Nigeria: Selected Issues and Statistical Appendix

This Selected Issues paper and Statistical Appendix analyzes the key challenges facing Nigeria. The paper discusses issues and prospects in the oil and gas sector, provides basic information on the sector, and highlights the importance of strengthened governance. It describes the fiscal policy rules, which presents options for Nigeria based on the experience of other countries. The paper highlights that implementing a fiscal policy rule is identified as one possible way for Nigeria to stabilize public expenditures in the face of volatile oil prices.

Abstract

This Selected Issues paper and Statistical Appendix analyzes the key challenges facing Nigeria. The paper discusses issues and prospects in the oil and gas sector, provides basic information on the sector, and highlights the importance of strengthened governance. It describes the fiscal policy rules, which presents options for Nigeria based on the experience of other countries. The paper highlights that implementing a fiscal policy rule is identified as one possible way for Nigeria to stabilize public expenditures in the face of volatile oil prices.

VI. Trade and Openness Policies in Nigeria60

177. This section first briefly reviews trade performance in Nigeria, noting in particular the slow growth of oil exports since the 1970s and the marginal contribution of non-oil exports. Export promotion policies appear to have been, at best, ineffective. We then survey developments in tariff policies in Nigeria—where average tariffs are among the highest in the world—drawing attention to developments in relevant comparator countries. We also focus on nontariff barriers, trade-related exchange rate issues, and institutional factors affecting trade. A concluding subsection notes that, despite progress in recent years, Nigeria has lagged comparator countries in liberalization, and a more determined medium-term program of trade and exchange policy reform is warranted to spur faster non-oil export growth and associated income growth.

A. Developments in Nigeria’s Trade

178. Over the past two decades, Nigeria’s export performance has weakened against broad comparator groups. Nigerian export value growth peaked during the 1970s, when oil price increases coincided with a rapid volume increase of oil exports. Subsequently, the U.S. dollar value of total exports and oil exports increased at rates of between 2.3 percent and 2.9 percent per annum (decadal average growth for the 1980s and 1990s, Table VI-1). Export growth weakened relative to non-oil developing countries and to African countries during the 1980s and the early 1990s (Figure VI-1). Over the long term, unsurprisingly, Nigeria’s export receipts are most closely correlated to those of developing country oil exporters.

Figure VI-1.
Figure VI-1.

Nigeria: Export Trends

Citation: IMF Staff Country Reports 2003, 060; 10.5089/9781451828931.002.A006

Source: IMF, World Economic Outlook database.
Table VI-1.

Nigeria: Long-Term Export Growth, 1971-2000 1/

(Average annual growth in U.S. dollars, in percent, unless otherwise indicated)

article image
Source: World Bank, World Integrated Trade Solution (WITS) trade database.

Using partner trade data. Growth expressed as annualized annual average of period average value, compared with previous period average value.

Coffee, cocoa, spices, oilseeds, and rubber.

Noncash crop agriculture.

Principally manufactures and chemicals.

179. Oil and gas have accounted for 95 percent of Nigerian export value since the 1970s, and growth has been slow since the 1980s. Oil export prospects depend significantly on the potential to expand Nigeria’s OPEC quota faster than the increase of total OPEC supply, and on the ability of OPEC quotas to support trend increases in oil prices. In all likelihood, notwithstanding significant unused production capacity in Nigeria, the prospects for relaxing both oil export price and volume constraints are limited, particularly in view of the significant excess capacity across OPEC and subdued global demand. Therefore, Nigeria’s export prospects may depend critically upon diversifying the export base away from oil and gas.

180. Nigerian non-oil exports have a very small base for future expansion. Non-oil exports have accounted for 5-6 percent of export value for the past three decades, equivalent to 2½ percent of GDP in more recent years (1996-2000). Traditional agricultural cash crop exports (2.1 percent of exports in 1996-2000) have faired poorly over the past 40 years; meanwhile, other agricultural products increased in importance during the 1990s (rising to 1.5 percent of export value), and manufactures have shown some promising recent growth rates, albeit from a small base (rising to 1.6 percent of export value).61

181. From a comparative perspective, Nigerian non-oil export volumes have been disappointing. The trend decline of real non-oil exports in Nigeria is also exhibited by some other African oil-exporting economies (Algeria, Angola, Cameroon, and Gabon). However, oil exporters with large populations (a relevant comparator group including Indonesia, Venezuela, and most markedly, Mexico), have diversified their export base and seen real increases in non-oil exports. Another comparator group—or, alternatively, a control group—of nearby coastal west African states (Benin, Côte d’lvoire, and Ghana) exhibits stronger non-oil growth than Nigeria. We now turn to a comparison of trade and exchange policies that help to explain the divergence of trade performance.

B. Export Policies

182. Nigeria has a wide array of export facilitation and promotion policies that have not functioned efficiently in view of the non-oil export volume declines, and appear to be undermined by the exchange rate-related and institutional weaknesses discussed below. The “manufacture in bond” scheme, which rebates 20 percent of export value (for selected exports), is used by about 200 companies to offset tax liabilities; however, few data are available to assess its magnitude or trade impact.62 A duty drawback scheme, administered by customs, is reported by the authorities to be operating well and benefiting companies producing textiles, selected household products, food products, and leather products (no data are available on the operations of the scheme). There is one export processing zone in Calabar, and a second zone is envisaged in Port Harcourt; the authorities reported that four factories were operating in these zones. An export grant scheme has been introduced in 2002 in agriculture (5 percent on agricultural cash crop exports) but the take-up of the scheme has not been assessed. Similarly, trade facilitation measures are advancing slowly: the Economic Community of West African States (ECOWAS) Trade Liberalization Scheme (ETLS) has not been ratified in Nigeria, and requests for duty-free importation from ECOWAS states have to be approved by the Ministry of Finance; the ECOWAS interstate road transit convention has not been implemented; no progress has been reported on facilitating intra-ECOWAS trade (such as the removal of checkpoints and border posts, and visa-free travel to Nigeria); and the ECOWAS certificate of origin protocol has not been ratified by Nigeria. Without the use of these legal instruments, customs administration cannot effectively enhance trade with Nigeria’s ECOWAS neighbors. Finally, as discussed below, export bans remain on a significant range of products.

C. Tariff Policy Developments

183. During the 1990s, Nigeria lagged most countries in lowering import tariffs and tariffs remain among the highest in the world. Tariff peaks above 40 percent protect much of domestic manufacturing. This subsection first discusses tariff protection in a cross-country context and then considers the tariff protection of domestic Nigerian producers.

184. Tariff policies became more liberal in Nigeria in the mid-1990s, in part as a result of the country’s impending accession to the World Trade Organization (WTO) in 1998. Tariffs replaced some significant import bans (on maize, vegetable oils, gypsum, and household items), and there was a phased reduction of tariffs on a range of imports, particularly primary and intermediate goods, in the context of a five-year tariff schedule published in 1995 (although frequently amended thereafter). Some tariff peaks were eliminated, and the principle of equal tax treatment of domestic and imported goods was established (with the introduction of nondiscriminatory excises).

185. Tariffs remain very high by international standards, and, since 2000, tariff policies have increased effective protection. Tariffs on inputs have continued to decline, but tariffs on finished goods have increased, substantially in some cases. The trade-weighted tariff has declined marginally from 18½ percent to 17½ percent between 2000 and 2002 (using 2000 weights), but the simple average tariff has increased from 29 percent to 34 percent during the same period.63 The simple average tariff, including other duties and charges, has increased to 37 percent, close to the highest tariff rate in the world.64

186. A “tariff gap” has opened between Nigeria, on the one hand, and regional trade partners and selected oil exporters, on the other, as the latter have lowered tariffs more than Nigeria (Figure VI-2). The tariff gap that has opened against ECOWAS and West African Economic and Monetary Union (WAEMU) partners results in part from progress in introducing common external tariffs in WAEMU and, to a lesser extent, in ECOWAS. For example, Benin has 4 tariff bands, at 0, 5, 10, and 20 percent. By comparison, Nigeria has more than 20 bands, rising to 150 percent. Both regimes employ tariff escalation, with the lowest tariffs on inputs, capital goods, and selected merit goods, and the highest tariffs on finished goods. Significantly lower tariffs in neighboring countries encourage informal transit trade, especially through Benin, thereby undermining revenues and the protective nature of tariffs.

Figure VI-2.
Figure VI-2.

Nigeria: Import Tariff Comparisons

Citation: IMF Staff Country Reports 2003, 060; 10.5089/9781451828931.002.A006

Sources: UNCTAD; WTO; and Fund staff calculations.

187. The tariff gap with Indonesia has widened markedly, as Indonesia pursued policies to lower import tariffs and diversify exports away from oil (Figure VI-3). There has been a significant decrease in Indonesian trade weighted average tariffs over the past two decades: starting from a similar base as Nigeria’s of close to 25 percent in the early 1980s, these tariffs fell to 3 percent in 2000. After some initial liberalization in the mid-1980s, meanwhile, Nigeria’s trade weighted tariffs were increased to 34 percent in 1990 and were subsequently reduced to 17 percent, somewhat below the average of two decades ago. Developments in 2001 and 2002 have reversed, partially, the liberalizing steps taken around the time of WTO accession. The widening gap between trade weighted and average tariffs in Nigeria reflects prohibitively high tariffs on selected tariff lines, which effectively discourage imports, thus biasing average tariffs downward.

Figure VI-3.
Figure VI-3.

Nigeria and Indonesia: Import Tariff Developments, 1982–2002

(Import tariffs in percent)

Citation: IMF Staff Country Reports 2003, 060; 10.5089/9781451828931.002.A006

Source: IMF staff reports drawing on WTO, UNCTAD and authorities’ data.

188. The Nigerian authorities have given high tariff protection to finished goods while gradually lowering tariffs on raw materials and intermediate inputs (a practice known as tariff cascading). Three-fourths of imports (by value) face tariffs of 20 percent or less (Table VI-2), and the trade-weighted average tariff has declined from 18.5 percent in 2000 to 17.4 percent in 2002, largely reflecting cuts on input tariffs. However, as discussed below, tariff cascading results in very high levels of effective protection for domestic producers.

Table VI-2.

Nigeria: Imports by Tariff Band, 2002

(In percent)

article image
Source: Ministry of Finance; and COMTRADE database.

189. Large domestic manufacturers in Nigeria enjoy particularly high protection and this may be a key factor in explaining the weakness of non-oil exports (Figure VI-4). Most large companies in Nigeria produce finished goods using imported intermediate inputs. A good measure of overall tariff protection for domestic producers is the tariffs applied to the finished products of publicly quoted tradable goods listed on the Nigerian Stock Exchange, weighted by market capitalization. This measure indicates that the average protection on finished goods is 58 percent, excluding the oil sector, in 2002, an increase from the 49 percent registered in 2000. The high tariffs reflect the predominance of breweries and food, beverage, and tobacco firms in the capitalization of the stock market and their applicable tariffs, in the range of 82-100 percent. The high tariff protection for domestic producers suggests that either profit margins are particularly wide or that domestic producers are not cost competitive against foreign producers. With a few exceptions, the lack of exports from domestic finished goods manufacturers suggests that lack of price competitiveness is the major factor.

Figure VI-4.
Figure VI-4.

Nigeria: Tariff Protection Estimates for Publicly Listed Companies

Citation: IMF Staff Country Reports 2003, 060; 10.5089/9781451828931.002.A006

Sources: Nigerian Stock Exchange; Ministry of Finance; and Fund staff estimates.Note: 1/ Weighted by stock market capitalization.

190. A more appropriate tariff structure for Nigeria would appear to be one with low, uniform, and nondiscriminatory rates. Nigeria’s medium-term policy objective of achieving regional trade integration through the adoption of a common external tariff with ECOWAS would mark a move in this direction, even though the country would retain a fairly high maximum tariff of 20 percent on finished goods while also discriminating in favor of regional producers. The liberalization would most likely be more significant vis-à-vis the rest of the world than with regional trade bloc partners, in view of the significant external tariff reductions entailed; much of the intraregional trade already appears to be evading customs procedures, as evidenced by the underreporting of Nigerian exports. Moreover, participation in ECOWAS does not represent a strong boost to competition overall, as the region has also lost a significant market share to other non-oil developing countries since the 1980s. This strategy might be complemented by the use of duty drawbacks for exporters of capital and intermediate goods, although the experience with such schemes in Nigeria has not been proved effective.

191. Given the scale of the tariff reductions needed in some sectors to converge with the common external tariff of ECOWAS, a medium-term tariff reform would need to be complemented by actions to enhance productivity growth. Figure VI-5 shows an indicative schedule of tariff reduction for 2002-07 aimed at converging with the ECOWAS common external tariff and focusing on goods produced by large, publicly listed firms. Complementary policy actions that could be taken to enhance competitiveness would include exchange rate adjustments, institutional reforms, and structural reforms; these actions would cut costs especially in ports, and in the roads and power sectors. These issues are discussed below.

Figure VI-5.
Figure VI-5.

Nigeria: Tariff Convergence with ECOWAS

(Indicative schedule for selected domestically produced products; tariff rate in percent)

Citation: IMF Staff Country Reports 2003, 060; 10.5089/9781451828931.002.A006

Source: Fund staff calculations.

D. Nontariff Barriers (NTBs)

192. Despite progress made in the context of accession to the WTO toward reducing import and export restrictions, Nigeria retains a number of significant barriers. Although NTBs have been reduced significantly in Nigeria since 1995, a significant proportion of agricultural production remains subject to trade prohibitions, particularly import or export bans (Table VI-3). Some import prohibitions have been replaced with high tariffs, in line with Nigeria’s WTO commitment to eliminate trade prohibitions by 2001.65 Nonetheless, a significant proportion of trade remains affected by NTBs: 41 percent of staple food production and 15 percent of nonstaple food production are subject to export or import prohibition, and the export of timber is prohibited (except one species). Policy reversals, such as in the recent case of the reintroduction of the import ban on printed fabrics, send confusing signals to domestic producers.

Table VI-3.

Nigeria: Selected Export and Import Prohibitions, 2002

article image
Source: Ministry of Finance.

193. Nigeria’s NTBs are generally higher than those in neighboring countries. IMF staff assessments of the restrictiveness of NTBs for Nigeria and selected comparator countries are shown in Table VI-4. Compared with francophone west African neighbors, Nigeria’s NTBs appear more restrictive, which suggests potential problems in enhancing regional trade integration. But a broader comparison with oil exporters indicates that trade restrictions are a fairly common occurrence and perhaps underscores Nigeria’s similar overall trade performance to that of developing country oil exporters. Perhaps surprisingly, Indonesia had until recently a fairly restrictive set of NTBs, which began to be dismantled only in the years after the Asian crisis; however, Indonesia’s restrictions were not generally intended to address the overvaluation of the exchange rate. Nigeria also has relatively high nonduty charges on imports that augment tariff protection.66

Table VI-4.

Nigeria and African and Oil Exporter Comparators: Nontariff Barriers, 2002

article image
Source: IMF, based on Article IV staff reports.

1= not restrictive; 2 = restrictive; 3 = highly restrictive.

E. Trade-Related Exchange Rate Issues

194. In Nigeria, a segmented exchange market remains a major impediment to openness. A history of fixed or inflexible exchange rates with generally high inflation has caused periods of very significant exchange rate misalignment, dating back to the 1970s. The public sector allocation of foreign exchange at an overvalued official rate fostered a multiple exchange rate system, including parallel markets. This also arguably led to other trade policy interventions through tariffs and NTBs to protect domestic producers from otherwise uncompetitive exchange rates. From 1993 through end-1998, parallel market premiums were high, often over 100 percent. Following the devaluation at end-1998 and the adoption of a more market-oriented exchange rate arrangement, the parallel premium has been reduced but remains significant (7.2 percent in 1999, 9.0 percent in 2000, and 18.3 percent in 2001) and still acts as an effective tax on legitimate exporters.67 The introduction in July 2002 of a Dutch auction in the foreign exchange market has underpinned a narrowing of the premium to under 10 percent. The ongoing liberalization of other countries’ exchange rate systems, for example, the recent exchange rate unifications in Pakistan and Iran, means that de facto multiple exchange rate arrangements are now confined to relatively few developing countries—primarily those with extensive state control or in situations of civil strife. Nigeria thus appears increasingly an outlier in maintaining a segmented exchange market.68 Progress in reducing tariff peaks, NTBs and institutional bottlenecks would assist in eliminating the remaining exchange market premium.

F. Institutional Factors69

195. The positive impact of trade and exchange system policy reforms could be undermined by significant weaknesses in the institutional arrangements underpinning trade. While a survey of legal, regulatory, and supervisory procedures is beyond the scope of this section, observers cite numerous institutional impediments to trade that are more formidable than in most developing countries. Key issues highlighted are the following:

  • Slow and costly customs clearance, in part resulting from the 100 percent destination inspection, which is a particular impediment to trading perishable goods. Import clearance takes 10-25 days and export clearance 7-10 days. The cost of clearance of a container in Lagos ports is estimated to be US$200, three times the cost at any other West African port.

  • Weak customs control and enforcement. Antismuggling efforts are weak, with no well-resourced units patrolling border areas. Nigeria does not have an effective visa system to prevent unlawful transshipment and the use of counterfeit documents. Such a visa regime is required for apparel and textile preferences under the U.S. African Growth and Opportunity Act (AGOA).

  • Sometimes or often an arbitrary approach in application of standards, labeling, testing, and certification regulations.

  • Burdensome and costly bureaucratic procedures. For example, seven agencies have the power to inspect imports and exports in ports, and there are excessive documentation requirements for permission to import, and thereby obtain foreign exchange.

  • Ineffective patent and trademark protection, although some recent intellectual property rights cases have been successfully prosecuted in Nigeria.

  • Weak contract enforcement and due legal process.

196. Medium-term trade policy reform would be buttressed by a strengthening of relevant trade-related institutions. Such an effort would address morale, training, and funding. Key agencies involved include: customs administration, the trademarks office, port authorities, the National Agency for Food and Drug Administration and Control, and commercial courts.

G. Conclusions

197. There is a broad policy agenda for enhancing Nigeria’s trade and non-oil export growth prospects. Policies to facilitate and promote exports would benefit from rationalization and simplification. Actions to narrow and then eliminate the tariff gap with neighboring countries and other competitors would be a significant step forward, such as the proposed medium-term regional trade integration with ECOWAS, which would eliminate tariffs within the region and substantially lower external tariffs. A longer-term goal of uniform, low, and nondiscriminatory tariffs should also be considered.

198. In order to achieve such a result, a new medium-term program of tariff liberalization is urgently needed to replace the current ad hoc practice of tariff adjustment. The distortions created by NTBs and nonduty charges remain significant, and would appear to hamper a wide range of non-oil exports and raise the cost of imports; a dispassionate review of the costs and benefits of NTBs would therefore be appropriate.

199. A flexible and unified exchange rate would help to address the competitive pressures of trade liberalization, and to offset the residual trade policies that inhibit trade.

200. While somewhat beyond the scope of this analysis, a parallel strengthening of institutions dealing with trade issues would be beneficial, including a lighter, more evenly applied regulatory hand, by allowing economic incentives to guide investment, production, and trade decisions. Strengthened institutions would also help exporters avail themselves of already existing incentives, such as the incentives granted in the 2000 U.S. African Growth and Opportunity Act and the Generalized System of Preferences, and would accelerate the removal of bureaucratic obstacles to intraregional trade.

201. Trade liberalization would also strengthen institutions by reducing the scope for discretionary rents that are associated with access to the parallel exchange market, duty concessions, and/or tax evasion, and that are encouraged by prohibitively high tariffs or trade bans.

60

Prepared by Christopher Lane.

61

Export data shown in Table VI-1 are compiled from partner trade statistics. After adjusting for the c.i.f. factor, the value of non-oil exports is approximately double the value reported by the Central Bank of Nigeria. This may likely reflect informal border exports, as discussed in Bio Soule, Prospects for Trade Between Nigeria and its Neighbors (Paris: OECD, 2001).

62

Customs monitors the production of exports, and the bond is signed prior to export. When export proceeds are certified as repatriated by the exporter’s bank and the export promotion council, an application for refund is made on a Central Bank of Nigeria MXP form. Rebates approved (20 percent of export value) are applied to future tariff payments. The rebate was increased from 10 percent to 20 percent in January 2001.

63

Average of four-digit level tariffs, based on the approved changes in the 2002 budget and subsequent circulars.

64

According to the latest available data on 183 Fund members, 11 countries have average tariffs, including other duties and charges, over 30 percent (Egypt, Morocco, India, The Bahamas, Burundi, Syrian Arab Republic, Tonga, Zimbabwe, Nigeria, and Comoros).

65

Export prohibitions on cassava, the largest staple crop, rice, and beans were removed in 1995, and on beer in 1998. Import prohibitions that have been removed include maize (1999) and vegetable oils (1999).

66

The main charges are as follows: a port surcharge of 7 percent of duty (equivalent to 2.3 percent of the simple average tariff); an administrative charge of 1 percent of f.o.b. import value for preshipment inspection; ECOWAS community levy of 0.5 percent of import value; and product-specific levies on cars (2 percent) and sugar (5 percent).

67

Exporters are required to sell export proceeds at the export proceeds rate, which is similar to the interbank rate.

68

Countries with segmented exchange markets in 2002 include Afghanistan, Cambodia, Laos, Mauritania, Myanmar, Sierra Leone, Somalia, Syria, Turkmenistan, Uzbekistan, and Zimbabwe.

69

This section draws upon the U.S. government’s annual publication Foreign Trade Barriers, available via the Internet at www.ustr.gov. See also “An Assessment of the Private Sector in Nigeria,” (unpublished; Washington: World Bank, 2002).

Nigeria: Selected Issues and Statistical Appendix
Author: International Monetary Fund
  • View in gallery

    Nigeria: Export Trends

  • View in gallery

    Nigeria: Import Tariff Comparisons

  • View in gallery

    Nigeria and Indonesia: Import Tariff Developments, 1982–2002

    (Import tariffs in percent)

  • View in gallery

    Nigeria: Tariff Protection Estimates for Publicly Listed Companies

  • View in gallery

    Nigeria: Tariff Convergence with ECOWAS

    (Indicative schedule for selected domestically produced products; tariff rate in percent)