40% duty hike compounds shocks of FX reforms amid hope of relief

BY EMEKA EJERE

Dream of many Nigerians to become automobile owners either for private or commercial use may have been pushed far away from reality following sudden spike in the prices of different categories of fairly used vehicles in the country.

The development is a consequence of the ongoing foreign exchange reforms, which has also affected the maritime sector with a 40 percent increase in the exchange rate used for calculating duty on imported cargoes including vehicles.

The Nigeria Customs Service (NCS) official exchange rate on duties and levies on imported vehicles and other commodities was adjusted on Friday (June 23) from N422.3/$ to N589.45/$, translating to about 40 percent upward review. The new charges have taken effect across the board, compelling importers of goods awaiting clearing to cough out additional money to get their cargoes out of the ports.

The review, which has raised the least duty to N1.097 million, followed the recent FX rates convergence, which has raised the official rate from about N462/$ to near N800/$.

Stakeholders said the policy would cripple businesses in the maritime sector, leading to job losses and a drastic fall in the number of imported vehicles, all of which would conspire against economic growth.

They are apprehensive that it will spell doom for the transport sector as well as importation and increase the poverty rate in the country, especially coming on the heels of fuel subsidy removal and planned hikes in electricity tariffs.

Findings reveal that the Customs exchange rate has continued to increase in the past eight years due to weakening naira, resulting in more hardship for the masses and increased cost of production for manufacturers.

Already, the National Bureau of Statistics (NBS) had, in its 2022 Multidimensional Poverty Index survey, said 63 per cent of people living in Nigeria, that is 133 million people, are multidimensionally poor.

Also, the Nigerian Economic Summit Group (NESG), in its 2023 Macroeconomic Outlook Report, projected the poverty headcount to rise to 45 percent this year. NESG attributed the rise to weak performance in the job-elastic sectors, low labour absorption of sectors that will drive growth and population growth estimated at 3.2 per cent.

In the same vein, the World Bank, in its Macro Poverty Outlook for Nigeria: April 2023, stated that about 13 million Nigerians would fall below the national poverty line by 2025. The global lender said the macroeconomic stability had weakened considerably due to multiple FX rates, high and increasing inflation, rising fiscal pressures and declining FX reserves.

Available records show that the increase in import duty rate and other fiscal policies of the government is already telling on the economy as importation has drastically reduced. This has also affected the revenue collection of Customs, since the more people import, the better it is for Customs to collect duty for its revenue.

A pointer to this, perhaps, is the National Bureau of Statistics (NBS) foreign trade data that showed a 47 per cent drop in the volume of used vehicles imported into the country in 2022 to N325.05 billion from N617.48 billion recorded in 2021.

Also, the NCS was unable to meet the N3.1 trillion revenue collection targets for the 2022 fiscal year. The Federal Government had given the service a revenue target of N4.1 trillion, but the House of Representatives put it at N3.1 trillion. Unfortunately, NCS was able to generate N2.6 trillion with a shortfall of over N4 billion.

Pulling the plug

About two weeks ago, the Central Bank of Nigeria (CBN) heeded the President’s call for the convergence of foreign exchange rates convergence, thereby pulling the plug on the prevailing subsidised Investors’ and Exporters’ (I&E) window.

The decision has since seen the official exchange rate climb up by over 60 per cent, eliminating the wide market arbitrage said to have been responsible for round-trip transactions, speculative tendencies and other ill-market practices.

The apex bank said the decision would address the age-long illiquidity and restore sanity in the market. According to reports, from 2020 to 2022, Nigeria lost, at least, N8 trillion to rent seekers, who explore the multiple rates in the FX market to rip off the country. The amount is said to be based on data sourced from CBN’s intervention in the highly discounted official market.

The decision to float the currency was hailed by the organised private sector and economists who said the move would unify the country’s multiple exchange rates and sanitise the FX market

The World Bank, International Monetary Fund (IMF) and the African Development Bank (AfDB) also hailed the decision of the CBN, saying it would unlock capital inflow to critical areas of the economy.

The development means buyers and sellers of foreign currency in the official FX markets are now allowed to quote rates they find comfortable in the FX market, as against the previous practice where rates were dictated by the CBN.

Incidentally, equity trading on the Nigerian Exchange Limited (NGX) concluded the first half of the year on a positive note, with the NGX All-Share Index gaining 18.9% and closing at 60,968.27 index points. This marks a significant milestone for the index, reaching its highest level in 15 years since March 5, 2008, when it stood at 66,381.20 points.

Analysts attributed the rally to the policies of the new administration of President Bola Tinubu, the harmonization of different exchange rates, and the floating of the naira.

Grappling with downside

There is a possible downside of the rates harmonisation if the value of naira continues to plunge. Historically, exchange rate devaluation has contributed seriously to inflationary pressure in the economy.

Already, the inflation rate is consolidating on its 17-year high at 24.4 per cent, the petrol subsidy removal expected to raise the inflation rate to 30 per cent this month, according to the former Statistician-General of the Federation, Yemi Kale.

The 40 per cent increase in the customs clearing FX rate determination may have further demonstrated that the exchange rate is a rising function of inflation.

In his reaction, the Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, condemned the increase in Customs import duty rate, noting that transportation costs have already gone up between 25 to 50 per cent.

Observing that transportation is critical to the survival of most citizens, Yusuf added that the hike in transport fares and the corresponding inflationary effect is already posing a threat to the livelihood of many, both within and outside the public sector.

According to him, wage earners, small business owners, informal sector operatives, artisans and the unemployed are all very vulnerable in the current circumstances.

“The sufferings are real and affect the citizens across all segments of our society –public service, private sector, informal sector, artisans, students, SMEs, the unemployed, aged, pensioners among others. There is, therefore, the need for urgent responsive actions from all tiers of government,” he said.

He said it was unfortunate the agreement signed with the Nigeria Labour Congress (NLC) did not reflect the desired urgency of the mitigation measures. He also observed that the agreement was scanty on immediate actions and quick wins, which are needed to immediately assuage the feelings of ordinary citizens and stabilise the social environment.

On the way forward, Yusuf advised the government on the right fiscal policy interventions in the interest of social justice and stability, which include waiving import duty, value-added tax (VAT) and other port charges on Semi Knocked Down parts for the assembly of mass transit buses immediately. Dr Muda Yusuf is a strong advocate of rates harmonization.

However, an economist, Mr Ibrahim Tajudeen, said the policy “is in line with the overall reform of the foreign exchange market by the government. Also, it is not the first time that we are seeing such a thing. A few years ago when the currency was devalued, the exchange rate for clearing goods also increased.

“So it is consistent with the development or reforms going on in the foreign exchange market. Nevertheless, I recognise that Nigerians are going to feel the negative impact. And I think the government has to do something to help the masses at some point.”