Nigeria’s federal government has banned the importation of vehicles through the nation’s land borders. The prohibition that was announced in early December to come into effect on January 1st is an attempt by the authorities to curb large-scale smuggling of cars into Africa’s largest economy to encourage local automobile assembling companies as well as protect government customs revenue. However, it comes with a number of downsides, not least having the opposite effect on smuggling than intended. Meanwhile, the local automotive sector had been showing some promise, but has been severely affected by wider economic challenges that import bans will do very little to remedy.
The Nigeria Customs Service (NCS) hopes the overland import ban will prevent the use of seaports in neighbouring countries, especially Benin, to transport vehicles destined for West Africa’s giant nation. The NCS says that despite Nigeria having bigger and better-equipped port facilities, importers prefer to send their cargoes to neighbouring ports and then smuggle the vehicles through porous land borders or by bribing officials at border entry points to avoid paying duties. Many consumers also travel from Nigeria to neighbouring countries, especially Benin, Togo and Cameroon, to buy cars from local dealers who are making brisk business catering to Nigerian customers who drive their purchases home through official and unofficial routes. The NCS reckons that more than 90% of vehicles imported to neighbouring countries are in transit to the Nigerian market.
Support and criticism
Automobile assemblers in Nigeria have unsurprisingly welcomed the move to in effect restrict vehicle importation solely to the country’s seaports. Large-scale smuggling of used cars into Nigeria is probably the biggest obstacle to the growth of a sizeable market for new, locally assembled vehicles in the country, required for the motor industry to grow. The chairman of the Nigeria Automotive Manufacturers Association, Tokunbo Aromolaran, said the ban on land entry shows that administration of the president, Muhammadu Buhari, is committed to the growth of local manufacturing. Mr Aromolaran, who is also the managing director of Volkswagen of Nigeria, said the restriction will boost the confidence of local assemblers who are concerned about the impact of the influx of used cars on their investment.
However, also predictably, the ban has been criticised by automobile traders who argue that it is likely to drive up vehicle prices in a country already facing inflation rates at an 11-year high. Both chambers of Nigeria’s bicameral National Assembly have separately passed motions calling on the government to lift the import restriction and asked the customs service to instead take steps to improve security and operation at the border posts to ensure that vehicle importers fully pay stipulated duties. The legislators argued that stopping vehicle imports through land borders will cripple the many small businesses engaged in the auto trade in the border areas and beyond and lead to significant job losses.
Moreover, the decision may also compound the problems of smuggling and loss of government customs revenue. This was the view taken by the National Council of Managing Directors of Licensed Customs Agents (NCMDLCA). The association maintains that many legitimate importers in Nigeria have already diverted their cargoes to neighbouring countries because of the high costs of using inefficient local seaports. The president of the NCMDLCA, Lucky Amiwero, told a maritime forum in January that diversion of Nigeria bound cargoes, including a variety of goods, rose from about 40% in 2014 to 60% in 2016 owing to unfriendly import policies.
The different perspective on the government’s action to curtail the imports of foreign vehicles highlights the dilemma facing the administration in its quest to steer the economy towards industrialisation. Automakers present a strong case that in an economy where producers are burdened with a myriad of cost-raising problems, including unreliable power supplies, high bank interest rates and low labour productivity, local vehicle assemblers will struggle to survive if the market continues to be swamped with used vehicles. However, Nigeria’s experience with protectionist trade policies, both tariff and non-tariff barriers—and indeed complete import bans—suggest that they rarely stem imports and may actually boost supplies of contraband goods.
The recent increase in vehicle smuggling into Nigeria highlighted by the NCMDLCA followed the July 2014 increase in import duties on vehicles from 20% to 70% (including a 35% levy) for new cars and to 35% for used cars as part of a five-year Nigerian Automotive Industry Development Plan (NAIDP) introduced in 2013 to revive the country’s vehicle and auto-parts industries. Under the new policy, local assemblers are allowed to import new vehicles at 35% duty, to a volume proportionate to their output, as an incentive to investors.
The policy of tying imports to local production has been quite successful in increasing the number of automakers in the country. Foreign brands that have set up production lines, in partnership with local firms, include Ford, Toyota, Nissan, Hyundai and Kia. Existing plants, such as Peugeot, Volkswagen, and ANAMMCO a Nigerian commercial-vehicle partnership with Daimler have been resuscitated. In January, Dangote Group of Companies, owned by Africa’s richest man, Aliko Dangote, announced it is setting up a US$100m truck assembly plant in Lagos in partnership with a Chinese firm, National Heavy Duty Truck Group Company (SINOTRUK). The plant will produce 10,000 trucks annually and employ 3,000 workers when fully operational.
A reversal looks more likely than recovery
Although progress has been made in reviving a moribund motor industry, local production remains far from recovering to the dominant market position enjoyed by local assemblers in the 1970s and early 1980s. The new cohort of producers are struggling with similar problems that confounded their predecessors—namely shortage of foreign exchange, low demand for new vehicles and competition from a thriving used cars market. Since the government introduced NAIDP, the Nigerian economy has crashed from rapid growth to recession, largely caused by the collapse in global oil prices. The drop in export earnings has resulted in the devaluation of the naira and shortage of the foreign exchange that motor assemblers require to import components. Furthermore, demand for new cars has diminished with falling disposal incomes, driving consumers to the used market. According to the National Bureau of Statistics’ latest GDP data, motor vehicles and assembly output rose from N11.3bn (US$370.5m) in the third quarter of 2013 (at 2010 constant prices) to N14bn in the third quarter of 2014, but then fell to N8.3bn in the third quarter of 2016. The subsector shrank by 33.3% in July-September and was the worst decline in the manufacturing sector. Even if closing the land borders to imports works—which we do not think it will—it would still only have a limited impact on a sector dealing with much wider economic constraints. Given that we expect the government to struggle to counteract such constraints, the prospects for the automotive sector—along with the rest of the economy—are weak.
Published: January 24th 2017