BusinessDay

Unceasing import substitution policy worsens Nigeria’s economic woes

Faced with spiraling inflation, a weak currency due to a high import bill incurred by Nigerians and low non-oil export, the Nigerian government for decades has resorted to an import substitution policy geared primarily towards curtailing a dependency on foreign products using a host of restrictive policy tools like tariffs, bans and quotas – still – the manufacturing sector that should lead Nigeria’s industrialization strategy remains handicapped and largely unable to take up this role in a renewed drive for self-sufficiency and foreign exchange revenue generation that is desperately required to enable the country rub shoulders with emerging economies like China and South Korea.

The protection of the infant industry, foreign competition, and the containment of the menace of dumping were other arguments advanced by successive Nigerian governments for the adoption of an import substitution policy whose history dates back to the 1970s with the promulgation of the Indigenization Decree that spurred industrialization leading to the establishments of white elephant projects – petrochemical plants, iron and steel industries, textile, breweries, agriculture and automobile industries to mention amongst others.

According to the National Bureau of Statistics (NBS), Foreign Trade Statistics report, the import spend of the country has been on the rise for the past 6 years despite the host of protectionist policies and trade barriers that have been mounted by the government in a bid to reduce the dependence of foreign goods. Also, trade with ECOWAS nations and other African nations has not risen as much as trade with other African nations has.

The value of total imports into the country in 2016 was N8.81 trillion. In 2017, this value rose to N9.96 trillion and then to N13 trillion, N16 trillion, and N19 trillion in years 2018, 2019, and 2020 respectively.

The Financial Derivatives Company (FDC) says that in 2015, Nigeria spent approximately N1.6 trillion on importing “boiler, machinery, appliances”, N1.3 trillion on “mineral products” and over N600 billion on “vehicles, aircraft and associated parts”. Spending such huge amounts to import has led to a dearth in local manufacturing and a steep decline in the foreign exchange earnings conserved.”

Nevertheless, economic and policy experts have often argued that a restrictive policy like import substitution that is protectionist is only inward and not outward-looking and thus does little to advance the long-term goals of export promotion that is adjudged the solution to the economic woes that have befallen the nation.

Renowned trade lawyer, political economist, and policy expert – Olu Fasan says that the concurrent adoption of import substitution and export promotion policies is contradictory and in fact impossible and has advised the Nigerian Government to expunge its practice.

“Import-substitution industrialization is a tried, tested, and failed policy. We should stop hankering after it. Hardly any country has ever industrialized and achieved sustained economic growth on the back of such a highly protectionist economy. The industrial revolution of the 18th and 19th centuries was accompanied by Britain’s unilateral free trade policy. In recent times, closed economies had to open up to become competitive. For instance, China joined the WTO, and, following its accession in 2001, its simple average tariff fell from about 40 percent in 1985 to under 10 percent in 2014.”

The African Continental Free Trade Agreement (AFCFTA) came into force with the commencement of trading on January 6th 2021. Touted today as the greatest promise to intra African and bilateral trade with a promise to double the size of Africa’s manufacturing sector to an annual output of $1 trillion by 2025 and create over 14 million jobs, Nigeria nevertheless faces a huge challenge in tapping into its prospects due to a tight trade restriction with her neighbors.

The United Nations (UN) says that irrespective of the fact that “45 African countries have signed the AFCFTApact, and 36 African Union member states deposited their instrument of ratification, only 3 African countries – Ghana, South Africa, and Egypt have met the custom requirements on infrastructure for trading.”. This means that Nigeria as of now is yet to commence trading under the AFCFTA.

More worrisome is a debilitating and incessant border closure policy that has stifled trade with fellow African nations for years thus promoting the menace of smuggling.

The President of the ADB – Akinwunmi Adesina also says that “The Africa Continental Free Trade Area presents a huge opportunity for Nigeria to drive an export-driven industrial manufacturing pathway. The in-ward looking import-substitution plans that have been pursued over time, ensured that local industries were unprepared when the continental free trade area was established.

Some of the concerns were legitimate, especially the challenge of dumping illegal imports into Nigeria, which has a direct effect on the profitability of local industries. However, illegal imports cannot happen if there is respect for the rule of law. Illegal imports happen because of the porosity of the borders, and ingrained rent seeking and corruption at the borders.”

History of border closure

In 2004, Nigeria restricted rice imports from Benin Republic in 2004 and added a 70% duty on other foreign rice. More countries were also added to the restriction list subsequently.

“In 2012, the Jonathan Administration introduced the Nigeria Industrial Revolution Plan (NIRP) in order to enhance local production of goods that were imported as well as chart a comprehensive course for turning Nigeria from a country that only exports raw materials (crude oil) to one that has a solid manufacturing base.”

In August 2019, under the current administration of President Muhammadu Buhari, the Federal government announced a partial border closure and in October 2019, a full closure of land borders thus impeding trade with neighbors- Benin, Cameroun, Chad, and Niger). In doing so, the Nigerian government breached the AFCFTA agreement for free movement between the 15 ECOWAS members and that with the AU countries committing to cutting tariffs by 90% while harmonizing trade rules.

Amongst the various condemnation that trailed this action, the World Bank says that the “decision is unilateralist and parochial, with only short-term advantages to it. One cannot argue that the indefinite border closure will only reduce the import rate into the country and further increase illegal routes of smuggling goods into the country.”

The Central Bank of Nigeria in July 2015 restricted about 41 items, from the foreign exchange in a bid to advance their local production. These products ranged from Rice, Cement, Margarine, Palm Kernel/Palm oil Products/vegetable oils, Meat and processes meat products, Vegetables and processed vegetable products, Poultry – chicken, eggs, turkey, Tinned Fish in sauce (geisha) sardines, Furniture, Toothpicks, Textiles, Kitchen utensils, and Glass and glassware.

In December 2020, four land borders were re-opened after more than a year after closing them.

Today, more than 26 goods are still on the prohibitive list with many more denied foreign exchange. Thus the quest for free trade on the AFCFTA is still a farce with a more restrictive policy by the government.

The International Food Policy Research Institute (IFPRI) says that “Nigeria’s border crisis continues to disrupt African trade relationships and ongoing negotiations. Nigeria has apparently not formally notified its regional partners of its recent restrictions as required by Economic Community of West African States (ECOWAS) trade rules. Thus the border closures contravene an agreement that guarantees free movement between the 15 ECOWAS members. They clearly go against both the letter and the spirit of AfCFTA.

“Nigeria is isolated; a majority of African countries are today attracted by trade liberalization and the promise of AfCFTA, particularly continental champions like Morocco and South Africa. Nigeria’s actions suggest that while it has formally endorsed a continental free trade zone, it is not committed to that goal—and may choose to remain behind at a critical moment for the continent.”

The World Trade Organization (WTO) says that “as of 1986, approximately 40% of agricultural and industrial products were covered by import prohibitions” and that the ease of its monitoring is perhaps the reason it had stuck with the policy over the years.

“The pervasive use of import prohibition in Nigeria has another, perhaps equally important, reason: it is administratively easier. In Nigeria’s responses to the questions raised on this matter during discussions at various GATT and WTO fora, it has been argued that import prohibitions are easier to monitor than price-based measures, since the presence of the banned products on local markets is, in principle, sufficient for enforcement.”

Ironically, even with the decreased rate of imports due to the depreciating naira, domestic production is still not being encouraged. This could be due to the high cost of doing business and the unfavorable government policies in Nigeria.

Whereas Nigeria is not amongst the African countries ranked among the top 100 most competitive countries in the world, based on the 2018 Global Competitiveness Index – she has continued a protectionist and unilateral policy that has only placed her in the comity of less industrialized nations. Mauritius, South Africa, Seychelles, Morocco, Tunisia, Botswana, Algeria, Kenya, Egypt, and Namibia represent Africa on the 100 most competitive countries table. This is not unexpected given the high cost of doing business and a government policy that have in fact continually limited the private sector from benefiting from the opportunities that abound in the country.

According to the African development bank President – Akinwunmi Adesina, “Take for example that 86% of small and medium sized enterprises in Nigeria spend $14 billion annually on diesel for generators. Nigeria’s companies lose on average 10% of sales because they do not have access to reliable and affordable electricity.

Governments, over time, have simply transferred their responsibility to citizens. When governments or institutions fail to provide basic services, the people bear the burden — a heavy implicit tax on the population.”

Smuggling

With border closure has come the menace of smuggling. The porous border between Benin Republic and Nigeria have been used by smugglers to import commodities especially food in view of the high prices that have been occasioned by the Nigerian government’s border closure. According to Benin’s National Institute of Statistics and Economic Analysis (INSAE) survey of 171 border points without customs officers, “17,749 individual illegal transactions took place over 10 days, with a total value of $15.2 million. Illegal trade between Benin and Nigeria represented 2.3-3.8 times the trade officially recorded by customs officials.”

Overtime, the restrictive import substitution policy of the Nigerian government has spurred inflationary pressures and has in-fact made-in-Nigeria goods less attractive to other parts of the world. On a norm, restricting imports to certain essential goods and at the same time devaluing the currency makes imports more expensive and exports attractive. However with import substitution industrialization policy, the government promotes budget deficits with increased spending on industrial investments which eventually overshoots revenue thereby stoking inflation and eventually reducing exports due to more expensive domestic goods.

A negative impact can from a similar policy advanced by India in the 1950s and 1980s. The Financial Derivatives Company (FDC) says that “It led to a “decline of India’s share of world export markets from 2% in the early 1950s to 0.53% 40 years later due to loss of export opportunities. India also faced balance of payment problems due to the growth of its import substituting industries, which required large quantities of imported raw materials, machinery and capital goods.”

However, the case with Sri Lanka was a success story. “Sri Lanka’s agricultural sector recorded increased production due to import substitution policies. Protectionist policies led to the increase in production of rice and several food crops.”

In 2016, The Lagos Chamber of Commerce and Industry (LCCI) released a document delving on the impact of the CBN’s tightened foreign exchange policy on businesses and the economy. For Financial services the LCCI noted “lower transaction volumes and restrictions on foreign credit lines. For Manufacturing there was a reduced manufacturing due to lack of raw materials, lower profits and slower consumer demand Tire and Rubber, default on repayment agreement with foreign suppliers and banks Pharmaceuticals, unavailability of key raw materials not locally produced, increased production cost Oil & gas, difficulty in settling outstanding financial obligations and banking charges and shut down of factories” amongst others.

Thus, in all, the LCCI noted that there was a negative impact of CBN’s restrictive foreign policy.

“The current import substitution strategy in Nigeria seems to be borne out of fear and capricious thinking rather than clear economic rationalization. For instance, the CBN’s shutting official access to forex for the importation of selected items uses import substitution as a smokescreen for the real exchange rate issue of currency misalignment and forex scarcity facing the country.

In addition, rather than have a blanket policy towards import substitution and trade controls, a case-by-case approach that limits the importation of goods based on a comparative advantage analysis should be used. In essence, a temporary import substitution for select commodities in which Nigeria has potential comparative advantage should be pursued.” The FDC Says.

Read also: Analysis: Why Tin-Can Port has become importers nightmare

As a solution to Nigeria’s negative import substitution policy, the FDC says that “There could also be incentives to attract foreign investors as they respond positively to favorable trade and forex policies. It is critical to make the business environment attractive to foreign investors so that they can bring their capital, technology, managerial and technical experience to the country.”

Brookings decries that currently, “intra-African trade is notoriously low, amounting to only around 15 percent of the continent’s total goods trade as of 2016.” Nevertheless, some countries in Africa are already making substantial progress to industrialization.

Professor Landry Signé of the Stanford University says, “Kenya is a good example of an African country, whose relatively strong industrial manufacturing sector accounts for nearly 20 percent of the country’s economic activity and 12.5 percent of all formal jobs, and which has become the primary supplier of motor vehicles for East African markets.”

Nigeria has been presented a choice to either industrialize using an export promotion policy or continue with an import substituting one that gives no result and assures failure.