Nigeria, in time past, has fueled illegal smuggling by allowing foreign commodities to gain access via its porous borders. As a result, industries have been adversely affected, and local manufacturers rendered less competitive compared to foreign counterparts. This deleterious impact on the economy was significant in the textile industry (a major contributor to Nigeria’s economy) where 145 companies shut down between 1980 and 2016 (only about 30 survived) due to the high rate of importation, smuggling, and challenging operating environment. Companies such as Dunlop and Michelin moved operations to Ghana, where the cost of production is relatively cheaper, making it easier for manufacturers to produce and sell to Nigeria.
The 7-month-old closure of the land border had its ‘mind’ aimed at boosting domestic production and curbing smuggling activities in the country. The impact of border closure had since been intertwined: while this move was beneficial to firms like Okomu and Presco as their year-on-year revenue grew by 86.3% and 5.9% respectively, companies like Dangote Cement lost volumes by 41% because they were unable to export to neighboring countries.
Plausibly observed, the land border closure compelled companies to comply with appropriate excise duties at the seaports, thereby improving government revenue lines. Consequently, the Nigeria Customs Service (NCS) generated N1.34 trillion in 2019, exceeding its previous period revenue and target revenue by 11.7% and 39.8%.
On the flip side, the negative consequences far outweighed the positive effects. Recent releases by the National Bureau of Statistics revealed that imports increased significantly by 37% while exports declined by 9.79% in Q4 2019, leading to a trade deficit. It is, therefore, puzzling to admit whether or not the border close led up to its intended goal of import-substitution.
Inflation rose year-on-year from 11.02% in August (pre-border closure) to 11.24% in September (after border closure). Ever since, it trended upwards till February, when it was reported at 12.21%. The attributable factor to the growing inflation rate is the increase in the food sub-index to 14.90% in February from 14.85% in January 2019.
Accordingly, consumers’ purchasing power declined due to the caveat of ‘more money pursuing fewer goods’. The inflation rate is expected to rise further with the partial adjustment in the exchange rate (Naira to USD) from N307/$ to N380/$ in the official market, ridding of multiple exchange rate windows, abased oil price and the impending increase in electricity tariff.
The ripple effect of inflation hangs over the financial market. Fixed income real returns earned by investors have been eroded as the inflation rate is much higher compared to Treasury bill return on 91 days, 182 days, and 365 days respectively. It suffices to admit that the Nigerian money market cannot reward investors’ risk appetite in this inflation season.
Furthermore, the border closure has created a tense trade relationship between Nigeria and its neighboring countries, especially Benin and Ghana. For instance, the Ghana Union of Traders Association (GUTA) recently forced the closure of businesses belonging to Nigerians in the country, stating violation in trade rules as reasons. This trade retaliation could escalate in the face of the lingering border closure.
It is unsurprising that Nigeria is besieged with a myriad of economic deficiencies. It desperately needs the resolution to embark on an impressive growth projectile. Addressing the high production cost by putting in place infrastructural facilities such as adequate power supply, efficient transport systems for distribution and the low-cost industrial estate should be a pre-requisite for flagging off a border closure policy with Nigeria’s economic dynamics. The thesis statement for this article will be that the 7-month-old land border closure has not achieved its main objective.
Written by Babatunde Ogunleye
Babatunde is an Investment Research Analyst with Stanbic IBTC Pensions Managers
Edited by Michael Ogunremi