US embassy cable - 02ABUJA1163

UNCLAS SECTION 01 OF 03 ABUJA 001163 
 
SIPDIS 
 
 
SENSITIVE 
 
 
LAGOS, PLEASE PASS TO FAS AND FCS 
 
 
E.O. 12958: N/A 
TAGS: ECON, ETRD, EFIN, EINV, PGOV, NI 
SUBJECT: NIGERIA: GON IMPLEMENTS PROTECTIONIST TARIFF 
SCHEDULE 
 
 
REF: LAGOS 725 
 
 
 1. (SBU) Introduction and Summary: On March 6, the 
Government of Nigeria (GON) approved extensive, apparently 
politically-motivated tariff amendments largely designed to 
protect domestic special interests, particularly in 
agriculture and the processed food sector.  Most domestic 
manufacturers saw modest reductions in tariff rates on their 
inputs while domestic manufacturers of some consumer goods 
will benefit from large increases on the finished products of 
their foreign competition.  A doubling of the tariff on rice 
will ultimately translate into less disposable income for 
urban Nigerians and added pressure on the consumer price 
index.  Unfortunately, the new tariffs will do little to 
improve domestic manufacturing or agricultural production, 
and will not substantially augment revenue for the GON. 
However, they do further damage to competitiveness in a 
country that already has too many monopolistic forces at 
work.  End Summary. 
 
 
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PAY NOW, PAY LATER 
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2.  (SBU) In the 2002 Fiscal Policy Measures and Tariff 
Amendments, the GON sharply boosted tariff rates on a wide 
range of processed food products contained within H.S. Code 
Chapters 1-25.  In general, tariffs doubled for many 
processed and unprocessed foods such as butter, cheeses, 
vegetables, margarine, meat products, sugar (confectionary), 
pasta, breakfast cereals, and chocolate.   The tariff on 
polished milled rice (H.S. Code 1006.0000), an important 
Nigerian staple, climbed from 75% to 100% in the Ministry of 
Finance's March 6 tariff schedule.  Newspapers reported that 
on March 27, the Federal Executive Council (cabinet) decided 
to raise the tariff to 150%.  (Note: As of April 11, the 
Ministry of Finance Deputy Director of Tariffs insisted that 
the tariff was still 100%, though he said an amendment would 
soon be released.  When pressed, he refused to say whether 
rice tariffs would or would not be raised in the amendment. 
A 150% tariff would have a much greater effect on the rice 
market and consumer patterns than the currrent 100%.) 
 
 
3.  (U) A few food products enjoyed tariff reductions. 
Duties on all types of wheat (H.S. Code 1001.1000-9000) were 
reduced from 10% to 5% -- a potential boost for U.S. wheat 
exporters.  Flavoring and fruit juice concentrate (in bulk) 
saw dramatic declines as the GON seeks to encourage more 
domestic re-packaging operations.  (Nigerians consume 
relatively large quantities of fruit juices.)  Domestically 
produced Chivita brand fruit juices will not be heavily 
impacted by the tariff reduction since it sources fruit 
locally. 
 
 
4. (U) Luxury products were subjected to significant tariff 
increases.  The rate on various tobacco products climbed from 
80% to 150%.  However, Nigerians consume very little tobacco 
per capita.  The higher tobacco tariff ultimately may benefit 
British American Tobacco Company, which has proposed a $150 
million tobacco plant at Ibadan.  Duties on beverage items 
(e.g. bottled water, wine, beer) went from 80-90 percent to 
100 percent ) an adjustment designed to increase domestic 
manufacturers' competitiveness.  Again, in an attempt to 
insulate domestic companies from cost-effective imports, 
stiff tariff increases were registered on beauty 
preparations, hair, and shaving products, as well as 
furniture, cigarette lighters, scent and toilet sprays. 
 
 
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Tariffs on Manufacturing Inputs Reduced 
--------------------------------------- 
 
 
5. (U) A wide range of inputs into the manufacturing process 
recorded tariff reductions, including a reduction of duties 
for all industrial machinery to a maximum 2.5% and exemption 
from VAT.  Mean duties on many chemicals (H.S. Code chapters 
25-40) were reduced from 15% to 10%, although the tariff on 
aluminum sulphates (H.S. Code 2833.2400) doubled to 20% in an 
apparent effort to stimulate production at the Aluminum 
Smelting Plant (ALSCON) in Akwa-Ibom State.  Toilet paper 
producer Star Paper Mill, Abia State, will most likely expand 
its market share with the five-fold tariff increase on tissue 
paper to 100% combined with lower tariffs on cellulose and 
wood pulp.  Textile manufacturers benefit from higher tariffs 
(65%-75%) on a range of woven fabrics both natural and 
artificial.  Concurrently, base products for textile 
production such as acrylics, nylons, viscoses, 
polypropylenes, and vinyl fibers enjoy a lower 5% tariff. 
Tariffs were adjusted both upwards and downwards on a wide 
range of base metal products; the net effect should favor 
heavy industry such as Nigerdock, Delta Steel, and the 
unfinished Ajaokuta steel mill. 
 
 
6. (U) Obvious beneficiaries of the tariff amendments include 
Nigerian pharmaceutical companies.  Lower tariffs of 5% 
almost across the board will be applied to machinery and 
electrical equipment (H.S. Code chapters 84-85), specifically 
for "bona fide" pharmaceutical manufacturers.   The affected 
items include injection molding and wrapping machinery, 
software compact discs, and portable digital automatic data 
processing machines.  Ironically, a special duty concession 
granted last year to Procter & Gamble (manufacturer of 
sanitary pads and diapers) enabling them to import assembly 
line machinery at a 5% tariff, is now diluted by the lower 
2.5% rate.  P&G had recently landed some machinery at the 
higher 5% tariff.  In addition, P&G,s  strenuous attempt to 
obtain a lower tariff on Ariel finished detergent proved 
unsuccessful as the tariff jumped  from 40% to 100% (reftel). 
 This was clearly a victory for rivals Unilever and PZ 
Industries, Plc., both U.K.- based companies producing 
detergent in Nigeria. 
 
 
7. (U) Other fiscal policy measures included in the 2002 
Tariff Amendments include: imposition of an outright ban on 
vehicles over 5 years old and used air conditioners (H.S. 
Code 8418.2100) and compressors, prohibition of containers 
originating in third countries entering Nigeria from its 
neighbors, and continuation of the ban on imported bulk 
vegetable oil.  The Nigerian Agency for Food and Drug 
Administration and Control (NAFDAC) has implemented large 
increases in fees for imported products as well as inspection 
fees.  An export incentive in the form of a 5% grant is 
offered for all agricultural cash crops -- of benefit to 
potential exporters under AGOA.  The new measures terminate 
pre-shipment inspection of imported goods by 1 July 2002; 
Nigerian customs shall commence destination inspection on 
that date ) it actually began 100% destination inspection in 
June 2001. 
 
 
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Back to the 70,s 
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8.  (U) Import substitution would appear to be the major 
theme of the 2002 tariff changes.  The GON officialdom 
contends that the new rates will significantly reduce 
domestic production costs, revitalize Nigeria,s industrial 
sector, and expand agricultural production.  While lower 
tariffs for capital equipment and inputs can augment 
competitiveness, in the Nigerian context the impact may not 
be significant.  As a portion of overall production costs, a 
tariff decline of 15% to 5% for machinery or chemicals, for 
example, may not be a sufficient fillip to reverse the 
decade-long decline in Nigeria,s industrial productivity and 
capacity utilization.  Other production costs, such as 
maintaining generators, the high cost of access to capital, 
other economic rents, security, and distribution bottlenecks 
are as severe as ever. 
 
 
9. (U) Wealthy Nigerians and expatriates will likely pay more 
for their food basket while the average Nigerian might 
substitute local products for the higher priced imports. The 
high-end consumers may be particularly galled to pay an even 
more extortive price for products, such as cheese, that do 
not have comparable domestic substitutes.  The ability of 
middle class Nigerians to purchase processed food has been 
dealt a severe blow.  Even locally-even produced items may 
also see rent-seeking price increases. 
 
 
10. (U)  Real economic harm may have come to Nigeria,s 
increasingly hamstrung middle class.  While very few 
Nigerians routinely purchase high value processed foods, 
millions eat rice.  However, rice imports are notorious for 
finding their way into the country below the full tariff 
rate, through under-invoicing schemes and smuggling. 
Importers report Nigerian customs collects a fixed "fee" per 
ton for rice; a higher tariff will likely increase the "fee" 
charged by Customs.  Ultimately, a portion of the higher 
legitimate or illicit duty on rice will be passed to the 
consumer.  Nigeria,s farmers are unable meet to Nigeria,s 
appetite for rice, even with the benefit of this  new 
protectionist measure. 
 
 
11. (SBU) The tariff amendments are an attempt at a 
comprehensive trade policy, but one based more on political 
expediency than economic rationality.  As such, it will 
likely result in higher food prices with little positive 
impact on domestic manufacturing.  Moreover, the tariffs 
appear to contravene West African Monetary Zone (WAMZ) tariff 
reduction objectives established last June.  GON tariff 
policy has previously aimed at increasing GON revenue, but 
there is a growing realization among some of the political 
leadership that high tariffs merely encourage payment 
avoidance.  Increased smuggling and tariff subterfuges are 
more likely than increased revenue.  However, the GON appears 
willing to stomach this consequence in order to score points 
with important vested interests. 
 
 
12. (U) In addition to the particulars of the tariff 
increases and decreases, these changes as a group represent a 
movement away from the principles of tariff reform: lower and 
more uniform rates.  They appear to run counter to the trade 
policy that was adopted last year with USAID's help.  As such 
they may make eventual agreement on a new IMF program more 
difficult, as the Fund was pushing for a 25% maximum as a 
first step toward reform.  Also, to the extent the tariff 
changes may reduce imports, they contribute to the 
overvaluation of the Naira and make doing business with and 
exporting from Nigeria more costly. 
 
 
13. (SBU) During a brief April 3 conversation with Ambassador 
Jeter, Chief Economic Advisor Magnus Kpakol said that he had 
argued against the amended tariff schedule up until its 
approval at the last Federal Executive Council (Cabinet) 
meeting.  Kpakol predicted that the higher tariffs would not 
earn substantially more revenue.  He feared that even more 
importers would seek to circumvent the new tariff structure, 
particularly by bringing in items overland across Nigeria,s 
porous borders.  Central Bank officials have expressed their 
belief that Nigeria would earn more revenue from a low tariff 
policy that encourages payment compliance, reduces the 
incentive to evade payments, and ratchets down rent-seeking 
opportunities and other corruptive behavior. 
 
 
14. (SBU) Perhaps the real tragedy surrounding the new policy 
measures is that many Nigerians know they will not work. 
Containers, old vehicles, and high tariff items will continue 
to move across the border with Benin upon payment of the 
appropriate "dash".   Nigerian manufacturers are likely to 
gain little from their marginally reduced cost of production 
inputs.  Meanwhile, protected companies will have no 
incentive to increase efficiency and competitiveness but will 
have a cushion to increase prices, especially on food 
products. 
15. (SBU) With elections now less than one year away, these 
tariffs seem aimed at placing the Administration in the good 
graces of various wealthy and influential special interests. 
Apparently, in the Government,s electoral calculus, the 
benefits of currying favor with this group outweigh the 
grousing that will probably come from average Nigerians due 
to higher tariffs and thus higher prices on consumer items 
and food.  In short, the government decided to be politically 
crafty but economically imprudent. 
Jeter