Are import restrictions bad for the economy?

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Nigerian Vice President Yemi Osinbajo, speaking at the 3rd Ministerial Performance Review Retreat in Abuja last week, stated that to import restrictions are a brake on economic activity.

The I declare that some imported items are necessary in the manufacturing process, and he called for consistency in adapting government policies among MDAs to avoid conflicting policies.

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

The Vice President cited the example of Bangladesh and said:

  • “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 garments, while it exported $37.94 billion worth of garments in the same year. There is nothing wrong with import if you are going to add value and export. I think 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 tax in 2015 and the border closure policy. Such policies can negatively affect the economy.

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How import restrictions affect economic policy

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

Exports are necessary to provide foreign exchange for the manufacture of inputs. In August, the Manufacturers Association of Nigeria (MAN) regretted the Difficulty accessing dollars at the official exchange rate. MAN said:

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  • “Manufacturing companies cannot access the dollar at the official exchange rate and need it to import raw materials. Consequently, they have gone to the parallel market to obtain the dollar at higher rates.
  • “The sector faces numerous challenges and needs the urgent attention of the federal government to provide an adequate bailout for the sector to avoid complete collapse.”

The FG, in an answer to manufacturers this month, said it will begin steps toward creating a separate, special foreign exchange window for exporting manufacturers.

This, according to the manufacturers, will put an end to a situation in which operators turn to the parallel market to obtain foreign exchange. Manufacturers noted that other countries such as South Africa were already adopting such proposals as a means of encouraging manufacturing activities.

The restriction of imports necessary for economic activity, aggravated by the currency crisis, literally kills economic activities.

Examples for Nigeria

East Asia offers the best economic models for Nigeria in terms of trade policy, so it is not surprising that the Vice President used the Bangladeshi garment industry as an example.

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

In 2020, Viet Nam exported $42 billion in streaming equipment and $21.4 billion in phones. However, its largest imports were the integrated circuits needed to make its largest exports possible at $34 billion.

Singapore had refined oil as its second largest export in 2020 to $30.2 billion, compared to its largest export of integrated circuits ($51.1 billion, which went to its electronics-exporting neighbors). However, to make its refined oil 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 care about access to FX liquidity as they freely import the components necessary for economic activity and make a difference in profit through exports.

Bottom line

Vice President Osinbajo identified two important factors to abolish an import restriction regime. He stated that this is how jobs and wealth are created. Many manufacturing countries in the world are major importers and import far more than Nigeria.

Second, he called for fiscal coherence, for effective policy implementation, saying that it is important that government policies are consistent, 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 full incorporation of all government agencies. In the case of Nigeria, both the customs service and the ministries of trade and finance must all be on the same page.

General import restrictions limit economic productivity; it creates a situation where manufacturers face bottlenecks in accessing FX (as we have seen with MAN) and also causes poverty as it restricts FDI to critical sectors that need investment.

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

The adoption of a blanket import restriction is also counterproductive to Nigeria’s economic diversification agenda as it has made Nigeria even more dependent on crude oil.

CSL Brokers saying nairametry that “Forex illiquidity will persist as foreign exchange inflows continue to be constrained by declining crude oil production, as crude oil makes up about 80% of the nation’s forex earnings. Furthermore, the persistent lack of liquidity, together with the 118% debt service to income, are disincentives for foreign capital inflows”.

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