Nigeria’s booming informal trade is costly for society, business and government, yet a critical opportunity exists to formalize such trade and drive more sustainable and less volatile growth, according to a new Chatham House report.
According to one estimate, informal activity accounts for up to 64 per cent of Nigeria’s GDP. This report finds that this is a result of obstacles that impede trading through formal channels. Among the key drivers of informality are bureaucratic burdens and other factors, such as:
- The need for Nigerian businesses to produce at least nine documents in order to send an export shipment and at least 13 in order to bring in an import consignment.
- Rigid and dysfunctional foreign-exchange regulations that push most smaller traders into the incompletely regulated parallel exchange market.
- Corruption and unofficial ‘taxation’, especially on major border highways, which delegitimize formal channels and encourage the use of smuggling routes.
As a result, the state loses direct tax revenues that would be generated by formal cross-border trade. This is not just siphoned into the informal economy; some is lost entirely. For example, many shippers opt to dock in neighbouring countries rather than deal with the expense and difficulty of using Nigeria’s ports.
Informal trade also undermines the social contract between the private sector and government. The state lacks tax revenues to pay its officials, improve infrastructure or implement reforms, while traders feel the government provides no services in return for any taxes they might pay.
This report makes a number of recommendations for how Nigeria could encourage more formal trade, including:
- Strengthening the resources and capacity of the Federal Ministry of Industry, Trade and Investment to coordinate action across key government ministries, departments and agencies, as well as public and private stakeholders.
- Prioritizing engagement in the development of Economic Community of West African States (ECOWAS) trade policies and fully implementing the ECOWAS Protocol on Free Movement of Persons to reduce harassment at borders.
- Allowing banks to operate simple services for small and medium-sized businesses to make trade payments directly from Nigerian naira to CFA francs and vice versa.
- Improving basic facilities that support traders, including improving the efficiency of border posts, installing truck parks and all-weather surfacing on market access roads, and introducing online booking for trucks to enter ports.
- Separating responsibilities for assessing duty and tariff liabilities from revenue collection in order to reduce opportunities for corruption, an approach already tested with success by the Lagos State Internal Revenue Service.
- Increasing funding and technical support for the National Bureau of Statistics, which has a significant role to play in measuring and capturing more of Nigeria’s external trade.