Nigeria looks to agriculture sector to decrease oil dependency

Long a critical sector for the Nigerian economy, agriculture recorded steady growth throughout the country’s recent recession and supported macroeconomic stability against a backdrop of volatility in the global oil market. Although the sector’s workforce, exports and GDP contribution have fallen in recent decades as oil and gas production became Nigeria’s economic mainstay, the country is home to vast amounts of arable land and a large, diverse production base that includes many high-value cash crops, offering significant opportunity for development and investment.

Recognising the sector’s high growth and export potential, the federal government of Nigeria has increasingly focused on agricultural development as a support mechanism for macroeconomic and non-oil growth. Recent mid-term national development strategies have sought to significantly augment production and exports, in close collaboration with investors from the private sector. Although growth continues to be constrained by limited access to credit and inputs, illegal food imports, infrastructure deficits and security challenges, recent progress in developing a network of planned staple crop processing zones (SCPZs), including major private sector investment announcements for facilities in these zones, demonstrates the sector’s high potential. Government lending and foreign exchange control programmes should help support smallholder farmers as well as domestic agro-industry, setting the stage for steady long-term growth.

Economic Impact

Agriculture is the largest single economic sector in Nigeria by contribution to real GDP growth, and a major source of employment for the country. The World Bank reports that agriculture’s contribution to real GDP has risen steadily in recent years, from 24.4% in 2016 to an estimated 25.1% in 2017 and a forecast 25.4% in 2018. Although the sector’s growth rate has fluctuated in recent years, it has remained positive, moderating from 4.3% in 2014, to 3.7% in 2015, picking up to 4.1% in 2016 and falling to an estimated 3.4% in 2017. The World Bank forecasts the sector will grow by 3.5% in 2018.

It is also a major source of employment. The agricultural workforce has fallen from a 25-year high of 60.7% of total employment in 2002 to an all-time low of 30.6% in 2010, before rebounding to 36.3% in 2016 and 36.6% in 2017, according to World Bank data. The National Bureau of Statistics (NBS), meanwhile, reports that agriculture grew by 10.6% year-on-year in nominal terms during the second quarter of 2018. In real terms, the sector expanded by 1.2% year-on-year in the second quarter of 2018, with the NBS reporting that its contribution to real GDP stood at 22.9% as of the second quarter of 2018.

Promising Growth

Although it accounts for a relatively small proportion of total manufacturing, including oil refining, the production of food, beverages and tobacco has also recorded strong growth recently, with the NBS reporting that the segment recovered from an 11.1% contraction in the first quarter of 2016 and expanded by 4.1% in the first quarter of 2017. Growth hit 5.5% in the first quarter of 2018, its highest level in nine quarters.

The sector also holds high potential for future growth. Out of 82m ha of arable land in the country, only 34m ha have been cultivated, according to a 2017 report by PwC titled “Transforming Nigeria’s Agriculture Value Chain”. There remains work to be done, however, particularly in terms of planning and infrastructure. “The government has been providing support to agriculture via the central bank and the Bank of Agriculture, but the sector still lacks a master plan to guide and structure budget spending and infrastructure development,” Chaim Zach, managing director of local poultry producer Agrited, told OBG.

Top Crops

Nigerian agriculture can be divided into four broad subsectors: crop production, livestock, forestry and fisheries. The NBS reports that crop production is by far the most important, accounting for 92.1% of nominal growth of the sector in the second quarter of 2018, and recording steady growth in recent years. NBS data shows that crop output rose by 3.02% in the first quarter of 2016, by 3.5% in the first quarter of 2017 and by 3.45% in the first quarter of 2018.

The country’s major crops include cassava, sorghum, cocoa, groundnut, maize and rice, with Deloitte reporting in August 2017 that cassava and yams accounted for 31% and 25% of total agricultural production, respectively, as well as just under half of domestic food consumption. These figures are indicative of a lack of crop diversification.

Production

Crop production improved steadily in 2017, and in February 2018 the National Agricultural Extension and Research Liaison Services (NAERLS) reported that maize output rose by 12% in 2017 to hit 12.1m tonnes, while rice production expanded by 14.7% to 8m tonnes. Sorghum production, meanwhile, rose by 4.4%, while soybean, cassava and cowpea production increased by, 11.4%, 7.7% and 6.1%, respectively. The Federal Ministry of Agriculture and Rural Development (FMARD) is responsible for agricultural policymaking and implementation. It oversees nearly 50 parastatals that operate as departments or agencies across the country, as well as its own technical and service departments. Technical departments include those responsible for agriculture, fisheries, livestock, land resources, fertiliser, food reserve and storage, and rural development, while service departments include finance, human resources, procurement, planning, analysis and statistics, and cooperatives.

Macro Targets

A key piece of agricultural policy is FMARD’s Agriculture Promotion Policy (APP), also called the Green Alternative, which runs from 2016 to 2020. Recognising agriculture as “key to long-term economic growth and security”, APP aims to develop Nigerian agri-business so that it is capable of meeting domestic food needs, boosting exports and supporting income and job creation. Its approach encourages development that is led by the private sector and facilitated by the government. Food security and crop production are key pillars, with the APP focusing on expanding the production of rice, wheat, maize, soya beans and tomatoes, as well as boosting the exports of cocoa, cassava, oil palm and sesame seeds. From 2018, APP’s targeted exports will also include bananas, avocado, mango, fish and cashew nuts, with infrastructure investment being expected to accelerate productivity, improve yields and promote investment.

Nigeria’s national economic development agenda also emphasises private sector participation in agricultural development, as well as the importance of attaining food self-sufficiency. Running from 2017 to 2021, the Economic Recovery and Growth Plan (ERGP) seeks to boost economic diversification by supporting strategic sectors including agriculture, energy, industry and micro-, small and medium-sized enterprises.

Recognising that agriculture will remain a stable GDP growth driver in the coming years, the ERGP projects the sector will grow by 6.9% annually over its duration, supported by expanded crop production as well as growth in fisheries, livestock and forestry. The plan aims to boost investment to reach food self-sufficiency targets for tomato paste in 2017, rice in 2018 (see analysis) and wheat in 2020, with the country slated to become a net exporter of rice, cashew, groundnuts, cassava and vegetable oil, among other food products.

A central goal of the ERGP is to nearly double agriculture’s contribution to GDP growth by 2020, from 4.7% in 2016 and 5% in 2017, to as much as 7% in 2018, 7.2% in 2019 and 8.4% in 2020. In a promising sign for private investors, the plan also emphasises closer collaboration with businesses to deepen investment in agriculture, power, manufacturing and services, with the private sector set to “become the engine of national growth and development”.

In achieving these bold targets, however, stakeholders face notable challenges. While agriculture remains one of the largest single sectors of the overall economy, declining productivity and underinvestment have constrained exporters and left several gaps in the agricultural value chain. Although the sector accounted for an average of 57% of GDP and generated around 64.5% of export earnings during the 1960s, the rise of Nigeria’s oil economy shifted the focus away from agriculture during the 1970s.

As highlighted by PwC, the sector’s GDP contribution declined steadily to an average of 23.5% between 2012 and 2017, with its share of export earnings at an average of 5.1% annually over the same period. PwC identified four main challenges facing the sector: limited supply of farm inputs, low levels of productivity and processing, and gaps in both marketing and trade networks. Input supply is affected by limited accessibility to quality seedlings, the high cost of agrochemicals, land acquisition difficulties and climate change, while productivity is impacted by frequent pest and disease attacks, poor irrigation systems, limited mechanisation and inadequate research. The ERGP echoes these assertions, identifying a number of major barriers, including limited credit and farm input access; the negative impact of climate change on yields; farmers’ limited access to national and international markets; and security threats such as cattle rustling, kidnapping and conflict between crop farmers and nomadic herdsmen. Indeed, in its May 2018 update for Nigeria, the World Bank projected agriculture growth would remain limited due to the ongoing conflict in the country’s north-east and middle-belt regions, despite the efforts of Central Bank of Nigeria (CBN) to implement development financing schemes and foreign exchange restrictions to support import substitution.

Import Conundrum

Domestic food production has not kept pace with population growth, and, starting in the 1960s, the government of Nigeria has deployed a series of import substitution measures aimed at supporting domestic agricultural self-sufficiency, including tariffs, quotas and import bans.

However, these measures have failed to stem rising food imports. In September 2017 local media reported that the country’s food import bill stood at N1trn ($3.2bn) annually. According to the World Bank, food imports as a percentage of total merchandise exports have risen significantly in recent years, jumping from 9.8% in 2008 and 10.3% in 2010 to hit 30.6% in 2011, then dropping to 22.7% in 2012 and 12.9% in 2016, but rising again in 2017 to 16.3%. FMARD estimated that domestic rice demand in 2016 was approximately 6.3m tonnes, of which only 2.3m tonnes was provided by local producers, while FBNQ uest estimated that total fish demand was around 2.7m tonnes in 2016, of which just 30% was sourced domestically. NAERLS reports that Nigeria is the second-largest tomato producer in Africa, with roughly 1.5m tonnes grown annually, yet the country spends an estimated N11.7bn ($37.8m) every year on importing tomato paste.

With global oil prices plummeting, the CBN took action in 2015 to reduce the country’s import bill by introducing policy measures aimed at conserving dwindling foreign exchange reserves, as well as reviving domestic industry. Chief among these was a decision to restrict foreign exchange market access for 41 categories of imports, with eight food products among them: rice, margarine, palm oil and vegetable oil products, meat and processed meat products, vegetables and processed vegetable products, tomato paste, poultry and tinned fish in sauce.

The import substitution measures have faced international criticism, with the World Bank, for instance, describing the foreign exchange restrictions and development financing schemes as “suboptimal policy measures”. However, other stakeholders believe this approach has proven beneficial for local agro-industry. For example, two of the country’s largest palm oil producers, Presco and Okumu Oil Palm, reported increased earnings during the first half of 2017. Rice imports also dropped significantly in the two years after the CBN introduced the measures (see analysis).

Spending Support

As well as imposing import restrictions, the federal government has channelled spending into a host of financing and insurance initiatives to improve farmers’ access to financial services. “Some 38m small farm-holders are unbankable and have no access to capital, technology or to the market. This represents a considerable opportunity to leverage the financial technology revolution and provide domestic capital to the agriculture industry,” Onyeka Akumah, CEO of Farmcrowdy, a digital agriculture programme created in Nigeria, told OBG.

In a November 2017 budget speech, President Muhammadu Buhari announced that the federal government planned to allocate N119bn ($384.7m) in the 2018 budget to strengthen the agriculture sector in order to bolster food security, with public spending planned to support recent private investments in segments including rice, sugar, maize, soya, cassava, yam and tomato, as well as oil palm, rubber and poultry.

According to the 2018 Appropriation Bill, FMARD was allocated a total of N203bn ($656.6m) in the 2018 budget, including N149.2bn ($482.4m) of capital expenditure and N53.8bn ($174m) of recurrent expenditure. With a view to expanding access to financial services, the federal government has also undertaken a host of spending interventions aimed at supporting agriculture in recent years, including establishing the Nigerian Agricultural Insurance Corporation (NAIC) to provide insurance coverage for farmers; the Nigeria Incentive-Based Risk Sharing System for Agricultural Lending (NIRSAL); the Growth and Employment in States project, which seeks to create 100,000 direct jobs and boost non-oil growth; and the Commercial Agriculture Credit Scheme (CACS) and Anchor Borrowers’ Programme (ABP), which are intended to expedite agricultural development through the provision of low-cost credit.

Programme Progress

Between 2007 and 2010, NAIC insured an average of 35,000 ha of food crops and 100,000 ha of commercial crops, paying N193m ($624,000) and NG687m ($2.2m) in claims to farmers during 2012 and 2013, respectively. The amount of land covered by NAIC is, however, less than 1% of the total.

Between 2011 and 2015, 225 credit risk guarantees valued at N21.7bn ($70.2m) were issued under NIRSAL. The CBN provided $500m for the programme over the period and moved to establish a public-private partnership, along with the Bankers’ Committee and FMARD, which will see an additional N75bn ($242.5m) provided to farmers. The CBN had disbursed a total of N336.4bn ($1.1bn) for 420 projects under CACS as of mid-2017, and the scheme is set to continue until 2025. Farming received 50.9% of total CACS disbursement, followed by processing (36.9%), marketing (6.6%), input supplies (3.1%) and storage (2.4%).

Anchor Borrowing

The ABP, meanwhile, was established in November 2015 as part of efforts to help smallholder farmers scale up to commercial production. The strategy involves targeting high-risk borrowers with low interest rate loans and farm inputs, under the condition that individuals join larger groups and collectives linked to an anchor agro-processor, or with the state government acting as a guarantor. Loans are repaid after farm production is sold to the anchor, with the expectation being that the programme will increase food production and reduce post-harvest losses, which are estimated to cost the country N2.7trn ($8.7bn) annually, according to the Nigerian Stored Products Research Institute. In March 2018 local media reported that approximately N55bn ($177.8m) had been disbursed to some 250,000 farmers across 30 states since the ABP’s inception.

Infrastructure Improvements

The ERGP reports that addressing infrastructure deficits will be critical to meeting its mid-term export targets, noting that the total amount of arable land being farmed in the country was 34m ha in 2015, 6% lower than the figure of 37m ha in 2007, indicating that an increasing amount of farmland is becoming idle. In response, the government is moving to address infrastructure deficits through several policy interventions, with the ERGP reporting that 5000 ha of irrigable land was opened to agriculture investors in 2016.

In the November 2017 budget speech, President Buhari reported that FMARD had completed over 33,000 ha of irrigation projects in key food-producing states, with the ABP and the Presidential Fertiliser Initiative, launched at the start of 2017, set to remain important support mechanisms for future work. The 2018 budget includes funding for irrigation projects at Ada in Enugu State, Lower Anambra in Anambra State, and Gari in Jigawa State. The Budget Office reports that N6.4bn ($20.6m) was allocated to FMARD for the construction and provision of roads in the 2018 budget, including N4.6bn ($14.8m) for rehabilitation and repairs. This will help farmers reach the market.

Infrastructure challenges are also being addressed through the development of 14 planned staple SCPZs, with the 2018 budget prioritising development of six SCPZs. In addition, private investments in SCPZ-linked rice processing and biofuel production are expected to significantly augment the country’s agricultural export receipts (see analysis).

Outlook

Although agriculture stakeholders in Nigeria continue to face serious challenges in terms of expanding production, reducing cheap imports and growing exports, the agriculture sector continues to show high potential for future expansion.

A large and growing domestic population, an ample supply of arable but unfarmed land and a diverse food production base should see the country make strong progress towards its mid-term growth targets. In addition, it needs to clamp down on chronic smuggling and reduce food imports, factors which together have dampened the near-term outlook (see analysis).