Wednesday, October 10, 2018

With US-China Trade War, 20-30% Import From China Is A Threat To Nigerian Economy

The current trade war between the US and China might soon start  to have a ripple effect on Nigeria and this could spell doom for the economy if the current over dependence on China for critical Items in the manufacturing sector of Nigeria go on without being checked. When it comes to examining the risk of importation to a country, we seem to only focus on the impact on foreign reserve and the nature of the items being imported and not so much is being said on where we are importing the goods from. In my opinion, I think the Real sector of Nigerian economy is seriously susceptible to a major risk called concentration risk because of the over dependence on China as the major source of our items of importation into Nigeria. 

The economist will tell us that the economy of any nation comprises four interrelated sectors, operating to ensure that resources are best utilised in the production of goods and services to maximise the welfare of its citizenry. The sectors are the financial, fiscal/government, external and real. While all four sectors have important roles in the welfare of the citizenry, the role of the real sector is particularly significant and strategic. It is the sector responsible for the production and distribution of goods and services (from a combination of factor resources), necessary to meet the consumption demand of an economy. It drives economic growth and development, and provides an indication on the living standard of the citizens of an economy and the effectiveness of governments macroeconomic policies. 

Furthermore, it facilitates the creation of economic linkages with other sectors and helps in capacity building, employment and income generation. In view of this, a discussion of the real sector is topical as it is the pillar upon which the governments objective of inclusive growth and poverty alleviation hinges, since it contributes the most to employment generation and growth. However, the real sector of the Nigerian economy is under threat and no one seem to be observing the trend and bring it to the front burner and hence nothing is being done about it. The wise man sees evil afar off and do something to avert it, but the fool will wait until it he feels the impact before doing something about it.

Looking at the data of Import from China since 2013 to 2017, you will observe that the volume of importation from China has consistently been above 20% of the total import into the country. For example, in 2013, about 22% of the total import volume into Nigeria was from China. The volume of importation from China increased to about 26% in 2014. In 2015 the total import volume from China into the Nigerian market jump to a whopping 35% while that of 2016 and 2017 were about 25% and 20% respectively. 

In the year 2017, Nigeria imported goods worth $28.9 billion from different parts of the world. Out of this, about $5.85 billion worth of goods were imported from China and this accounts for about 20.2% of the total import into the country. What is of interest to me in this particular year is the fact that a good chunk of the products are inputs at different levels and stages to the manufacturers and processors in the country. For example, out of this, about $3.9 billion was used for the importation of machines and computers, $1.7 billion was used to import electrical machinery and equipment, about $2.4 billion was used to import raw materials like cereals, minerals and plastics articles for the plastics and rubber industries while about $646 million was spent for the importation of other raw materials that are chemicals.

A number of people might argue that, the reason why many people are flocking to China to purchase what they need for their factory is because of the competitive prices. To the extent that this is true, however, I think the government has the responsibility to look beyond profitability and focus on the impact of this concentration risk on the economy. If this trend continues unchecked and China experience any form of economic challenges, which has already started from the depreciation of Chinese currency resulting from the trade war between the USA and China, these will have an adverse effect on the Nigerian economy since all the factories that solely depend on China will have to either contend with the resulting high cost of importation from China or close down their operations.

The implication of over reliance of the manufacturing sector of the Nigerian economy on a single country is far reaching. An adverse situation in the politics and economics of China mean a decline in the importation of machineries, raw materials and spare parts. This might consequently leads to the reduction in product output and thus leading to a decline in income and profitability of such organisation and possibly a recession in the Nigerian economy. The implications of all these is retrenchment of workers and increased unemployment in the country. A government that is forward thinking will not wait until things get out of hand but rather put processes and system in place to mitigate this before it becomes too late.

Some of the things the government can do is to first commence sensitisation among the players in the concerned sector of economy to let them know the implication of what they are doing to their businesses and the economy in general. In addition to this, the government can use some of the tools at his disposal to discourage over reliance on China and encourage the purchase of similar products from other parts of the world. Some of the government tools that can be very effective to get this done is Tariff, Tax holidays, VAT exemption, Import Origin Quota etc.

It is my firm belief that if these tools are dynamically and strategically deployed, then we can effectively avert the likely doom that could bedevil the Real Sector of the Nigerian economy very soon. However, if we continue on the current path of unabated increase in the dependence of the critical sector of our economy on importation from China (or any other country), then we may be in for a very hard time if these perceived risks eventually crystallised.

Bamidele Ayemibo

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