By Olu Fasan

The central bank governor, Godwin Emefiele, believes smugglers are “killing” Nigeria’s economy. Speaking at a recent roundtable event in Lagos, he said: “Nigeria is very good at making brilliant economic policies, but smugglers are those sabotaging these policies”. Thus, he said, the CBN would “block the smugglers’ accounts in all Nigerian banks”. Those circumventing the government’s foreign exchange restrictions on certain importswould also be “blacklisted” and prevented from operating in the foreign exchange market and the banking industry.

Emefiele said the CBN “has the names of individuals and companies involved in smuggling”. Which shouldn’t be surprising. In her book, Reforming the Unreformable, former Finance Minister Dr Ngozi Okonjo-Iweala wrote that: “Nigeria must be one of the few countries in the world where smugglers are known and talked about openly, and where these same big-time smugglers walk around freely in the corridors of powers”.So, smugglers are ubiquitous in Nigeria, and the authorities, including the CBN, probably know them!

Yet, it’s draconian to block the accounts of any individual or cut a firm from the lifeblood of an economy by preventing it from operating in the foreign exchange market or the banking system. It’s also authoritarian to take such measures extrajudicially without the orders of a court. Elsewhere, the rule of law would prevail even in dealing with alleged smugglers. But, here, a Presidential Order has authorised “aggressive” measures against “smugglers”.

Governor, Central Bank of Nigeria (CBN), Mr Godwin Emefiele

Of course, smuggling flourishes in Nigeria and harms legitimate businesses and the economy. For instance, a World Bank report states thus: “The total amount of potential smuggling from Benin is estimated at close to $5bn, nearly 10% of Nigeria’s official imports”. Recently, the Financial Times published a story entitled: “Smuggled rice makes mockery of Nigerian question to boost farming”, in which it said that “more than one million tonnes of rice entered Nigeria through its porous border with Benin in the first three months of this year”.

Over 1m metric tons of rice smuggled into Nigeria in 3 months- RIPAN(Opens in a new browser tab)

But why is Nigeria rife with smuggling? Well, the main answer is economic and implicates Emefiele himself. Economic theory tells us that smuggling flourishes where there are highrates of protection. Indeed, in those circumstances,smuggling could improve economic welfare because, as the economist Jagdish Bhagwati argues, “it constitutes partial or total evasion of high tariffs and import bans that represent a suboptimal policy”. In other words, smuggling is a response to severe policy distortions and can alleviate those distortions.

Now, Nigeria is one of the world’s most highly protectionist countries; it maintains import-prohibition lists and high tariffs to shield its inefficient and struggling manufacturing and agricultural industries from international competition. But these distortions have become extremely severe under President Muhammadu Buhari, with his government’s policies of import-substitution and self-sufficiency, for which Emefiele has been the driving force!

Truth is, Emefiele is the most protectionist and interventionist CBN governor in Nigeria’s history. His first term was defined by restrictions on imports and tight control of the foreign exchange market. His reappointment recently was precisely because of his Soviet-style state planning ethos, which chimes with President Buhari’s dirigiste economic worldview.In 2015, the Central Bank under Emefiele published a list of 41 products, later increased to 43, wide-ranging in scope, whose imports were/are deemed ineligible for discounted foreign exchange. The policy was intended to spur local production and manufacturing.

But, unsurprisingly, the policy and other protectionist measures introduced by Emefiele have had perverse consequences, including incentivising widespread smuggling. Surely, when you ban import of intermediate products, you increase the cost of production for local firms and undermine their competitiveness. And when you ban import of consumer goods that you are not producing enough of, you artificially raise the prices of the available local products. The truth is that lack of productivity undermines the capacity of Nigerian firms to produce and sell goods cheaply, and import prohibitions make the situation worse for the people.Yet, nearly half of Nigerians live in extreme poverty and most of the rest can’t make ends meet! It’s very anti-people to pursue such policies, as I wrote recently in a piece, entitled, “Nigeria can’t ban imports amid poverty and hunger” (Vanguard, May 2, 2019)

Surely, in that situation, smuggling is, economists would argue, an optimal response to a suboptimal policy. Think of it, how would Nigeria stop smuggling when smuggled products are cheaper than local ones? Economic analysis shows that where there are large differentials in the retail prices of local products and similar foreign ones, smuggling would flourish. For instance, rice is one of Nigeria’s most important staples, accounting for 10 per cent of household food spending. Yet, smuggled rice is far cheaper than Nigerian rice. Is there any wonder that Nigeria’s markets are full of smuggled rice?

It’s simple economic logic: there won’t be smuggling if there is no demand for smuggled goods. But the truth is that, porous borders or not, smuggling thrives in Nigeria because there are high demands for smuggled products, thanks to severe policy distortions!

Therefore, Emefiele was wrong in saying that “Nigeria is very good at making brilliant economic policies, but smugglers are those sabotaging them”. To the contrary, it’sNigeria’s penchant for making bad, suboptimal policies that incentivises large-scale smuggling.

So, Emefiele can blocksmugglers’ accounts; he can, since the CBN has money, even build prisons for smugglers. But unless he addresses the policy distortions, he’s simply shadowboxing. Smuggling will continue to flourish!