On Import Substitution: A Path to Resolving Nigeria’s Currency and GDP Growth Challenges

I woke up today around 5 am thinking about Nigeria’s currency problem and how it could be resolved sustainably. This was inspired by a conversation yesterday with an investment colleague at a NHEF dinner about the decline in the USD value of his apartment and the recent devaluation over the last two years. Let’s not kid ourselves, most USD investments will struggle to achieve their return targets if the local currency devalues by 40%+.

Coordination between builders (entrepreneurs), capital providers (private equity firms, banks, and pension funds), the distribution mechanism (the stock exchanges), and the big guy with the biggest carrot and stick (government) is key. By the way, the coordinating mechanism isn’t necessarily a task for consultants but for entrepreneurs who can create an operational model from operating experience. critical are also folks experienced in value chain investing who have done so successfully. Is anything here new, not really. Maybe the planned coordination is new, but the concept of import substitution isn’t. This time, the country has a chance to execute with the utmost transparency and accountability.

Here’s the plan:

1. Mapping the Value Chain of Top Imports: Identify top imports in Nigeria and their value chain. Select those whose value chains can be produced locally without significant parts needing to be imported. Choose the top 10 opportunities for the “import substitution” program.
2. Allocate Each Opportunity to a Circle: Each circle should consist of: An entrepreneurial team. A VC/PE firm(s) to fund its build-out and stabilization. A bank to provide affordable working capital as needed. While I don’t think a guarantee pool is needed if the project selection is thorough, there is always some level of execution risk.
3. Evaluation and Scaling: In years 5-7, rank the top 3 cohorts based on governance, profitability, and scale. List these companies on the stock exchange with pension funds as key investors.
4. Government Role: Remove red tape. All of it. Provide pioneer tax incentives for 10 years. Prioritize local ownership and participation within the value chain to minimize value leakage. Ensure exchange listing for those ready from year 7 onwards. Make the project an act of congress so successive administrations commit to it as well. Award the circle that significantly contributes to import reduction with the CFR award.
5. Rinse and Repeat: By implementing this strategy, Nigeria can replace imports, ease pressure on currency devaluation, create jobs, improve productivity, and enable wealth creation. This approach allows for targeted import substitution through intentional collaboration between entrepreneurs and the capital markets.

This is timely. We have excellent entrepreneurs in Nigeria and the diaspora, strong and credible leadership at the relevant areas: SEC, stock exchanges, central bank, and coordinating ministry of the economy. The pension funds now have slightly over a trillion Naira in AUM. Most importantly, we have a president who understands the power of coordination and consistency in achieving development.

Examples of Opportunities:

Nigeria has significant potential to produce many of the items it currently imports, leveraging its agricultural capacity, mineral resources, and industrial potential. Here are some key imports that could be produced locally, or if already produced locally, where production can be significantly increased or improved:

1. Cereals (mainly wheat and rice) Local Potential: Nigeria has the climatic conditions and arable land to produce rice and other cereals. Substituting wheat with sorghum or millet could be explored. Both are far healthier than wheat and would promote a healthier populace. Challenges: Requires investment in agricultural technology, irrigation, and milling facilities.
2. Fish and Crustaceans Local Potential: Nigeria has vast water resources suitable for aquaculture and fisheries. Challenges: Needs investment in aquaculture infrastructure, breeding programs, and processing facilities.
3. Plastics and Articles Thereof Local Potential: Nigeria has significant petroleum reserves, providing the raw materials (petrochemicals) needed for plastic production. Challenges: Requires the development of petrochemical plants and plastic manufacturing facilities.
4. Furniture Local Potential: Nigeria has access to timber and other raw materials required for furniture production. Challenges: Requires skilled labor, modern machinery, and efficient supply chains.
5. Textiles Local Potential: Nigeria can grow cotton and has a history of textile production. Challenges: Requires modernization of textile mills, investment in technology, and improved farming practices.
6. Footwear Local Potential: Availability of raw materials like leather and rubber; traditional craftsmanship in certain regions. Challenges: Needs investment in modern manufacturing facilities and design capabilities.
7. Beverages Local Potential: Nigeria can grow many of the ingredients required for beverages, including fruits, sugarcane, and grains. Challenges: Requires efficient processing and packaging industries.
8. Animal and Vegetable Fats and Oils Local Potential: Nigeria has the climate to grow oil palms, soybeans, and other oil-producing crops. Challenges: Requires investment in processing plants and sustainable agricultural practices.
9. Rubber and Articles Thereof Local Potential: Nigeria can produce natural rubber from rubber trees. Challenges: Requires development of rubber processing plants and related industries.
10. Pharmaceutical Products Local Potential: With proper investment, Nigeria can produce pharmaceutical products using local raw materials and leveraging local scientific expertise. Challenges: Requires stringent regulatory frameworks, investment in research and development, and modern manufacturing facilities.
11. Iron and Steel Local Potential: Nigeria has iron ore deposits that can be exploited. Challenges: Requires significant investment in mining, refining, and steel manufacturing infrastructure.
12. Optical and Medical Instruments Local Potential: With appropriate investment in technology and manufacturing, Nigeria can produce basic medical instruments. Challenges: Requires high-level expertise, quality control, and advanced manufacturing technologies.
13. Machinery Local Potential: Nigeria has the potential to assemble and manufacture some types of machinery, particularly agricultural and industrial equipment. Challenges: Requires technical expertise, investment in manufacturing plants, and supply chain development.
14. Aluminum Local Potential: Nigeria has bauxite deposits, which can be processed into aluminum. Challenges: Requires significant investment in mining and smelting infrastructure.
15. Paper and Paperboard Local Potential: Nigeria can grow wood and other raw materials needed for paper production. Challenges: Requires investment in modern paper mills and recycling facilities.
16. Electrical Machinery and Equipment Local Potential: With proper investment, Nigeria can assemble and potentially manufacture some electrical machinery and equipment. Challenges: Requires high-level technical expertise, investment in technology, and robust supply chains.
17. Organic Chemicals Local Potential: Can be produced using petrochemicals derived from Nigeria’s oil and gas sector. Challenges: Requires development of chemical processing industries and regulatory frameworks.
18. Beauty Products Local Potential: Nigeria is the highest producer of Shea nuts. Instead of importing body creams and lotions, Shea butter can be processed into various consistencies and products. Challenges: Requires modernization of the value chain and removing obstacles, including distracting NGO interventions.

These ideas primarily focus on import substitution. By producing goods locally, we decrease dependency on imports and lessen the demand for foreign currency, thereby mitigating devaluation pressures.

Moreover, these initiatives have the potential to be highly profitable if executed well. At Consonance, we specialize in identifying investments that can outperform by beating devaluation and preserving value. While I won’t go into the specifics of these strategies here, we have a proven track record in this area.

We invite you to join our fund to gain deeper insights into our investment strategies. By collaborating with us, you can contribute to Nigeria’s and Africa’s economic development and benefit from our expertise.

Kudos to the Dangote refinery project, Releaf for building a scalable platform to supply raw materials to edible oils processors, AFEX for enabling local production for various food processors and many others. These efforts are not easy but incredibly essential, and achieving scale is critical for them to be fully appreciated.