How FX Shortage, Customs Arbitrary Import Pricing is Crippling Manufacturing and Enabling Food Insecurity

How FX Shortage, Customs Arbitrary Import Pricing is Crippling Manufacturing and Enabling Food Insecurity

The Nigeria Customs’ recent switch to using an arbitrary valuation method to determine duty charges at the ports is generating a lot of controversy, criticism, and raising serious concerns within the organized private sector (OPS).

They posited that the unpopular tariff regime which negates the ease of doing business is crippling the manufacturing sector and discouraging investors.

It sets back large and small-scale business activities, with a strong impact on national food security especially, while piling more woes on the already hard-pressed consumers.

Simply put, when raw materials for which the country has lower production capabilities are shipped from overseas, Customs would slap heavy duties, using the cost of the local prices of similar products to determine the tariff to be charged on the imported goods at the point of clearance.

Considering that the cost of sourcing these products from the countries where they are amply produced under favourable conditions is low compared to the cost of their local equivalent, the tariff evaluation methods set by Customs increases the landing cost of the goods shipped from overseas. 

This port evaluation action nullifies the extra efforts local businesses put into sourcing affordable production inputs that fall within the price corridor that is affordable to the masses. The insensitive pivot always ends up stimulating product price inflation across the local market as importers are forced to factor in the extra tariff charges into their mark-up calculations.

Take for instance food and cosmetics prices have doubled in the past months as food processing firms such as poultry food manufacturers, flour millers and cosmetic product manufacturers who couldn’t source enough grain and chemicals for production locally have their costs of production skyrocket due to high tariffs on the raw production inputs shipped from outside the country.

For most consumers who do not know why and how previously affordable products have gone beyond their reach, these analyses offer an explanation. 

The Customs tariff evaluation strategy is unfair to the local manufacturers who evidently cannot source quality raw materials in large quantities locally. It is unfair, as well, to the masses who look up to the government for recourse in this period of unprecedented hardships.

This unfair practice calls for sharp rebuke as it is filtering into all layers of businesses and society. A social media influencer called Abike Halima Raheem (also known as Papaya Ex) recast her ordeal recently. She expressed shock at the scale of the unfair tariff evaluation practices at the ports.

She, instantly, took to her social media platforms to lash out at the Nigeria Customs Service (NCS).  According to her, she had purchased some goods on a trip to Dubai, the United Arab Emirates (UAE).

On arrival at the local ports, the customs officials that were supposed to clear her goods requested a payment of N4 million, which represents 20% of the value of her products. She simply couldn’t fathom how on earth she would be asked to pay 20% of the total cost of her imported goods as a tariff. She felt ripped off.

The social media influencer’s ordeal mirrors what importers go through daily at the ports. BizWatch Nigeria went on a fact-finding mission. Many of the people we spoke toa few of them in the food manufacturing, lamented that their business plans have been distorted by the customs’ subjective tariffs. They said that they have been compelled to raise the prices of their goods.

Lamenting how the customs’ unfair tariff keep inflating product prices, logistic personnel of a Nigerian fast-moving consumer good (FMCG) company, who doesn’t want his name mentioned in this report, said the business environment is toxic.

He added that as a result of the unfavourable operating environment, many players in the food production value chain have moved operations from the country.

“It is very costly to import the raw materials you need to produce for your consumers in this country. And it will surprise you that, it is not exactly the materials you secure from outside that country that is costly, but the cost of allowing your raw materials in after purchase.

“Sometimes, you don’t even know how the Customs arrive at what they request to clear your goods. This is why our customers often see that our prices go up,” he explained.

Also groaning over the random charges, the Chief Executive Officer (CEO) of Cibo Prima Farms, Ojebola Matthew attributed the increment in food prices to the cost of production. 

According to him, farming in Nigeria is now alarmingly costly due to some factors: “There are many factors that contribute to what people eat from the farm.

Amongst them is fertiliser, which has gone up by almost 100% in less than a year. For instance, the fertiliser we bought last for N10,000 now sells for at least N17,500. How will Nigeria not experience a food shortage?”

Like Matthew, a trader identified herself as Kafayat Hassan revealed that the arbitrary charges by customs are part of the factors that have led to a hike in many commodities prices. She listed tea, feeds and fodders, spices, and herbal products as her main trade specialty and grieved that they are among the worst affected items.

“It’s been difficult and costly to get my goods into the country because of import duties charged by Customs.”

Effects of customs arbitrary tariff evaluation regime on consumers

Consumers are mostly at the receiving end of any production cost increase. As Mohammad Siddiqui of Daffodil International University posited in his research work, a Customs valuation system that is arbitrary and opaque can be harmful in many ways.

“An ill-conceived Customs valuation system encourages corrupt practices that are detrimental to the development of the rule of law in the long run. It also undermines investments, both foreign and domestic,” he explained

In Nigeria, even though the NCS only recommends a 1% administrative charge of Free-on-Board (FOB) value of all imports based on the exchange rate on the approved e-Form, findings by BizWatch Nigeria revealed that importers pay duty that varies from 5% up to 60%, which averages 12%. It is, however, pertinent to note that all imports are also subject to a port surcharge and a 7.5% value-added tax (VAT).

Displeased with the multiple charges piled on businesses, Omotolani Ashiru, a Tax Expert and Investment Advisor, said multiple taxation has always been a major challenge in doing business in the country. He added that these complex charges continue to plunge many people below the poverty line.

Sharing Ashiru’s sentiment, Fikayo Owoeye, a financial expert with Reuters, revealed that customs arbitrary charges may not be unconnected to the continuous hike in food prices.

“A lot of people can no longer afford to eat three times every day in Nigeria. Although other factors have contributed to this, we can’t shy away from the fact that the subjective charges have worsened Nigeria’s inflation, such that the purchasing power of the people, especially as it relates to food, has been weakened,” he explained. 

Efforts to reach NCS’ Spokesperson Timi Bomodi, on this matter proved abortive as he didn’t answer his calls. 

This Customs tariff evaluation model isn’t the only issue bedeviling the manufacturing sectors and consumers in Nigeria. The tariff regime is one of many issues the Federal Government need to tackle head-on to revamp the manufacturing sector and provide the good life desired by the masses.

Other issues piling woe on the manufacturing sector and consumers: 

Insecurity

While there is unanimity amongst stakeholders that the subjective duty charge is a major cause of food inflation in Nigeria, Muda Yusuf, the Chief Executive Officer (CEO) of the Centre for the Promotion of Private Enterprise (CPPE), expressed an opinion that insecurity is as well disrupting the agricultural value chain.

“The first thing that needs to be dealt with is the problem of insecurity. It has threatened the agricultural sector in particular. People that are producing the food cannot go to their farms because a lot of them have been killed, kidnapped, and are now living as Internally Displaced Persons (IDPs),” he stated.

Dollar scarcity and CBN Insensitivity 

Dollar scarcity is another factor identified by analysts as contributing to the headache of the manufacturing sector in the country. On Monday, July 25, 2022, BusinessDay reported that Manufacturers in Nigeria are now only able to get about 5 per cent of the foreign exchange they need from banks for the importation of raw materials due to the shortage of dollars.

The paper said a source in the financial sector said the Central Bank of Nigeria (CBN) had reduced the sale of dollars to eligible businesses, pushing more demand for the greenback from the official market to the parallel market. 

The question many analysts are asking is why is there a shortage of dollars when FX reserves in Nigeria reportedly increased to 39,250 USD Million in July from 39,090 USD Million in June of 2022.

The other question is what is the Central Bank of Nigeria (CBN) doing to support manufacturers? The CBN needs to do more for the real sector, especially at such a difficult time when inflationary trends continue to heighten. 

The CBN raised its Monetary Policy Rate (MPR) by 100 bps to 14% this July, following a 150-bps hike in May. This policy action raises borrowing costs to the highest since February 2019 amid concerns that persistent inflationary pressures could weigh on the country’s fragile recovery.

Inflation accelerated for a fifth straight month to 18.6% in June of 2022, the highest rate since January 2017. This is above the central bank’s target range of 6%-9%. These policies are not having the desired effects on the economy. 

The reality is that manufacturers rely on imported raw materials and consequently, a weak local currency will negatively impact import costs. The recent devaluation exercises of the naira have also not yielded the expected convergent outcome across the numerous forex windows.  

The declining contribution of the manufacturing sector to GDP as a result of misaligned local policy takes a toll

Data released by the National Bureau of Statistics (NBS) shows that the aggregate contribution of the Manufacturing sector to the Gross Domestic Product (GDP), in real terms, from 2019 to 2021 was N19.26 trillion, while that of the agriculture sector was N55.05 trillion.

A breakdown of the NBS data shows that the real contribution of the manufacturing sector to GDP in 2019 was N6.47 trillion; N6.29 trillion in 2020; and N6.50 trillion in 2021, representing 9.06 per cent; 8.99 per cent and 8.98 per cent, respectively.

Within the same period, however, the contribution of the agriculture sector was N17.96 trillion in 2019; N18.35 trillion in 2020; and N18.74 trillion in 2021, representing 25.16 per cent; 26.21 per cent; and 25.89 per cent, respectively.

In Conclusion If urgent actions are not taken to rescue the manufacturing sector, especially the food processing segment from the crunching effects of the current harsh operating environment, the prevailing quandaries of food insecurity, poverty, hunger, starvation and malnutrition in Nigeria will snowball into a massive national socio-economic meltdown.

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