NIGERIA: TRADE POLICY REFORM PROMISES BUT LITTLE ACTION

UNCLAS SECTION 01 OF 03 ABUJA 001306

SENSITIVE
SIPDIS

DEPT PASS TO USTR-AGAMA
TREASURY FOR PETERS AND HALL
DOC FOR 3317/ITA/OA/KBURRESS, 3130/USFC/OIO/ANESA/DHARRIS
DOE FOR GPERSON, HAYLOCK

E.O. 12958: N/A
TAGS: ETRD ECIN ECON PGOV PREL NI
SUBJECT: NIGERIA: TRADE POLICY REFORM PROMISES BUT LITTLE ACTION

REF: A. ABUJA 893

B. ABUJA 870

C. ABUJA 817

D. ABUJA 760

SENSITIVE BUT UNCLASSIFIED - NOT FOR DISTRIBUTION OUTSIDE USG


1. (SBU) Summary. The Government of Nigeria's (GON) trade policy
has seen few reforms lately, with banned products, high tariffs and
incomplete implementation of the Economic Community of West African
States (ECOWAS) Common External Tariff (CET). The use of a
combination of tariff and non-tariff barriers is a standard import
substitution policy; however, GON officials have contended that full
implementation of the CET, removal of, some, if not all, of the 46
import bans and a reduction in tariffs will take place soon. The
recent decision to temporarily remove tariffs on rice was a positive
step forward. CET negotiations were not concluded by December 31,
2007 as earlier scheduled, because of wrangling among ECOWAS member
states on Nigeria's proposed fifth tariff band (50% tariff on these
products) and Type B exceptions. Notwithstanding this, the GON
contends it remains committed to the CET. The GON provides export
incentives to exporters to enhance the contribution of the non-oil
sector to the national economy. Septels will report on the
Ambassador's recent discussions on Nigeria's trade regime with the
Ministers of Commerce and Industry and Agriculture. End summary.
.
CET Update
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2. (U) In October 2005, the GON began to implement the ECOWAS CET,
reducing the number of tariff bands in Nigeria from twenty to five.
The five tariff bands are: zero duty on capital goods, machinery and
essential drugs not produced locally; 5 percent duty on imported raw
materials; 10 percent duty on intermediate goods; 20 percent duty on
finished goods; and 50 percent duty on goods in industries that the
government seeks to protect. The proposed 50 percent tariff applies
to 17 product categories or 113 tariff lines, representing
approximately 9.3% of regional imports from the rest of the world,
but not all items currently subject to import bans. Items deemed to
be necessities such as anti-retroviral drugs for the treatment of
patients with HIV/AIDS are imported duty-free. GON officials
contend they remain committed to full implementation of the CET,
will continue good faith negotiations, and see the CET as part of
the GON's ongoing economic reforms to improve its trade and
investment environment and the harmonization of trade in the
sub-region.
.
Tariffs Number Two Source of Government Revenue
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3. (SBU) Tariffs provide the GON with its second-largest source of
revenue after oil exports. Excessively high tariffs, a
non-transparent tariff regime, frequent policy changes, and the
usually unclear interpretation of government directives by the
Nigerian Customs Service make importing difficult and expensive, and
sometimes create severe bottlenecks for commercial activities. Many
importers complain that the tariffs presently charged are
excessively high, and the GON uses arbitrary reference prices at
times. Many importers resort to under-valuing and smuggling to
avoid paying full tariffs. Some of the products that attract very
high tariffs include sparkling wine (100 percent); rice (109
percent) and tomato puree (50 percent). (Note: The tariff on rice
was temporarily suspended for six months because of the global food
crisis and high prices in Nigeria in particular by Nigeria's Federal
Executive Council (FEC) on May 7, 2008 - reftels A & B. End Note)


4. (SBU) A study by the Carana Corporation that was funded by USAID
reported that production has doubled in the Nigerian rice sector, in
the last five years, but this increase has come at a significant
cost to consumers. In addition, it does not appear that producer
prices have benefited commensurately. In comparing Nigeria to
Senegal, due to market inefficiency and the capture of rents in the
Nigerian economy, the price paid to the producer is almost the same
in Senegal (26 cents per kilo) and in Nigeria (21 cents per kilo);
however, consumers pay 50% more in Nigeria (78 cents per kilo) than
in Senegal (45 cents per kilo). (Comment: Promoting agriculture
based on tariffs alone rarely leads to successful growth of
agricultural industries. Policies that are aimed at reducing the
gap between producer and consumer prices will have a more
stimulating effect on the industry than imposing a high tariff that
does not necessarily benefit farmers. End Comment.)
.
Non-Tariff Barriers (Import Prohibition)

ABUJA 00001306 002 OF 003


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5. (U) Despite continuing towards the adoption of the CET, the GON
continues to ban the importation of 46 products - citing the need to
protect local industries. Items on the import prohibition list
include maize (corn); bird's eggs; cocoa butter, powder, and cakes;
millet; pork; beef; live birds; frozen poultry; fresh and dried
fruit; wheat flour; sorghum; vegetable oil and fats; cassava;
bottled water; biscuits; spaghetti; noodles; fruit juice in retail
packs; beer; non-alcoholic wine; and alcoholic beverages. These
banned products violate Nigeria's World Trade Organization (WTO)
commitments, but other WTO members have not challenged the GON
within the WTO framework.


6. (SBU) On July 2, Ikechukwu Oguejiofor, Acting Director of the
Fiscal Policy of the Ministry of Finance, informed EconSpec that
the GON was making concerted efforts to substantially reduce the
number of banned items. Oguejiofor said that the Ministry of
Finance would publish the 2008 - 2012 Tariff Book in one month, and
the number of banned items will be reduced substantially. (Note:
Ministers of Agriculture and Commerce and Industry confirmed this to
Ambassador in meetings on June 24 and June 10. End Note) Badeji
Abikoye, Director of Trade at the Ministry of Commerce and Industry,
also corroborated Oguejiofor's statement regarding changes to the
upcoming Tariff Book, and underscored that the Ministers of Finance
and Commerce and Industry have been collaborating to ensure that
most of the bans are lifted.
.
Customs Barriers
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7. (U) The Nigerian Customs Service (NCS) is responsible for
implementing trade policy at the various ports. NCS mismanagement
has led to port delays, non-transparent valuation mechanisms,
erratic application of government policies, high berthing and
unloading costs, and corruption that have posed serious obstacles to
trade. President Yar'Adua's administration has promised to
implement a comprehensive customs reform that would drastically
reduce the time for clearing goods at the ports from the present two
weeks to two days. (Note: Despite the GON commitment to improve
transparency and processing, relatively little has been done in that
direction. End Note)
.
Export Subsidies
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8. (SBU) The GON through its ministries and other agencies
administers various export incentives such as tax concessions,
export development funds, capital asset depreciation allowances,
foreign currency retention programs, Free Trade Zones, and Export
Processing Zones. The agencies responsible for the implementation
of export incentives include the Nigerian Export Promotion Council,
Ministry of Finance, Ministry of Commerce and Industry, Nigeria
Customs Service, Central Bank of Nigeria, and the Nigerian Export
Processing Zone Authority. Funding constraints, misrepresentation
by exporters and erratic application of regulations limit the
effectiveness of these programs.


9. (U) In 2007, President Yar'adua ordered the suspension of all
waivers on taxes and import duties, because such waivers resulted in
large losses to government revenue intake and were not bolstering
manufacturing productivity. Currently, the Export Expansion Grant
(EEG) is the only export subsidy available to exporters because of
the GON's rescission of all other export subsidies after it began
implementing the CET in October 2005. The GON argued that the CET
automatically favors manufacturers through its lower tariffs on
capital goods and raw materials.


10. (U) The EEG is a scheme that provides a financial inducement to
exporters who have exported a minimum of 500,000 naira ($4,273)
worth of semi-processed and finished products. Under the EEG,
exporters of processed commodities and unprocessed mineral and
agricultural commodities are entitled to a specified percentage
grant on their export turnover, subject to the confirmation receipt
of repatriation of export proceeds from the Central Bank of Nigeria.
The percentage payment received by exporters under the EEG are in
two categories -- Category A (40 percent for intermediate and fully
manufactured products with a high value addition); and Category B (5
percent for all other exports not classified under Category A).
.
Industry Support Committee
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ABUJA 00001306 003 OF 003



11. (SBU) The GON setup an Industry Support Committee (ISC) in 2007
to investigate and audit waivers, tax concessions and export
subsidies granted by the GON to manufacturers and importers, assess
their impact on GON fiscal objectives. Contacts have reported that
the ISC has completed its assignment and its findings were submitted
to President Yar'adua. It is expected that the Federal Executive
Council (the Cabinet) will discuss the recommendations contained in
the ISC report in the next few months.
.
Comment
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12. (SBU) On the global level, examples of protected infant
industries achieving global competitiveness under high tariff
protections schemes are scarce. Nigeria's import substitution
strategy followed by most developing countries from the 1960's to
the 80s has not been a best practices success story. Despite
Nigeria's large market and significant trade restrictions,
manufacturing sectors - excluding oil-related activities - have
stagnated and even declined. Tariffs and bans are protecting
existing activities but not as a bridge to greater competitiveness
or the emergence of new ones.


13. (SBU) Economic growth in Nigeria should be built on three
important pillars: (1) efficient administration, (2) developed
infrastructure (transport, communications and energy) and (3)
education. Current tariff protections have impeded market pressures
that could drive investment and reform in governance, infrastructure
and education. If Nigeria chooses to pursue a fifth band it needs
to also put in place policy initiatives facilitating access to
capital markets, infrastructure and energy supplies that will
support growth of private enterprise. A Ministerial Monitoring
Committee, at its meeting held in Nouakchott on February 21, 2008,
requested that the ECOWAS and West African Economic and Monetary
Union (WAEMU) Commissions conduct a study on the impact of creating
a fifth band, determine its rate and the list of products that it
will cover among other issues relating to protection instruments to
complement customs duties, taking into account ongoing experiences
in the region and World Trade Organization provisions.


14. (SBU) Import bans, high tariffs and CET accession issues have
been ongoing for several years and the GON has previously promised
to address them. In October 2004, former President Obasanjo in his
address to the GON National Assembly on the 2005 budget said Nigeria
would implement the CET by July 2005 and rescind all import bans by
December 31, 2007. Minister of Commerce and Industry Ugwuh informed
USG officials during the 2007 TIFA Council meeting in Abuja that
though he is in support of removing the bans achieving that goal has
political undertones. Continued USG engagement during the July
14-15 AGOA Forum in Washington and the fall TIFA Council Meeting
provide opportunities to advocate for further reforms.


15. (U) Septels will report on the Ambassador's recent discussions
on Nigeria's trade regime with the Minister of Commerce and Industry
and the Minister of Agriculture, including the establishment of
working groups under the U.S.-Nigeria Framework for Partnership to
the assist the GON in its transition to a more productive trade
regime.

SANDERS