There is a familiar and predictable pattern to Nigeria’s response to economic crisis. Each time the country faces an economic hardship, often triggered by the collapse of the oil market, the government reaches for a suite of protectionist measures, including import restrictions and exchange control. The aim is mainly to shield local industries from foreign competition, but also to conserve foreign exchange. This pattern of import-substitution interventions has underpinned Nigeria’s trade and industrial policies for decades. The measures have never worked, of course, but that has not stopped successive governments from using them. Why is this so? Well, my cynical view is that they are easy-to-use, off-the-shelf, ‘policy’ tools. No serious creative thinking or rigorous intellectual effort is required to introduce protectionist measures. Tariffs can be raised and imports banned overnight by diktat, with a stroke of a minister’s pen.
The Central Bank of Nigeria (CBN) recently followed this well-trodden protectionist path when it banned importers of 40 foreign products from accessing the foreign exchange market, effectively restricting the import of those items. The CBN claims that the intervention would help to “resuscitate local manufacturing” and change the structure of the economy. But we know that it will achieve none of these objectives. It may help conserve some foreign exchange, but it will do nothing to transform the Nigerian economy as the CBN would have us believe! More on the CBN ban in a moment, but, first, I want to show that Nigeria has a long history of using import restrictions to protect domestic industries, and that these measures breach Nigeria’s international commitments, potentially harming the country’s image.
The allure of protectionism has always been strong in Nigeria especially when there is an economic downturn. Nigeria’s first major economic crisis of the oil era hit the Shehu Shagari government in the early 1980s. That government’s response, as set out in the Economic Stabilisation (Temporary Provisions) Act of 1982, had at its core the curtailment of imports. When the Buhari military regime replaced Shagari’s government in December 1983, it escalated Shagari’s import restrictive policy by placing all imports under licensing and closing Nigeria’s borders. The number of goods banned rose to about 75 under the Buhari regime. The Babangida regime that replaced Buhari’s was, broadly speaking, economically liberal, with the pro-market elements of its structural adjustment programme, but it started by imposing a 30% levy on all imports. Although Babangida later abolished the import levy and, crucially, the notorious import-licensing system, the tariff system that he introduced was a major protectionist tool. For instance, the regime’s tariff review board was raising tariff rates almost every year, sometimes up to 100% for some products. In 1994, the Sani Abacha regime introduced wide-ranging regulations and controls. By 1995, however, to assuage the concerns of foreign investors, Abacha announced what he called “guided deregulation” and reversed some of the existing controls. But as Abacha became increasing dictatorial and unpopular internationally, his economic and trade policies became very restrictive.
The situation did not improve under the civilian dispensation that started with Obasanjo’s administration in 1999. Indeed, President Obasanjo once vowed that “We are certainly going to ban more products”, adding that “The idea is to protect our local industries and boost our manufacturing capability substantially”. And his government used import bans extensively, although powerful individuals often bypassed Ministry of Trade officials and even the minister to secure waivers directly from Obasanjo himself. Of course, much of policy-making in Nigeria, even today, is based on administrative fiat and discretion, rather than adherence to due process and respect for individual procedural rights. As my friend, Razeen Sally, professor of international political economy at the National University of Singapore said: “protectionism is inherently arbitrary and opaque”. And Nigeria’s trade policy is not only generally discriminatory and restrictive, it’s arbitrary and opaque! This was always a source of frustration for many of Nigeria’s trading partners.
I worked as a research fellow at the World Trade Organisation (WTO) in Geneva in 2005, and observed how Nigeria’s major trading partners frequently challenged the country in WTO committees about its incessant use of import restrictions to protect domestic industries. I saw how Nigeria’s overstretched trade diplomats in Geneva always struggled to defend Nigeria’s trade policy and how they usually asked for more time to consult ‘capital’ before they could answer difficult questions. Under the WTO trade policy review mechanism, Nigeria’s trade policy is reviewed every seven years. In its 2005 review, the WTO noted that “since its last TPR in 1998, Nigeria trade regime has become more protective”. The IMF went even further in its Article IV consultation report by declaring that Nigeria’s trade policy regime “is one of the most restrictive in the world”. Subsequent reports show that little has changed in ten years, and the CBN’s intervention to restrict certain imports would simply reinforce that international judgement.
Indeed, the recent altercation between the CBN and The Economist magazine, which criticised the CBN measures in an article titled “Toothpick alert” to which the CBN responded in a rejoinder, reflects the kind of the exchanges that are likely to be going on now at the WTO between Nigeria and its key trading partners. Nigeria, of course, will insist that the measures are designed to help its economy.
But, let’s be clear, the CBN argument that the forex ban would “facilitate the resuscitation of domestic industries and improve employment generation” is not convincing. If restricting imports has the capacity to transform the economy as the CBN suggests, why is Nigeria’s economy still structurally deficient after nearly 40 years of banning imports to protect domestic industries or, indeed, after nearly 55 years, since independence, if you add the fact that Nigeria also followed the discredited Latin American economic model of import substitution industrialisation policy in the 1960s and 1970s?
Unpopular as this may sound, I believe the problem is not that Nigeria is importing too much; it’s that it is not exporting enough beyond the market-unstable oil! Non-oil revenues are only 4% of the GDP. According to the WTO, Nigeria’s share in world total merchandise exports is 0.55%, while manufactures account for just 1% of the country’s total exports. We do not have firms that can add value in manufacturing (beyond light processing) and that can compete abroad and export more. Yet, in a globalised world, you cannot deal with the problem of import dependency by simply banning or restricting imports; you deal with it by allowing the market to regulate imports through a fair and competitive exchange rate regime, and by promoting exports. But if Nigeria is really serious about promoting non-oil exports, it needs to support industries that are either export-oriented or that have the potential to be export-oriented instead of propping up inefficient import-substitution domestic producers. It is striking that most of the 40 items on the CBN forex ban list are intermediate or consumer goods. Yet you cannot foster productive and export-oriented industries by restricting their access to cheap imported raw materials or intermediate goods.
There is also the point that the forex ban, which covers several consumer products, would reduce real incomes for households, particularly poor ones. I wrote last week about rising poverty in Nigeria, and argued that high costs of living are a key cause of this. Surely, import restrictions would result in higher prices of consumer goods. This is because sheltered domestic producers tend to become complacent or “goof off”, as the Columbia University economics professor, Jagdish Bhagwati, put it, and produce costly and poor quality products, which domestic consumers are forced to buy because they no choice. Thus, import restrictions deny consumers three of the key benefits of trade liberalisation: choice, quality and value! Those who support protectionism to save local jobs should know that protectionism condemns workers in the protected sectors to low productivity jobs and poor wages. Only higher productivity, which comes from competition, innovation, a skilled workforce and good infrastructure, can lead to higher wages and better standards. For workers in sheltered domestic industries, it’s thus a double whammy: poor wages and higher living costs. What’s more, their jobs cannot even be protected in the long term! Workers should be properly trained and supported so they can help businesses grow or switch jobs if necessary.
So, the CBN forex ban is bad economics and bad policy. But, that said, import restrictions can be legal if introduced in accordance with international trade rules. For instance, WTO law permits import restrictions for infant industry reasons; it permits import bans on balance of payment (BOP) grounds; and allows import prohibitions for safeguard reasons, that is, when there is a sudden and excessive flow of imports that is harming domestic industries. However, the processes for invoking these exemptions are rigorous and stringent. For instance, a country needs the IMF’s written support to use the BOP provisions, and needs to put in place a robust restructuring plan for domestic industries, including a sunset clause, before it can invoke the safeguard exemption.
The problem is that Nigeria is woefully incapable of invoking these legally acceptable exemptions. For instance, Nigeria’s previous attempts in the late 1990s to prohibit imports for BOP and safeguard reasons were declared by the WTO to be “inconsistent with WTO rules” and caused strained relations with its major trading partners. Since then Nigeria has not used these provisions. There is also the rule on fair trade. Some Nigerians complain about “cheap” imports that harm local producers, but if foreign goods are being “dumped” on Nigeria, i.e. sold below their home prices or production costs, WTO law allows the government to investigate this and, if justified, to impose anti-dumping duties on such goods. But Nigeria lacks the institutional and regulatory capacity to investigate anti-dumping issues. So, unable to invoke these exemptions, Nigeria is using extra-legal means to protect its industries through ‘illegal’ import restrictive measures.
My long-held view is that protectionism is a sub-optimal policy tool. It undermines productive industries and reduces the living standards of poor households. We need an alternative development strategy that is based on an outward-looking economy, not an inward-looking one. But if Nigeria wants to intervene temporarily to protect its local industries, it should focus on the productive and export-oriented sectors. This is what the East-Asian countries did when they linked government support to the ability of a firm to produce for export. Even then, we now live under a rules-based global trading system. So, Nigeria must still ensure that its trade restrictive measures are in accordance with international trade rules. This means it must have in place a robust regulatory and institutional framework to invoke WTO exemptions. Only then can Nigeria maintain an international reputation as a rule-of-law country. This is crucial for investor confidence!