit Support Scheme, and other government-backed lending schemes, has contributed to the increase in agriculture’s share of total bank credit from 1.4 percent in 2008 to 4 percent in mid-2014. 

One more program under the Agenda worth mentioning is the Staple Crops Processing Zones (SCPZ) program, which is focused on encouraging private sector agribusinesses (especially large scale foreign-owned businesses) to set up staple crop processing plants in zones where the relevant staple crops are grown in large quantities. The crop processing plants will secure a steady supply of agricultural outputs from local farmers by guaranteeing the purchase of those outputs at market prices. The increased prevalence of quick service restaurants and other formal food retail establishments in the country could also provide an outlet for agricultural outputs from local farmers. 

By 2014, 14 million farmers were registered under GESS, and $31 million was disbursed by Nigeria’s Bank of Industry to agriculture-based SMEs with the intention of enabling job creation within the industry. Nigeria became the first African country to provide subsidies to farmers through their mobile phones demonstrating some of the more creative developments that the Agenda has enabled. From 2011 to 2014, Nigeria’s national food production grew by 21 million tonnes. Additionally, 3.56 million jobs were created between 2012 and 2014, and $8 billion in investment commitments have been made as a result of the Agenda. 

The Agenda represents an important departure from prior government attempts to boost agricultural development in that it completes a comprehensive import substitution program. Not only will local farmers be shielded from global competition but they also will now be given the necessary tools and support systems to become globally competitive. Formerly, similar programs did not have the scope or funding necessary to enact lasting change and appropriately complement import restrictions. 

Conclusion

While theoretically a sound model, the results of the implementation of import substitution policies in various world economies have been mixed. In East Asia, coupling import substitution policies with an added emphasis on an “export push” has been successful. China acts as a shining example of this effect as import substitutions primed China’s economy to take off in the 1970s, allowing it to become the largest economy in the world and modernize rapidly. Many other developing countries, however, have failed to significantly develop their industries of intent using import substitution policies alone. 

The reasons for the varying levels of success and failure remain multifaceted and debated. Some researchers blame the fact that a combination of high protection and import dependency means that the industry of intent is not prepared for international competition; others argue that effective import substitution requires conditions that promote innovation and new thinking, which might be lacking in the country. 

Nigeria as an example stands out for two main reasons. First, import bans on their own were for decades highly unsuccessful at boosting agricultural productivity and helping local producers regain market share from imports. And second, the Agenda’s holistic approach so far appears to be remarkably successful at doing so. With the Agenda launched in 2011, Nigeria is still far from being able to provide all its own food. But if it continues on this trajectory, it may one day become a model for raw material exporters, especially in Africa, trying to escape dependency on food imports.

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