Non-oil export business in Nigeria Impact of Incentives on Agribiz Presented by

- 1 -Olam Impact of incentives on Nigeria’s agribiz

Non-oil export business in NigeriaImpact of Incentives on Agribiz

Presented by

Creating Value is our business

Olam Nigeria Ltd.

November 2012


Contents

1 Introduction

2 Prospects

3Impact of EEG

4 Need for incentives

5 Challenges faced by Nigerian exporters

6 Way forward


Introduction

1


Introduction

This presentation highlights the potential of developing the non-oil export sector in Nigeria and challenges faced by the non-oil sector

The focus areas of this presentation are:

Review of recent surveys by international development agencies

Need for diversification of the economy

Significance of the agro-allied sector

Growth of non-oil exports in last 10 years

Policy somersaults faced by the private sector

Realisation of the Transformation Agenda hinges on economic diversification


Prospects

2


Nigeria‘s long-term economic potential

Agribusiness has tremendous growth potential given right policy framework

According to a widely read study by Mckinsey,only 1/3rd of Africa’s arable land is cultivated. Africa needs to create jobs at a faster pace to absorb its growing labour force

The same study identifies 3 key sectors with highest employment potential

a) Agriculture

b) Manufacturing

c) Retail & hospitality

Agriculture accounts for 40 % of Nigeria’s GDP and 2/3rd of employment

Existing low agri productivity provides huge headroom to grow

Federal government Agriculture Transformation Agenda provides an impetus to realization of Nigerian growth potential in food and cash crops



Agribusiness has tremendous growth potential given right policy framework

Nigeria – richly endowed with fertile land

Long history of cash crops cultivation – cocoa, cotton, cashew

Agricultural production more difficult to migrate than manufacturing Agricultural products – demand is relatively stable and resilient even in recessions and

financial crisis

Supply chain and infrastructure deficiency – can be mitigated with policy intervention

Huge job/livelihood creation and wealth creation potential



There are several transformation opportunities in agric sector

Oil-Palm – large domestic market, good soil and climate challenge of security, long gestation

Cotton : provide jute bags to farmers better quality and higher farm realisations

Bio-fuel: Potential to replace imports and be an export base. Policy framework required

Rice : import substitution as well export into regional ECOWAS markets over the long term clearly articulated long term policy on tariff and investment incentives

Sugar: development of industrial scale sugarcane farming to address local consumption Sugar masterplan – a way forward !

Farm Yield and Quality: Nigeria lags behind other West African countries. WA countries lag behind Asian/Latin American region. Bridging this gap can create transformational growth in the sector.


Impact of EEG

3


EEG Impact - Agric sector

Growth in crop size( 10%- 25% per year) – Sesame, Cocoa , Cashew

Growth in Farmer Incomes- across almost all products

Farm-gate prices as % age of FOB values are highest in West Africa for

agricultural-crops like cocoa, sesame, cashew etc.

Multiplier Effect of 2.36 as per USDA on agricultural exports –> 70% of

non-oil exports is agric high knock-on +ve impact in GDP and

employment

Farming is turning from subsistence to commercial in export led sectors

(cocoa/cashew/sesame etc,)


EEG Impact – Case Study - Sesame

Crop volumes have grown almost 3 times in 5 years

65000 MT (2005-06 ) to 180,000 MT (2011-12)

Farmer incomes have trebled

Average Naira 50000 / MT (2005) to 165000 / MT (2010)

Farmer realization ~ 85% of CNF price( higher than Ethiopia and Sudan etc)

Export profile shifting from natural seeds to de-hulled sesame seeds – greater

export revenue, greater local value addition, more investments, more local jobs,

Diversifying markets – Far East , Middle East, Europe & USA


Nigeria‘s non-oil export growth

Nigeria’s non-oil exports have grown 300% in the last 6 years(2005-11) growing at a CAGR of 25%

Source :Cobalt/NEPC shipment statistics

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

0.5

1

1.5

2

2.5

3

0.2 0.2 0.2

0.80.7

0.80.7

1

1.3

1.81.9

2.3

2.8

Nigeria's Non-oil Exports(US$ billion)

Exports($ mn)Exports ($ Bn)


Nigeria‘s non-oil export growth

Agro-allied products drive Nigeria’s non-oil exports with Cocoa and leather contributing about 50% of total exports

Product wise market share of non-oil exports: 2011 (%)

Source: Cobalt/NEPC

Cocoa; Series1; 832; 30%

Cotton; Series1; 71; 3%

Cashew; Series1; 100; 4%

Rubber; Series1; 285; 10%Leather; Series1; 500; 18%

Shrimps; Series1; 54; 2%

Sesame seed; Series1; 200; 7%

Tobacco; Series1; 76; 3%

Aluminium; Series1; 76; 3%

Plastic footwear; Series1; 55; 2%

Others; Series1; 516; 19%

CocoaCottonCashewRubberLeatherShrimpsSesame seedTobaccoAluminiumPlastic footwearOthers

Cocoa

Leather


Need for incentives

4


Incentives are needed to offset competitive cost disadvantages faced by Nigerian exporters

Nigerian cocoa exporters face a disadvantage even after taking EEG into account(1/2)

Factors USD/MT USD/MT USD/MT

Power cost disadvantage in processing

30

Additional port charges 10

Additional freight charges 10

Additional finance cost @ 8% p.a. 200

Disadvantage on account of low productivity(yield/ha)

350

Import duty imposed in EU due to non-signing of EPA by Nigeria

180

(A) Total disadvantage 780

(B) EEG Benefit at full rate 900

(C) Net benefit to exporter (A-B) 120

Subsidy available in Ivory Coast 188


Incentives are needed to offset competitive cost disadvantages faced by Nigerian exporters

Nigerian cocoa and cashew exporters face a distinct cost disadvantage

Cost/MT (US$) Ivory Coast Tanzania Nigeria

FOB charges 21 17 30

Fuel & Energy 3 3 10

Wages 205 190 370

Cost disadvantage faced by Nigerian cashew processors


Challenges faced by Nigerian exporters

5


Constraints faced by Nigerian exporters• The government policy encourages diversification of the economy by boosting

non-oil exports. Incentives in the form of export grant are given to cushion the impact of infrastructural disadvantages and high cost of doing business in Nigeria

• However, there is a need to improve the implementation of the policy to realize the full potential of the non-oil sector

• Major challenges facing the non-oil export sector are

• Inconsistency in implementation of export incentive policy – frequent interruptions

• restrictions by customs to accept NDCCs

• Lack of appreciation of the contribution of the non-oil export sector to the economy

• Loss of preferential market access to EU due to non-signing of EPA

• Present system only allows payment after 1 year of export – causes delays

• Erosion of the benefit due to climbing discounts of NDCCs

• Nigeria was ranked 127 among 142 countries in terms of competitiveness (2012)


Policy instability and discontinuity have weakened the non-oil export sector and is affecting Nigeria’s image as a reliable international trading partner

„The value of non-oil exports increased by 37.1% attributed to

improvement in production,processing and packaging of Nigeria‘s

products...........

Despite this development the non-oil export subsector performed

dismally accounting for only 3.6% of the total exports due to poor

Infrastructure,policy slippages and volatility of commodity prices.“

CBN Annual Report 2010 (P 146)

Constraints faced by Nigerian exporters


Way forward

6


ConclusionsNon-oil export promotion by way of incentives (EEG) should be sustained

Realization of government’s Transformation Agenda depends on diversification of the economy

Non-oil exports have increased by 300% during 2005-11 investments, job creation – growth much higher than Nig GDP growth rate

EEG is required to cushion the effect of infrastructural and other disadvantages faced by Nigerian exporters

Need to have more effective inter-ministerial coordination on implementation of policies by relevant agencies

Affirm clear and strong commitment to the incentive policy(no policy can be perfect) for 5-7 years and review every 5 years to refine/improve – to attract long term and big ticket investments

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Thank You

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Non-oil export business in Nigeria Impact of Incentives on Agribiz Presented by