The World Bank’s latest Nigeria Development Update for December 2023 reveals a staggering revenue loss of over $300 million between 2015 and 2019, attributable to tax evasion
The World bank while commenting on the impact of FX restrictions put in place by the Government, said, “these restrictions not only pushed economic agents toward the parallel FX market, widening the gap between the official and parallel exchange rates, but they also raised the prices of both imported and domestic goods.
“The most significant impact was on households, which saw their purchasing power decrease with higher prices. In addition, they undermined the competitiveness of local firms reliant on imports for their inputs and the competition pressures in the domestic market.
“These negative outcomes outweighed any potential industrial policy payoffs, calling into question their net social and economic values. The section concludes by proposing complementary policies that would support Nigeria’s macroeconomic stabilisation and structural reforms to increase competitiveness and economic diversification.”
The World Bank also noted that the restrictions however had unintended consequences which heightened trade barriers and created costly economic distortions.
It further revealed that, “The FX restrictions on importing 43 product categories have now been lifted, but import bans on specific items remain in place. Nigeria maintained two distinct lists of trade restrictions. The first, FX restrictions imposed on importers in 2015, were lifted on October 12, 2023. Initiated by the CBN, the restrictions purportedly aimed to conserve FX reserves and bolster domestic industry and job creation. They affected 43 product categories13, encompassing over 936 product lines according to the Harmonized Standard (HS) customs classification.
“The Nigeria Customs Service (NCS) enforces the second, still active, list of trade restrictions. As the statutory authority tasked with implementing trade policies, the NCS operates within the framework of the Government’s fiscal policy measures, as directed by the Ministries of Trade and Finance, to enforce a comprehensive ban on the importation of 23 product categories.
“The two lists overlapped on certain products, creating governance loopholes, uncertainty for the private sector, and higher prices. There was an overlap of seven product categories between the two lists. The overlap and lack of clarity on these measures led to the restrictions affecting product categories beyond those included in the restrictions.
“The FX access restrictions and import bans while the FX restrictions did not explicitly prohibit importing the 43 categories of goods on the restriction list, they created a significant hurdle. Since importers were unable to obtain FX through official channels to cover the cost of their imports, they turned to the more expensive parallel markets and resorted to smuggling the imported products into the country.
“Moreover, private sector firms often raised concerns over how these restrictions affected exchange rate management, inflation, and firms’ productivity. Partly because of these restrictions, Nigeria ranked 97 out of 153 countries in 2023 on the Competitive Industrial Performance Index, 44 places below South Africa (ranked 53),” the report stated.
The Bank also disclosed that FX restrictions on imports had also directly resulted in an 18.1 percent increase in trade evasion.
“This evasion rate in Nigeria is triple that of low-income countries. The unrecorded trade flows, which were not reflected in Nigeria’s balance-of-payments (BOP) statistics, were evidenced by a comparison between exports to and imports from Nigeria as recorded by trading partners.
“While reported imports in Nigeria dropped by over two-thirds between 2015 and 2019, exports to Nigeria from trade partners only halved in the same period. These recording gaps, especially pronounced in sectors such as textiles (exceeding 100 percent), art (94 percent), and hides and skins (78 percent), suggest that imports under FX restrictions had consistently been evaded, including in product categories that were not part of the FX restrictions lists,” the Bank explained.
“The revenue impact of import restrictions amounted to about US$1.4 billion, or about US$275 million annually, between 2015 and 2019.
“This estimate accounts for the revenue that would have been collected if imports had been formally recorded at the borders, and assuming no evasion due to import restrictions, which did not materialise following the introduction of the import restrictions. The overall revenue loss is significantly higher when including evasion due to high tariffs.
“Assuming that there was no trade evasion due to high tariffs and import restrictions between 2010 and 2019, Nigeria would have collected additional annual revenue of US$1.8 billion. This is a conservative estimate and is equivalent to 0.4 percent of GDP and 6.6 percent of overall tax revenue in 2020. Based on these estimates, overall tariff revenues would have been 45 percent higher each year in the absence of evasion. The sectors with the highest revenue losses are plastics, metals, stones and textiles.”
Whilst applauding the removal of restrictions, the Bank noted that the economic gains from this policy direction can be enhanced by lifting the outright import bans.
“While the removal of import restrictions may present challenges to certain sectors, these can be mitigated for some of them with a comparative advantage. Reducing the overall cost of doing business is a crucial first step,” the report stated.
The report explained further that, “this can involve facilitating custom processes, reducing domestic and international trade and transport costs, and removing institutional barriers to doing business. Concurrently, a careful review of the tariff structure on certain banned import items, particularly those where Nigeria holds a comparative advantage, and to commit to a simple and enduring tariff structure with more discipline.
“This review should aim to provide a balanced approach where tariffs could be slightly adjusted to replace import restrictions and, therefore, to support domestic industries without counteracting the advantages of more open trade.
“In the medium term, the tariffs could be phased out to allow for better resource allocation in the economy. Through this dual approach of easing business operating conditions and fine-tuning tariff policies, the negative impacts on the disadvantaged sectors may be reduced, while still capitalizing on the broader economic benefits of the lifted FX restrictions.
“Beyond removing import restrictions, several complementary reforms are needed to support Nigeria’s structural agenda and overall gains in competitiveness and economic diversification.”
The Bank also praised the fiscal and monetary reforms of the Government.
It noted that “recent reforms, if continued and enhanced, are expected to unwind critical macroeconomic imbalances and distortions that have held back Nigeria’s growth in the recent past.”
The report however called for tighter and effective measures to ensure implementation of the policies noting that the institutionalisation and tightening of policy will make the reform of the removal of subsidy become disinflationary starting in H1, 2024.