Obstacles Preventing Nigeria Becoming A Service Driven Economy

On a recent webinar about Nigeria's economic recovery, one of the speakers said Nigeria should focus on becoming a service rather than manufacturing industry based economy. I was totally taken aback by the comment especially as the speaker in question was from a multilateral bank. Before I state the obvious reasons why any Sub-Saharan country, perhaps with the exception of South Africa, Rwanda and Kenya can even contemplate such thoughts, let me clarify exactly what the service industry is.

The service industry, also known as the tertiary industry, 'involves the provision of services to businesses as well as final consumers, one where no goods are produced whereas primary industries are those that extract minerals, oil etc. from the ground and secondary industries are those that manufacture products, including builders, but not remodeling contractors' - Wikipedia. Common industries include information technology, hospitality, travel and tourism, transportation, wellness, finance, design and information services.

If the service industry is a child of the Industrial Revolution which has grown to its maturity during the period of post-industrial society then Nigeria is not ready to be a service industry lead economy. The relationship between manufacturing and services is innate, one cannot exist without the other. This is a knowledge based economy that must be preceded by economic liberalisation to work. Economic liberalisation meaning the lessening of government regulation and restrictions in an economy in exchange for private sector participation. Promoting free trade, deregulation, elimination of subsidies, price controls and rationing systems. Whilst India managed to successfully side step the manufacturing industry for the service industry, which now contributes to 36% of it's GDP, this was only possible because of economic liberalisation.

A closer look at the components of economic liberisation:

Free Trade

Nigeria closed its border with Benin last August then went on to close all land borders to goods - legal and illegal - in an attempt to curb smuggling, inefficient customs process, a vast informal sector and the dumping of cheap foreign goods. Unfortunately, this also means killing any idea of free trade with Nigerias large informal sector which represents 80% of the economy feeling the full brunt of the closure, not to mention the vast majority of businesses in neigbouring countries that trade legitimately and rely on Nigerias large population to buy it's product. Furthermore, Nigeria was the last prominent nation to sign the AfCFTA, after succumbing to regional and international pressure. Protectionism policies are commonplace, banning the import of a number of products including rice and maize, to spur local production but without sufficient support mechanisms put in place or allowing for a transition period. The clear lack of thought in import bans has unintended consequences however. The recent maize import ban resulted in an immediate lack of chicken feed for instance.

Deregulation

Nigerian state governors are notorious for randomly announcing regulation that hit hard at local businesses pockets or totally destroy private sector solutions to ongoing challenges not been addressed by government. The series of regulations that have been established in the first eight months of this year, just in Lagos alone, has gotten the state badged as enemies of innovation forcing business to close, iterate - Max.ng is now a logistic company following the ban on Okada or move state - SafeBoda entered the Nigeria market in Ibadan rather than Lagos as originally planned.

Subsidies

Normally used as a temporary mechanism so consumers can start to consume or buy essential products or services, subsidies are supposed to be phased out before consumers get too comfortable the said consumerables prices. Subsiding is an unsustainable instrument subject to abuse and distortions as is the case in Nigeria. Energy subsidies alone were costing Nigeria 3 - 4% of its annual GDP. The decision to finally end the subsidy was due to the culmination of the crude oil price drop, currency devaluation and mounting costs of COVID-19 all happening simultaneously.

Price Control

The 1977 Price Control Act gave the government powers to fix prices on nine commodities - milk, flour, salt, sugar, bicycle and spare parts, motorcycle and spare parts, motor vehicles and spare part and petroleum products. An act implemented during General Buhari's military rule, ironically. Luckily, a market based economy is now used where people are free to determine prices of products and services. However the act still exists and is yet to be repealed. We can only hope that it is never revived. For businesses however there are a number price control mechanisms they still have to consider including valuation practices of Nigerian Customs Services (NCS), approval of foreign fees for Technical Transfer Agreement (TTAs) by the National Office for Technology Acquisition and Promotion (NOTAP), approval of fees and agreements in the communication sector by Nigeria Communications Commission (NCC), as well as the notional crude oil selling price fixed for exploration and production (EP) companies by the Nigeria National Petroleum Corporation (NNPC).

Rationing Systems

Routine load shedding is a common mechanism used to address chronic shortage of power supply however constraints in transmission and unreliable generation make it difficult to achieve an equitable allocation of power. Dollar restrictions is also a common rationing system used when there is a lack of dollar inflow into the country. This particular risk is a major obstacle for investors considering investing in Nigeria alongside currency volatility.

Other obvious factors preventing Nigeria from evolving into a service industry include low investment into education. The entire budget allocation for education in 2019 was $1.7bn (620.5 trillion Naira), 15 - 20% less than the amount recommended by UNESCO. Lack of infrastructure - road, rail, power and telecoms. Despite all the mobile network operators in the country, WiFi access is still problematic and data is expensive.

I think it was Journalist David Hundeyin who said Nigerian citizens have to start voting based on promised policies rather than the promise to rid the country of corruption. I'm inclined to agree with him as the right policies including those that tackle the above alongside political will is what catapults a country forward. In turn, corruption will be addressed through the implementation of these policies.