Opportunity Cost of Nigeria’s Trade and Industrial Protectionist Policies

The World Bank in its latest report on Nigeria Development Update argued that the country’s protectionist trade policy is counterproductive, writes Dike Onwuamaeze

Nigeria’s trade protectionist policy, ostensibly conceived to protect Nigerian local manufacturing industry, is counterproductive. This is the verdict of the World Bank in its latest report titled, “Nigeria Development Update June 2022.” The report said that Nigeria’s trade policy is costing the country more public revenue and pushing its citizens into poverty.   

The World Bank report made some bold and unequivocal assertions. One, the country’s trade policy since the inception of President Muhammadu Buhari’s administration in 2015 has been remarkably moving further in a protectionist direction and yielding several unintended consequences, including high levels of tariff evasion accounting for the loss of $1.8 billion annually in public revenue. This is estimated to be 0.4 percent of GDP.

The report also asserted that the country’s increasing trade protectionist stance is constraining the efficiency and competitiveness of its domestic firms.  

The third assertion made in the report is that import restrictions are pushing millions of Nigerians into poverty as “distortionary trade policies can decrease overall purchasing power and, in turn, increase poverty.”

unpredictable trade policies

The report further asserted that Nigeria’s restrictive and unpredictable trade policies are increasing smuggling, diminish revenues, hurt consumers, and raise production costs.

It added that Nigeria’s weak trade performance in recent years has been exacerbated by its highly restrictive trade regime. Moreover, import restrictions are pushing millions of Nigerians into poverty, encourage smuggling and reduce revenues.

The report said that fully liberalised trade would increase household income; and called for trade policy reforms that could reduce production costs for firms while preserving revenues. It argued that higher production costs in turn make it difficult for Nigerian firms to compete against producers based in countries that levy lower tariffs on inputs.

It also pointed out that increasing and diversifying exports and FDI is central to advancing Nigeria’s industrialisation and development objectives.

The World Bank said that Nigeria’s “government could reform its tariffs to reduce production costs, while still preserving fiscal revenue.”

It averred that, “full liberalisation of trade will increase household income on average by 3.8 percent and reduce the share of people living in poverty by 2.3 percentage points.

“This is because liberalising trade will lower prices, and the resulting gains in purchasing power would outweigh any income losses for households producing the goods that end up being cheaper.”

The report also said that trade policy reforms could reduce production costs for firms while preserving revenues.

In addition, Part Three, Spotlight One of the World Bank’s NDU report captioned “The Unintended Consequences of Nigeria’s Trade Policies” affirmed that trade and investment have been key drivers of global growth and poverty reduction over the past 30 years for countries that embraced trade liberalisation.

increased participation

It also added that increased participation of firms from developing countries in regional and global value chains has contributed significantly to job and wealth creation.

However, the World Bank noted that Nigeria is being denied these benefits due to the prevalence of trade restrictive policies and widespread skepticism, which cast doubts about the benefits of export-led growth and increased integration.

The effect of this widespread skepticism, according to the bank, is that the long-standing policy aim of respective Nigeria’s governments to achieve economic diversification have largely remained unsuccessful and foreign direct investment has not reached its potential and has been in fact declining in recent years.

According to the report, “Nigeria’s trade policy has moved in a heavily protectionist direction, with an escalation of import restrictions through higher tariffs and levies, import bans, foreign exchange limitations, and border closures. Although these measures were intended to support the country’s industrialisation and security goals, they have had numerous unintended consequences. For one, import restrictions result in high levels of tariff evasion, and thus a loss in revenue estimated at 0.4 percent of GDP, or $1.8 billion annually.

“Secondly, these policies also adversely affect poverty by raising consumer prices. Finally, they inhibit the efficiency of domestic firms by raising the cost of their production inputs, thereby constraining their competitiveness and limiting their potential to export to regional and global markets.”

The World Bank, therefore, highlighted the urgent need for a change in Nigeria’s trade policy and approach that would focus on reviewing trade policy to safeguard revenues, reduce poverty and support domestic firms; and reducing domestic and international trade and transport costs.

The bank also harped on the need to realign Nigeria’s trade orientation toward the creation of appropriate policy and institutional infrastructure that would support Nigeria’s trade and industrialisation priorities.

export performance

It said: “This spotlight provides an overview of Nigeria’s recent export performance and focuses on some of its key underlying features. It also examines the role of import restrictions that shield some incumbents from competition while hurting consumers and most firms, and constraining government revenues. These policies have been central to the country’s limited success in diversifying the economy and furthering the growth of the manufacturing sector. Nigeria has ample room to harness the development potential of increased trade and investment.

“This is especially apparent when considering five dimensions of Nigeria’s recent trade performance: Nigeria remains one of the world’s least diversified countries. Although experiences differ globally, countries that achieved greater diversification over the past decades grew more quickly and had more consistent growth overall.

“In Nigeria, however, most exports are concentrated in oil, while remaining exports are mostly basic agricultural goods that add little value.  

“Nigeria exports relatively little to the rest of Africa, as oil exports are primarily directed outside the continent. Nigeria’s formal intra-regional exports make up less than 10 percent of its total exports, while almost one quarter of South Africa’s exports go to the African region.

“Nigeria’s share of intraregional trade within ECOWAS has also remained low—approximately two to four per cent of Nigeria’s total recorded exports between 2019 and 2021. However, the ECOWAS region accounts for a far greater share of Nigeria’s non-oil exports—close to 10 percent in recent years. This shows the potential for Nigerian industries from greater continental integration, for example through the African Continental Free Trade Area, if the productivity of exporting firms can be strengthened and trade costs reduced.”

Nigeria’s experience

The report referred to a recent International Monetary Fund (IMF) analysis in 2021 that contrasted Nigeria’s experience with that of three Asian countries, namely Indonesia, India and Malaysia that had a similar focus on import substitution during the second half of the 20th century but were able to diversify.

All these three countries, said the report, trailed Nigeria in GDP per capita in 1980 but now far exceed it. Key drivers of change in these three countries included: economic crises that created a window of opportunity for reform, which entailed a focus on education and knowledge accumulation; and the gradual reduction of trade and investment barriers.

 The World Bank report noted that Nigeria’s share of the FDI, especially in extractives, has been declining both as a share of GDP and relative to comparator countries. FDI, which goes hand-in-hand with trade, is a critical ingredient to economic growth, contributing to increased productivity, innovation, and technology transfer. FDI supports the diversification of the economy and helps domestic firms export more.

“Nigeria’s FDI inflows as a share of GDP have dropped from over 2.0 per cent a decade ago to less than 1.0 per cent in recent years. But some comparator countries, such as Ghana, have consistently seen FDI inflows in excess of 6.0 per cent of GDP.

“The decline in FDI in Nigeria has been driven by the weak performance of the mining and oil and gas sectors. The services sector, on the other hand, has attracted the largest share of Nigeria’s FDI, potentially indicating greater diversification away from extractives. Between 2009 and 2019, FDI in services made up 50.3 per cent of all inflows, followed by manufacturing sector’s 28.4 per cent and extractive ibdustries 21 per cent,” the report said.

Finding the right balance:

The bank emphasised that industrial and trade policy could contribute to Nigeria’s development aims. It said that increased openness to trade could help Nigeria achieve longstanding policy goals of economic diversification and industrial development.    

This is important as Nigeria is embarking on an ambitious course towards greater integration and policy reform. This is most evident through its active participation in African Continental Free Trade Area (AfCFTA) negotiations and its efforts to develop a domestic implementation plan.

But the AfCFTA’s implementation would require substantial preparation and engagement across the federal and state governments, the private sector and other stakeholders, but holds significant potential for the country to use regional integration in support of private sector-led growth.

“Nigeria has also developed a new National Investment Policy and is preparing a new Trade Strategy. Moreover, at the sub-national level, state governments across the country are implementing ambitious business environment reforms.

“Further continental integration can help enhance the competitiveness of Nigeria’s manufacturing sector. By making manufacturing more competitive, Nigeria could leverage regional market integration to achieve economies of scale, lower costs, and increase its broader international competitiveness.

“Regional value chains can, in turn, offer a stepping stone toward global value chains. Increased competitiveness from regional integration can lead to greater diversification of export products and markets and incentivise domestic producers to compete with foreign firms. The vibrant entrepreneurial ecosystem in Nigeria would benefit from being connected to technological and process innovations, know-how, diaspora mentorship, research and development. This could include supporting existing networks of research and development institutions to foster innovation,” the report said.

It added that “trade offers a vital, but often untapped pathway to poverty reduction. Through its effects on investment, technology transfer, and competition, trade can help growth—boosting job creation, increasing domestic value added, and reducing the price of goods that Nigerians buy. All such effects may contribute to reducing poverty.

“Yet, the benefits from trade are not automatic. There is a need for careful sequencing, broad consultation, and finding a way to maximise the gains from trade while taking proactive measures to support the adjustment process.

“This includes understanding how to facilitate labor mobility, as well as the importance of complementary policies such as business environment reforms and supporting skills development. The following policy options provide an overview of the way forward.”