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One of the topics we discuss frequently is the industrialization of Africa and the continent’s role in global value chains. In the last article we wrote, we noted that “In Africa, we know that despite the promise, many Africans have yet to see the benefits of globalization, and many African countries have struggled to move up the global value chain. Africa remains disconnected from global raw material value chains. In fact, by 2022, 46 African economies were deemed to be dependent on primary commodity exports, a situation associated with lower levels of development, economic instability, and fiscal unpredictability.”
Read here: “Reglobalization and Africa’s role in creating a sustainable future
Data from the African Development Bank (AfDB) shows that Africa is at the end of the global value chain, with manufacturing accounting for only 1.9% of the world’s total. Manufactured goods account for only 18.5% of the continent’s exports. This situation is even more serious in countries that rely heavily on raw materials.
Take Angola, for example, according to official data, in 2023 the share of oil and mineral products in exports was 94% and 4.26% respectively, for a total of 98.26%, leaving only a meagre 1.74% for other exports (including manufactured goods). In terms of tax revenue, the oil sector (59.6%) and mining (0.64%) accounted for 60.24% of the Angolan government’s revenue in the same period. In this context, the government has quite limited room to formulate development policies, and both the external balance and tax revenue are strongly affected by exogenous factors.
As a result, calls are growing for Angola and other African countries to step up their diversification and economic transformation efforts.
There is much debate on this issue. Politically, countries such as Angola, Ghana, the Democratic Republic of Congo, Zambia and Botswana have decided to mandate local processing of raw materials as a way to add value to products and lay the foundation for industrialization along the value chain. But this debate does not adequately analyze the economic challenges that this shift entails.
Lessons from Nigeria’s Dangote Refinery
The saga of the Dangote refinery in Nigeria is an interesting case study that illustrates well the challenges both upstream and downstream of the oil value chain, but is also applicable to other raw materials.
The 650,000 barrels per day refinery was built on the outskirts of Lagos at a cost of $20 billion by Aliko Dangote, Nigeria’s and Africa’s richest man. The refinery has the capacity to process more than half of Angola’s daily oil output.
Due to its size, the refinery is likely to have a systemic impact on Nigeria’s industrialization and on Nigerian, African and international fuel markets. This means that the refinery is located at a point in the value chain where, on the one hand, the volume of crude oil required by the refinery is huge (upstream) and, on the other hand, international competition in the fuel market (downstream) is bound to be large. As with raw materials, the economic challenges change as you move up the value chain.
Whatever the political issues that may lie behind Dangote’s conflict with the Nigerian government, it is certain that Nigeria faces the dilemma of whether to export crude oil to obtain foreign exchange needed for imports and debt repayment, or to supply most of the oil for internal processing. The same dilemma applies to raw materials such as cobalt, copper and gold.
In a statement released on Friday, Dangote Refinery accused the Nigeria Upstream Petroleum Regulatory Commission (NUPRC) of failing to enforce the Domestic Crude Oil Supply Obligation (DCSO), which requires crude oil producers to supply a portion of their output to national refineries.
Dangote called on Nigeria’s upstream oil regulator to force producers to comply with laws that require them to supply local refineries, saying lax regulation is increasing their operating costs. Although Nigeria is Africa’s largest oil producer, Dangote’s refinery has been importing oil from other countries. What’s more serious, Dangote said, the refinery imports Nigerian crude from international traders at an additional premium of $3 to $4 per barrel.
The DCSO was created under the Nigerian Petroleum Industry Act 2021, but has proven difficult to enforce due to falling oil production and a lack of foreign exchange at the state-owned Nigerian National Petroleum Corporation.
In the short term, the Nigerian government cannot abandon crude oil sales for foreign exchange. Nigerian President Tinubu is currently facing violent public protests against economic reforms and the instability of the local currency, the naira. Nigerian government finances rely on oil exports from the NNPC, which provides most of its important foreign exchange reserves.
Nigeria’s debt to international gasoline suppliers has surpassed $6 billion since early April as state oil company NNPC struggles to make up the difference between fixed oil prices and international fuel costs. NNPC is negotiating an international loan with oil as collateral, forcing it to export more and more of its oil. NNPC has secured $3.3 billion in oil-backed loans through Afreximbank.
Aliko Dangote told Business Day that the company’s shareholding in Dangote Refinery was reduced from 20% to 7.2% due to the failure of Nigerian state oil company NNPC to pay the balance of financing due.
Dangote Refinery has also clashed with downstream regulators over fuel imports, claiming it faces unfair competition from fuel importers. Nigeria’s fuel imports are controlled by powerful economic and political lobbies that have no interest in increasing local production.
But with a serious overcapacity for export, Dangote Refinery is expected to operate in a challenging business environment. Dangote not only has to control the domestic market but also conquer foreign markets with his own regulatory and quality control mechanisms. This is a huge challenge. Moving up the global value chain means stronger competitiveness, better quality and innovation.
Economic diversification and industrialization in Africa
“Africa has a real opportunity to create jobs and promote inclusive economic transformation through domestic production and raw materials-based industrialization, leveraging the continent’s resources and opportunities arising from changes in the global production structure,” the African Development Bank said. “Exploring Africa’s industrialization opportunities involves adding value to national products, raw materials, and developing linkages with regional and international value chains.”
Dangote’s experience shows that this process implies a change in the economic paradigm and must be driven strongly by the government in partnership with the private sector to succeed.
In recent years, the economic model of Western countries has changed dramatically with the energy transition, which has prompted governments to adopt industrial policies. The approval of the US Chips and Science Act (for semiconductors) and the Inflation Reduction Act (for green transformation) and the EU’s industrial policy strategy (for the digital economy and energy transformation) are all examples of favorable economic policy changes.
But African countries face a business order that is still rooted in the neoliberal paradigm. This paradigm shift is made difficult by the lack of coherent economic diversification and industrialization policies and the financial resources to implement them.
The large share of raw materials in the economy creates important constraints on the trade balance, debt servicing, and taxation. The trade-off between short-term foreign exchange and tax needs and the long-term benefits of economic diversification implies careful choices of economic policies and can carry significant political costs.
In the short term, there are not enough resources to finance change. As for foreign direct investment (FDI), as countries move along the value-added chain, FDI is attracted by other economic factors, including the business environment, the quality of human capital and exports. In the case of raw materials, FDI is attracted even when political and economic risks are high and insecure.
Another important issue is the market-related industrialization and economic diversification strategy. The size of the Dangote refinery necessarily implies an aggressive fuel export strategy. Penetrating other markets is a difficult task. Although some products can be sold to the domestic market, the strategy of relying solely on import substitution does not seem to work based on the past experience of South American countries. Therefore, establishing partnerships with other countries and investment and trade agreements is an important factor.
Regarding Angola, the Minister of Mineral Resources, Oil and Gas, Diamantino de Azevedo, recently gave a speech entitled “What Oil and Gas (Still) Have to Give to Angola and What the Country Expects from Critical Minerals” as part of the Conversas Economia 100 Makas program. The minister outlined a coherent strategy to stabilize oil production and expand the downstream oil, gas and mineral value chains, thereby promoting economic diversification. It remains to be seen how this strategy fits into the government’s broader plans, in particular how the trade balance and public finances will facilitate this dynamic, rather than impose restrictions as was the case with the Dangote refinery in Nigeria.
By: José Correa Nunes
Executive Director of Angola Portal
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