Nigeria is said to be losing billions of naira to illegal cross border trade daily.
A report released yesterday by the Chatham House titled: “Nigeria’s booming borders: The drivers and consequences of unrecorded trade,” stated that the country suffers economic losses as a result of obstacles that impede trading through formal channels.
“Nigeria’s context of booming unrecorded trade flows, the networks that operate them and the financial flows that underpin them are, in fact, a response to the obstacles and complications that impede trading through formal, monitored channels,” the report stated.
Chatham House, a Royal Institute of International Affairs, is an independent policy institute based in London with a mission to help build a sustainably secure, prosperous and just world.
The report, co-authored by Leena Koni Hoffmann and Paul Melly, stated that Nigeria’s booming informal trade is costly for society, business and government.
“Every day tens of thousands of unofficial payments are made, none destined for government. Policy-makers need to create an environment that encourages trade to flow through formal channels and capture lost revenue,” says co-author Hoffmann.
“Formalisation would assist Nigeria to pursue more high-quality, high-tech economic activity at a time when rising labour costs in Asia are creating scope for Nigerian manufacturers to compete,” she adds.
The report stated that a substantial proportion of Nigeria’s cross-border trade currently flows through informal channels.
“There are strong indications that unrecorded flows through the key economic corridors between Nigeria and its neighbours are several times greater in volume than the amount of trade that is officially reported,” it said.
According to the report, unrecorded or informal activity could account for as much as 64 per cent of Nigeria’s Gross Domestic Product (GDP).
At the end of 2014, Nigeria’s recorded external trade stood at $135.8 billion. “Yet, official statistics paint only part of the picture and cannot capture the massive volume of informal export and import activity,” the report further stated.
The report noted that there are powerful reasons why Nigeria’s vast external trade remains largely informal, unrecorded and untaxed.
One major hindrance to economic growth is the formal processes for clearing customs are slow, complex and expensive. “Nigerian businesses must produce at least nine documents in order to send an export shipment and at least 13 documents in order to bring in an import consignment – in both cases, this is significantly more than in many other emerging economies,” the report stated.
Also, rigid and dysfunctional foreign-exchange regulations that push smaller traders into the incompletely regulated parallel exchange market is part of the obstacles.
The report stated that corruption and unofficial ‘taxation’ are a heavy burden on traders; major border highways have become rich sources of revenue for illegal patronage networks within state agencies.
According to the report, “Customs officials act both as assessors of duties and as collection agents, multiplying opportunities for graft and creating a culture in which they are able to set up unnecessary ‘checkpoints’ to extract unauthorised ‘taxes’ from traders and transporters on main roads in border areas.
“This type of corrupt activity means that supposedly formal channels of doing business are replete with informal practices. Traders often prefer to use smuggling routes, where they may be stopped less frequently and will, therefore, pay fewer bribes.”
As a result of these drivers of informal trade, the state loses direct tax revenues that would have been generated by formal cross-border trade. This is not just siphoned into the informal economy; some is lost entirely.
“For instance, the expense and difficulty of using Nigeria’s own ports leads many shippers to opt for Cotonou in Benin or Lomé in Togo, thus paying customs duties and tariffs on landing in those countries, instead of paying them to the Nigerian authorities,” the report added.
Informal trade, according to Chatham House, also undermines the social contract between the private sector and government. “The state lacks tax revenues to pay its officials, improve infrastructure or implement reforms, while traders feel that government provides no services in return for any taxes they might pay,” the report noted.
The report, however, makes recommendations on how Nigeria could encourage more formal trade. These include: Strengthening the resources and capacity of the Federal Ministry of Industry, Trade and Investment to coordinate action across key government ministries, departments and agencies, as well as public and private stakeholders; prioritising engagement in the development of Economic Community of West African States (ECOWAS) trade policies and fully implementing the ECOWAS Protocol on Free Movement of Persons, to reduce harassment at borders.
It also urged government to allow banks to operate simple services for small and medium-sized businesses to make trade payments directly from Nigerian naira to CFA francs and vice versa; improving basic facilities that support traders, including improving the efficiency of border posts, installing truck parks and all-weather surfacing on market access roads and introducing online booking for trucks to enter ports and separating responsibilities for assessing duty and tariff liabilities from revenue collection in order to reduce opportunities for corruption.
The report opined that if Nigeria is to fulfil its real potential as the trading engine of the West and Central African regional economy, policy-makers need to create an environment that encourages trade to flow through recorded channels.
“As Africa’s largest economy, formalising external trade would allow Nigeria to fulfil its potential as the trading engine of the West and Central African economy and shape the business landscape across the region,’ says co-author, Paul Melly.
Meanwhile, the Federal Government has allayed the fears of potential European investors about the country’s business environment, reaffirming its commitment to a sustained conducive investment climate.
Executive Secretary, Nigeria Investment Promotion Commission (NIPC), Mrs Uju Hassan-Baba, gave the assurance on Monday when the Head, European Union delegation to Nigeria and ECOWAS, Mr. Michel Arrion, visited her in Abuja.
Hassan-Baba said that the issue of investment climate was top on the agenda of the present administration, considering the urgent need for diversification of the nation’s economy.
She also attributed the recent decline in the country’s Foreign Direct Investment (FDI) to the last general elections and the current global economic and financial crunch.
The National Bureau of Statistics (NBS), in its capital importation report in June, said that the country’s FDI declined by 48.7 per cent in the first quarter of 2015.
The NIPC boss noted that it was normal for investment inflow to slow down given the uncertainties that surrounded the general elections and global economic crisis.
She, however, stated that things would improve from next year when the government must have fully settled down for business.
Mrs Hassan-Baba said that the NIPC was working vigorously with other relevant ministries and agencies to urgently address investors’ complaints about the business environment in line with a recent presidential directive.
She added that government, on its part, was vigorously tackling the issues of insecurity, corruption, unstable power supply and other pitfalls in the investment climate.
Earlier, Arrion expressed concern over the decline in the country’s FDI from a peak of $8.9 billion in 2011 to $5.6 billion in 2013.
He noted that as a result, Nigeria had been overtaken by South Africa and Mozambique which, according to him, accounted for 14.3 and 10.3 per cent of FDI in Africa.
According to him, Europe remains Nigeria’s most important partner with regard to FDI with Netherlands, France, UK and Italy accounting for 49 per cent of the country’s stock in 2013.
The EU delegation head noted that most of the impediments to European investments in Nigeria were related to the business climate rather than technical issues like financing.
He said: “I think the core issue is certainly the enabling environment, the business climate, the rule of law etcetera.”