Incentives as a vehicle to boost non-oil exports

A major plank on which the economic reconstruction programme of the current Muhammadu Buhari led administration rests on is the diversification of the economy through agriculture and solid minerals. Simply put non-oil exports.  With the country formally declared to be in recession, the economy- businesses and citizens are reeling in existential pains of meeting basic needs and this is caused by the burst of a political economy that has been oil fueled in the past 4 decades.

Before now, the non-oil sector has not contributed much to the economic growth because of petro-dollars, inconsistencies in government initiatives designed to incentivize the sector and flip-flop in policies among others.  A major policy initiative to boost non-oil exports in Nigeria started in year 2005 with the introduction of the Export Expansion Grant for exporters by the Federal Government. The EEG was administered by the Nigerian Export Promotion Council as the coordinating agency.

The major beneficiaries of the Export Expansion Grant essentially are the exporters of products, in this case, agricultural products that have been turned to full manufactured and semi-manufactured goods for export purposes through value addition.  The use of value addition, as one of the criteria to benefit from the EEG Scheme, has contributed to significant investments in processing, particularly in tanning of Hides and Skins, Cocoa, Rubber, Cotton, Textiles, Sesame Seed, Gum Arabic and Cashew products, as well as an increase in exports of downstream oil derivatives, especially Lubricants, thus, enhancing the non-oil export sector as a source of livelihood to over 10 million Nigerians, especially in the agro-allied sector.

The grant is based on the confirmed value of the goods exported for which proceeds have been repatriated back to Nigeria. What the exporters get as the EEG is Negotiable Duty Credit Certificate, NDCC, a reimbursable credit which they take to the Customs to get the credit on duties payable.  For example, Company A has N5billion duty to pay Custom Service and the Company A has N1billion worth of Negotiable Duty Credit Certificate. The company will take its NDCC to Customs for a net off on its Customs duty obligations. Instead of paying Customs N5billion in duty the company will pay N4billion.

It is instructive to state that since the start of the Export Expansion Grant in 2005, the grant has boosted the growth of non-oil exports in astronomical and geometrical proportions. Before EEG, non-oil sector contributed paltry sum of $0.7billion in FOREX to Nigeria economy and by year 2008 with EEG it grew to $1.8billion. By the end of year 2014 when the grant became an issue of controversy it has grown to $2.7billion in terms of its contribution to Forex receipts of Nigeria.

That EEG expanded the frontier of non-oil exports in terms of repatriated Forex proceeds into the economy has never been in doubt. It was a great enabler of the non-oil exports sector. A revolutionary initiative designed to catapult the non-oil sector from the underdog status to an economic power house.

Like everything Nigeria where bureaucracy and artificial administrative bottlenecks are constructed to create distortion and dislocation, the Customs via a circular stopped all its command on the August 10^th, 2010 from accepting Negotiable Duty Credit Certificate from Exporters citing abuse and bad behaviours by some of the Exporters. With the legendary case of impunity in Nigeria it might be difficult to dismiss the stoppage of the NDCC by the Customs despite the positive impact of the EEG to the economy as shown by the available statistics from the Central Bank, Cobalt International Services and the International Trade Centre from 2005-2008.

What are the issues that informed the Customs’ restrictions on NDCCs? One was the allegation that the importers were using it to import rice and cars into the country, a clear violation of the terms of the NDCC. The second was the allegation that Exporters were also using NDCCs to bring in other non-raw materials and spare parts into the country. Customs as a major revenue generating agency of government would naturally frown at any abuse of an incentive that denies her much needed revenue while at the same time the objective of the scheme is perceived to be shortchanged. For Customs, it would appear Nigeria must not lose on both counts- not getting the revenue from duties and excise and at the same time the non-oil export sector also jeopardized.

Customs would have done well to isolate cases of infractions and abuses, if any, against any Exporter that violated extant rules governing the EEG and the usage of the accompanied NDCCs instead of a blanket restriction on an interventionist scheme put in place by the government to stimulate a sector that should be growing every year with the attendant benefits across the value chain. Government through her agencies has the capacity to detect and punish infraction according to the governing principles and rules with collateral damage and a systemic risk. The unintended consequences of the restriction have added to the prevailing problem of forex scarcity in Nigeria.

The economy is so much Forex starved now such that the Central Bank will appreciate any extra dollar inflow into the system to ease pressure on the existing demand for US dollars.

Regardless of the misgivings of the Customs service as per the weaknesses and abuse of the EEG the available data revealed positive impact of the EEG on export growth from 2005 to 2014. In any case, five Investigative Committees, Presidential Committee on Trade Malpractices 2005-06, Presidential Committee on Trade Malpractices 2008, Investigation by Presidential Committee 2007-08, PwC and EEG Inter-Ministerial Committee in 2011 and an Investigation by the House of Representatives in 2012 could not validate any flagrant abuse till date that should have warranted any extreme measure by the Custom Service.

As it stands today, the total NDCC credit in favour of about 105 exporters in Nigeria currently should be about N123billion since 2010. The Customs restrictions and the refusal of the Ministries of Finance and that of the Trade and Investment to resolve this avoidable logjam is causing avoidable hemorrhaging of a sector that employed 39,394 Nigerians as at 2009.

Since the restriction on the utilization of the NDCC, the non-oil export sector had contracted significantly. Annual turnover of the Exporters had declined by 31%, Capital Investment in Plant and Machinery had declined by 46% instead of the growth trajectory pre-2010 while annual non-oil exports from Nigeria since 2010 also declined by 33% in 2014 according to the Nigeria Export Promotion Council’s report titled “Report of the Impact Assessment Exercise on the Restriction of the Usage and Non-Acceptance of the Negotiable Duty Credit Certificates (NDCC) on the Beneficiaries of Export Expansion Grant (EEG) Scheme from 2009 – 2014”.

Human beings are the biggest casualties of the entire episode due to loss of jobs in a country where there is an acute unemployment. The combined employments of about 105 Export companies was almost 40,000 in 2009 and by 2014 because of the restrictions there had been 55% job losses industry-wide.

This is where the current administration must step up to the plate and resolve this matter if truly there was any commitment to diversify and change the structure of our economy from over-dependence on oil revenue. The received wisdom from the economic crisis that currently besets Nigeria is such that the country can no longer rely on oil as the only major source of revenues accounting for over 85% of foreign exchange. Beyond the problem of drastic fall in price of crude globally the twin problems of militancy in the Niger-Delta region and militants blowing up oil and gas infrastructure have combined to make our situation more ominous.

This is the time for the two Ministers, Dr. Okey Enelama (pictured), Trade and Investments and Mrs. Kemi Adeosun, Finance who both have responsibilities for fiscal policies and instruments that will improve business and investment climates in Nigeria to get involved in the matter and find a win-win solution.

The Nigeria Export Promotion Council in its report identified key challenges that have plagued the EEG and the usage of NDCCs since 2005 and also way forward.  The challenges are not in any way beyond what the Federal Government through the executing agency and the two principal driving Ministries can handle by strengthening existing rules and regulations. Violators of rules and regulations should be punished not an entire industry.