Pressure is mounting on the Nigerian government to lift trade restrictions with Benin and Niger as food prices rise in cities and protests ignite in border regions. The economy’s sluggish growth, accelerating inflation, and weak revenue collection, including from the oil sector that is suffering from a spree of vandalism attacks, pose further risk for the implementation of the 2020 budget and the sustainability of debt servicing.

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On 18 November, Nigeria’s National Bureau of Statistics said annual inflation was 11.61 percent in October, up from 11.24 percent in September, marking the highest rate in 17 months. Accelerating inflation is mostly due to higher food prices which are in turn caused by restrictions imposed by Nigeria’s government on trade with neighbouring Benin, and to a lesser extent and Niger. Nigeria partially closed its formal borders in August to fight smuggling of rice and other goods. The trade restrictions are set to remain in place until at least 31 January 2020 (See BENIN: TRADE DISPUTE AND POLITICAL TENSIONS DESTABILISE COUNTRY’S EXEMPLARY MODEL).

SÉMÉ KRAKÉ INTEGRATED NIGERIA-BENIN BORDER CROSSING

The higher inflation rate adds to mounting concerns over the state of Nigeria’s economy. EXX Africa had accurately forecast that the border closures would lead to a spike in food prices and facilitate smuggling of contraband fuel and other goods (See NIGERIA: TRADE RESTRICTIONS DRIVE UP NIGERIAN INFLATION AND BOOST FUEL SMUGGLING). Moreover, EXX Africa’s previous assessments that weak tax collections, disappointing crude oil exports, and rising debt servicing costs would further drive down economic output have also proven accurate (See NIGERIA: WEAK TAX COLLECTIONS AND ASSET SEIZURES POSE RISK TO REPAYMENT OUTLOOK).

Trade restrictions are counter-productive

The closure of Nigerian borders for various different reasons is a recurring event in its economic history. Based on historical data since the 1980s, Nigeria closes its borders with Benin at least once every ten years. Most of these instances lasted only a few days, although the border was closed for almost two years in 1984 and 1985 when Muhammadu Buhari last held power in Nigeria.

  • Between April 1984 and December 1985, then Nigerian President Muhammadu Buhari closed all of Nigeria’s borders to protect Nigeria’s internal economy. The borders were reopened after almost two years when Nigerian General Ibrahim Babangida intervened to oust the government of President Buhari in 1985.
  • In 1996, the Nigerian military government led by General Sani Abacha closed Nigeria’s borders with Benin for several days due to a dispute with Benin’s government over the killing of Ogoni activists.
  • Between 9 and 14 August 2003, Nigeria closed its borders with Benin over allegations of cross-border stolen vehicle trafficking.
  • In 2013, Nigeria closed its borders with Benin for a few days to protest lower customs fees for rice.
  • On 20 August 2019, Nigerian President Muhammadu Buhari imposed wide-ranging restrictions to trade flows across the Sémé Kraké integrated Nigeria-Benin border crossing on the strategically important Lagos-Cotonou trade corridor. In October, the measures that also impact formal trade with Niger were extended at least until 31 January 2020.

The latest trade restrictions and partial border closures effectively halt all formal trade across the 800-kilometre frontier between the two countries. The restrictions also curb regional trade and go against the spirit of the African Continental Free Trade Area (AfCFTA) which both Benin and Nigeria signed in June 2019.

Nigeria President Buhari has claimed that Asian-grown rice and other goods are being imported at Benin’s Port of Cotonou and then transferred to Nigeria at preferential terms, thus undercutting Nigeria’s own rice production. The Buhari government has invested heavily in boosting agricultural production in northern states over the past five years, which has been successful in meeting some of the country’s domestic demand for staples such as rice, maize, sugar, and tomatoes.

Nigerian authorities also claim the food imports are part of a widespread smuggling ring that benefits from political protection in Benin. Nigeria frequently makes such allegations as an excuse to impose nationalist measures to curb regional trade. In reality, the trade restrictions are imposed for Nigeria’s own political motives. The Nigerian trade restrictions may become counterproductive as these are pushing up the price of food staples and gasoline in Nigeria, thus further encouraging smuggling of these goods despite the trade halt.

While the impact of the trade restrictions in Benin has been mitigated by the government’s proactive measures over the past three years, in Nigeria rising inflation and a fall in household incomes are more likely to leave a significantly detrimental legacy. The two countries’ economies were correlated until 2015, when Nigeria’s economy slowed significantly due to lower global oil prices and restricted crude output, while Benin’s economy showed marked improvement that year. This trend has continued despite this year’s border closures. Indeed, this year’s trade restrictions imposed by Nigeria on Benin, as well as other neighbouring countries, has had a contrary effect by motivating Benin to reduce its dependence on Nigeria and to boost its local markets while seeking greater economic diversification.

Nigeria’s border communities are facing the brunt of the trade restrictions. Fuel stations along Nigeria’s land borders have closed and prices have spiked after customs authorities banned deliveries of petroleum products to stations within 20 kilometres of the border in an attempt to curb smuggling. Protests on the Nigerian side of land borders are becoming more frequent and the governing party’s lawmakers are calling on the government to lift the trade ban fearing more unrest in coming weeks.

There are already indications that Nigeria seeks to lift the trade restrictions in early 2020 as socio-economic and political grievances caused by the trade ban mount within Nigeria itself. On 14 November, Nigeria, Benin, and Niger agreed to set up a joint border patrol force to tackle smuggling between the West African countries. This may offer the symbolic value that Nigeria would need to lift the trade restrictions and resume normal trading relations over coming months.

Slowing growth and weak revenue collection

Rising food prices, which may be more than just a temporary effect of the trade restrictions given the country’s inability to meet local food production targets, are exacerbating Nigeria’s already distressed economic outlook. The other key concern is that the government is failing to increase revenues and meet revenue collection targets. Tax revenues are just 8 percent of economic output. The Federal Inland Revenue Service is coming under pressure from the federal government to increase value added taxes and introduce new levies, which will be highly unpopular and coalesce into broader protests against rising food prices.

 

Inflation is set to spike further in the fourth quarter as the restrictions remain in place. This may also impact Nigeria’s already sluggish economy. Economic growth slowed to an annual rate of 1.94 percent in the second quarter, following 2.1 percent growth in the first quarter. The central bank has rather unrealistically forecast growth of 3 percent for 2019. Growth is more likely to remain at around 2 percent in 2019 and 2020. The economy has been held back by sluggish performance in the non-oil sector, despite government efforts to improve those industries and wean Nigeria off the crude oil on which it depends.

The IMF forecasts 2.3 percent growth for Nigeria this year, which seems unrealistic given the statistics from the first two quarters. The target of 2.93 percent growth in next year’s budget also looks improbable. Much will depend on the outlook for the oil sector. Despite stronger oil prices and less disruption to production, export revenues were about 50 percent below target for the first half of this year. Nigeria’s oil production is still running below the budget assumption of 2.18 million barrels a day. Oil output levels will be further depressed due to sustained economic sabotage by vandals on Nigeria’s oil-exporting Nembe Creek Trunk Line (NCTL), which has led to significant losses in production. The NCTL, one of two that exports Bonny Light crude oil, has been shut down more than once this year. It was shut down due to a fire in April and placed under force majeure in September.

Weak state revenues are raising concerns over debt servicing. Nigeria already spends two thirds of its revenues on debt servicing. This may rise as revenues remain weak and further debt is issued to finance the record 2020 budget. The budget includes some provisions based on the 2019 election manifesto, such as a promised 29 percent hike in minimum wages which should take the lowest pay grades up to about USD 83 a month. Such spending pledges would balloon the fiscal deficit and put further pressure on the government raise taxes.

INSIGHT

The shutdown of the Benin border has caused food inflation in Nigeria to accelerate, raising the risk of protests in urban centres and communities close to border crossings that have been most affected by the trade restrictions. Pressure will mount on the government to lift the restrictions, although hard-line advisers to the president remain steadfast in their commitment to the trade ban which they hope will protect local industry and curb smuggling activities. To counter slowing economic output and rising inflation, the government is set to continue propping up the currency and maintain costly subsidies, both policies which foster massive fraud and embezzlement.

Nigeria’s exports are also restricted, which will stop movements of cocoa and sesame seeds via land borders. Yet, the closure has no impact on Nigeria’s economically crucial oil exports, which are shipped out almost entirely via the nation’s seaports and offshore oil platforms. However, the border restrictions have caused trucks to pile up at Nigerian border crossings, while countries from across West Africa such as Ghana have sent emissaries to Nigeria to seek preferential trade access.

The trade restrictions also bode ominously for the future of the African Continental Free Trade Area (AfCFTA) deal, which has already been frustrated by border closures in East and Central Africa. Now with West Africa also facing protracted border closures impacting official trade, it is unlikely that the IMF’s regional forecast of 3.2 percent economic growth will hold for this year.

SEE COUNTRY OUTLOOK: NIGERIABENINNIGER