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Home Economy

Are import restrictions bad for the economy?

William Ukpe by William Ukpe
October 28, 2022
in Economy
Nigerian Imports
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Nigeria’s Vice President, Yemi Osinbajo, while speaking at the 3rd Ministerial Performance Review Retreat in Abuja last week, declared that blanket import restrictions are a dampener on economic activity. 

He stated that some imported items are needed in the manufacturing process, and called for coherence in government policy adaptation between MDAs to avoid conflicting policies. 

He also stated that importation is not a problem, as what matters is what value is added to the imported products before they reach Nigerian consumers. 

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The vice president cited the example of Bangladesh, saying:

  • “Bangladesh, the world’s leading garment manufacturer, does not produce most of the cotton it uses. It only grows 2% of its annual cotton requirement. 
  • “In 2019 Bangladesh imported $11.8 billion worth of textiles and apparel, while it exported $37.94 billion worth of garments in the same year. There is nothing wrong with importation if you are going to add value and will export. I think that we should focus on doing that.”

The current administration of President Muhammadu Buhari has implemented some major import restrictions. Some of these restrictions include a 70% rice import duty in 2015 and the border closure policy. Such policies can negatively affect the economy.

How restricting imports affects economic policy 

No major economy in the world today practices autarky which is an economic model of 100% self-sustenance. And that’s because imports are needed to accelerate productivity, especially in industrial goods. For example, China imports most of its iron ore mainly from Australia and Brazil. China is one of the major exporters of steel-based products. 

Exports are necessary for the provision of foreign exchange for manufacturing inputs. In August, the Manufacturers Association of Nigeria (MAN)  lamented the difficulty in accessing dollars at the official rate. MAN said: 

  • “Manufacturing companies are unable to access the dollar at the official rate and they need it for the importation of raw materials. They have been consequently going to the parallel market to get the dollar at higher rates. 
  • “The sector is facing numerous challenges and it needs the urgent attention of the federal government to provide an adequate bailout for the sector to avoid total collapse,” 

The FG, in a response to manufacturers this month, said it will begin steps towards creating a separate and special foreign exchange window for exporting manufacturers. 

This, according to the manufacturers, will put an end to a situation where operators go to the parallel market to source forex. The manufacturers noted that other countries like South Africa were already embracing such proposals as a means of encouraging manufacturing activities. 

Restricting imports needed for economic activity compounded by the FX crisis literally kills economic activities

Examples for Nigeria 

East Asia offers the best economic models for Nigeria on trade policy, which makes it no surprise the Vice President had used the Bangladesh textile industry as an example. 

Southeast Asian production model requires free trade import of products for comparative export markets. Looking at 2 examples, Singapore and Vietnam: some of their largest exports are 100% dependent on the import capacity of components needed to make the export viable. 

In 2020, Vietnam exported $42 billion worth of broadcasting equipment and $21.4 billion worth of telephones. However, its largest imports were integrated circuits needed to make its largest exports possible at $34 billion. 

Singapore had refined petroleum as its second-largest export in 2020 at $30.2 billion, compared with its largest export of integrated circuits ($51.1 billion, which went to its neighbors exporting electronics). However, to make its refined petroleum industry possible, Singapore imported $13 billion worth of crude oil in 2020. 

Singapore, which has no natural resources, exported $281 billion worth of goods and $165 billion worth of services during the period, while Vietnam exported $300 billion worth of goods and services valued at $16.6 billion. 

This means that manufacturers in both Singapore and Vietnam do not worry about access to FX liquidity, as they freely import components needed for economic activity and make a profit difference through exports. 

Bottomline

Vice President Osinbajo identified two important factors for abolishing an import restriction regime. He stated that this is how jobs and wealth are created. Many countries of the world that manufacture are huge importers, and they import far more than Nigeria. 

Secondly, he called for fiscal coherence, for effective policy implementation, saying it is important for government policies to be coherent, otherwise different parts of the government could end up adopting opposing policies. 

What this means is that having a smooth pro-trade policy is not enough, there has to be total onboarding from all government agencies. In Nigeria’s case, both the customs service and the ministries of trade and finance must all be on the same page. 

Blanket import restrictions limit economic productivity; it creates a situation whereby manufacturers face bottlenecks to access FX (as we have seen with MAN) and also causes poverty as it restricts FDI to critical sectors that need investments. 

Trade policy also needs to be aligned with a power and port infrastructure policy as the East Asians have done to make access to infrastructure an effortless experience for global trade. 

Adopting a blanket import restriction is also counterproductive for Nigeria’s economic diversification agenda, as it has made Nigeria even more dependent on crude oil. 

CSL Brokers told Nairametrics that “FX illiquidity will persist as foreign exchange inflows remain constrained by the dwindling crude oil production since crude oil constitutes about 80% of the nation’s forex earnings. More so, the persistent illiquidity, coupled with the 118% debt service to revenue are disincentives to foreign capital inflows”. 


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Tags: Foreign Exchange CrisisImport Restriction
William Ukpe

William Ukpe

For further inquiries about this article contact: Email: william.ukpe@nairametrics.com or outreach@nairametrics.com. Twitter: @_sirwilliam_ @nairametrics.

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