NIGERIA: GON IMPLEMENTS PROTECTIONIST TARIFF

UNCLAS SECTION 01 OF 03 ABUJA 001163

SIPDIS


SENSITIVE


LAGOS, PLEASE PASS TO FAS AND FCS


E.O. 12958: N/A
TAGS: ECON ETRD EFIN EINV PGOV NI
SUBJECT: NIGERIA: GON IMPLEMENTS PROTECTIONIST TARIFF
SCHEDULE


REF: LAGOS 725



1. (SBU) Introduction and Summary: On March 6, the
Government of Nigeria (GON) approved extensive, apparently
politically-motivated tariff amendments largely designed to
protect domestic special interests, particularly in
agriculture and the processed food sector. Most domestic
manufacturers saw modest reductions in tariff rates on their
inputs while domestic manufacturers of some consumer goods
will benefit from large increases on the finished products of
their foreign competition. A doubling of the tariff on rice
will ultimately translate into less disposable income for
urban Nigerians and added pressure on the consumer price
index. Unfortunately, the new tariffs will do little to
improve domestic manufacturing or agricultural production,
and will not substantially augment revenue for the GON.
However, they do further damage to competitiveness in a
country that already has too many monopolistic forces at
work. End Summary.


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PAY NOW, PAY LATER
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2. (SBU) In the 2002 Fiscal Policy Measures and Tariff
Amendments, the GON sharply boosted tariff rates on a wide
range of processed food products contained within H.S. Code
Chapters 1-25. In general, tariffs doubled for many
processed and unprocessed foods such as butter, cheeses,
vegetables, margarine, meat products, sugar (confectionary),
pasta, breakfast cereals, and chocolate. The tariff on
polished milled rice (H.S. Code 1006.0000),an important
Nigerian staple, climbed from 75% to 100% in the Ministry of
Finance's March 6 tariff schedule. Newspapers reported that
on March 27, the Federal Executive Council (cabinet) decided
to raise the tariff to 150%. (Note: As of April 11, the
Ministry of Finance Deputy Director of Tariffs insisted that
the tariff was still 100%, though he said an amendment would
soon be released. When pressed, he refused to say whether
rice tariffs would or would not be raised in the amendment.
A 150% tariff would have a much greater effect on the rice
market and consumer patterns than the currrent 100%.)



3. (U) A few food products enjoyed tariff reductions.
Duties on all types of wheat (H.S. Code 1001.1000-9000) were
reduced from 10% to 5% -- a potential boost for U.S. wheat
exporters. Flavoring and fruit juice concentrate (in bulk)
saw dramatic declines as the GON seeks to encourage more
domestic re-packaging operations. (Nigerians consume
relatively large quantities of fruit juices.) Domestically
produced Chivita brand fruit juices will not be heavily
impacted by the tariff reduction since it sources fruit
locally.



4. (U) Luxury products were subjected to significant tariff
increases. The rate on various tobacco products climbed from
80% to 150%. However, Nigerians consume very little tobacco
per capita. The higher tobacco tariff ultimately may benefit
British American Tobacco Company, which has proposed a $150
million tobacco plant at Ibadan. Duties on beverage items
(e.g. bottled water, wine, beer) went from 80-90 percent to
100 percent ) an adjustment designed to increase domestic
manufacturers' competitiveness. Again, in an attempt to
insulate domestic companies from cost-effective imports,
stiff tariff increases were registered on beauty
preparations, hair, and shaving products, as well as
furniture, cigarette lighters, scent and toilet sprays.


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Tariffs on Manufacturing Inputs Reduced
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5. (U) A wide range of inputs into the manufacturing process
recorded tariff reductions, including a reduction of duties
for all industrial machinery to a maximum 2.5% and exemption
from VAT. Mean duties on many chemicals (H.S. Code chapters
25-40) were reduced from 15% to 10%, although the tariff on
aluminum sulphates (H.S. Code 2833.2400) doubled to 20% in an
apparent effort to stimulate production at the Aluminum
Smelting Plant (ALSCON) in Akwa-Ibom State. Toilet paper
producer Star Paper Mill, Abia State, will most likely expand
its market share with the five-fold tariff increase on tissue
paper to 100% combined with lower tariffs on cellulose and
wood pulp. Textile manufacturers benefit from higher tariffs
(65%-75%) on a range of woven fabrics both natural and
artificial. Concurrently, base products for textile
production such as acrylics, nylons, viscoses,
polypropylenes, and vinyl fibers enjoy a lower 5% tariff.
Tariffs were adjusted both upwards and downwards on a wide
range of base metal products; the net effect should favor
heavy industry such as Nigerdock, Delta Steel, and the
unfinished Ajaokuta steel mill.



6. (U) Obvious beneficiaries of the tariff amendments include
Nigerian pharmaceutical companies. Lower tariffs of 5%
almost across the board will be applied to machinery and
electrical equipment (H.S. Code chapters 84-85),specifically
for "bona fide" pharmaceutical manufacturers. The affected
items include injection molding and wrapping machinery,
software compact discs, and portable digital automatic data
processing machines. Ironically, a special duty concession
granted last year to Procter & Gamble (manufacturer of
sanitary pads and diapers) enabling them to import assembly
line machinery at a 5% tariff, is now diluted by the lower
2.5% rate. P&G had recently landed some machinery at the
higher 5% tariff. In addition, P&G,s strenuous attempt to
obtain a lower tariff on Ariel finished detergent proved
unsuccessful as the tariff jumped from 40% to 100% (reftel).
This was clearly a victory for rivals Unilever and PZ
Industries, Plc., both U.K.- based companies producing
detergent in Nigeria.



7. (U) Other fiscal policy measures included in the 2002
Tariff Amendments include: imposition of an outright ban on
vehicles over 5 years old and used air conditioners (H.S.
Code 8418.2100) and compressors, prohibition of containers
originating in third countries entering Nigeria from its
neighbors, and continuation of the ban on imported bulk
vegetable oil. The Nigerian Agency for Food and Drug
Administration and Control (NAFDAC) has implemented large
increases in fees for imported products as well as inspection
fees. An export incentive in the form of a 5% grant is
offered for all agricultural cash crops -- of benefit to
potential exporters under AGOA. The new measures terminate
pre-shipment inspection of imported goods by 1 July 2002;
Nigerian customs shall commence destination inspection on
that date ) it actually began 100% destination inspection in
June 2001.


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Back to the 70,s
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8. (U) Import substitution would appear to be the major
theme of the 2002 tariff changes. The GON officialdom
contends that the new rates will significantly reduce
domestic production costs, revitalize Nigeria,s industrial
sector, and expand agricultural production. While lower
tariffs for capital equipment and inputs can augment
competitiveness, in the Nigerian context the impact may not
be significant. As a portion of overall production costs, a
tariff decline of 15% to 5% for machinery or chemicals, for
example, may not be a sufficient fillip to reverse the
decade-long decline in Nigeria,s industrial productivity and
capacity utilization. Other production costs, such as
maintaining generators, the high cost of access to capital,
other economic rents, security, and distribution bottlenecks
are as severe as ever.



9. (U) Wealthy Nigerians and expatriates will likely pay more
for their food basket while the average Nigerian might
substitute local products for the higher priced imports. The
high-end consumers may be particularly galled to pay an even
more extortive price for products, such as cheese, that do
not have comparable domestic substitutes. The ability of
middle class Nigerians to purchase processed food has been
dealt a severe blow. Even locally-even produced items may
also see rent-seeking price increases.



10. (U) Real economic harm may have come to Nigeria,s
increasingly hamstrung middle class. While very few
Nigerians routinely purchase high value processed foods,
millions eat rice. However, rice imports are notorious for
finding their way into the country below the full tariff
rate, through under-invoicing schemes and smuggling.
Importers report Nigerian customs collects a fixed "fee" per
ton for rice; a higher tariff will likely increase the "fee"
charged by Customs. Ultimately, a portion of the higher
legitimate or illicit duty on rice will be passed to the
consumer. Nigeria,s farmers are unable meet to Nigeria,s
appetite for rice, even with the benefit of this new
protectionist measure.



11. (SBU) The tariff amendments are an attempt at a
comprehensive trade policy, but one based more on political
expediency than economic rationality. As such, it will
likely result in higher food prices with little positive
impact on domestic manufacturing. Moreover, the tariffs
appear to contravene West African Monetary Zone (WAMZ) tariff
reduction objectives established last June. GON tariff
policy has previously aimed at increasing GON revenue, but
there is a growing realization among some of the political
leadership that high tariffs merely encourage payment
avoidance. Increased smuggling and tariff subterfuges are
more likely than increased revenue. However, the GON appears
willing to stomach this consequence in order to score points
with important vested interests.



12. (U) In addition to the particulars of the tariff
increases and decreases, these changes as a group represent a
movement away from the principles of tariff reform: lower and
more uniform rates. They appear to run counter to the trade
policy that was adopted last year with USAID's help. As such
they may make eventual agreement on a new IMF program more
difficult, as the Fund was pushing for a 25% maximum as a
first step toward reform. Also, to the extent the tariff
changes may reduce imports, they contribute to the
overvaluation of the Naira and make doing business with and
exporting from Nigeria more costly.



13. (SBU) During a brief April 3 conversation with Ambassador
Jeter, Chief Economic Advisor Magnus Kpakol said that he had
argued against the amended tariff schedule up until its
approval at the last Federal Executive Council (Cabinet)
meeting. Kpakol predicted that the higher tariffs would not
earn substantially more revenue. He feared that even more
importers would seek to circumvent the new tariff structure,
particularly by bringing in items overland across Nigeria,s
porous borders. Central Bank officials have expressed their
belief that Nigeria would earn more revenue from a low tariff
policy that encourages payment compliance, reduces the
incentive to evade payments, and ratchets down rent-seeking
opportunities and other corruptive behavior.



14. (SBU) Perhaps the real tragedy surrounding the new policy
measures is that many Nigerians know they will not work.
Containers, old vehicles, and high tariff items will continue
to move across the border with Benin upon payment of the
appropriate "dash". Nigerian manufacturers are likely to
gain little from their marginally reduced cost of production
inputs. Meanwhile, protected companies will have no
incentive to increase efficiency and competitiveness but will
have a cushion to increase prices, especially on food
products.

15. (SBU) With elections now less than one year away, these
tariffs seem aimed at placing the Administration in the good
graces of various wealthy and influential special interests.
Apparently, in the Government,s electoral calculus, the
benefits of currying favor with this group outweigh the
grousing that will probably come from average Nigerians due
to higher tariffs and thus higher prices on consumer items
and food. In short, the government decided to be politically
crafty but economically imprudent.
Jeter