Download Manson Nwafor

The Effects of ECOWAS Regional Trade
Agreements In Nigeria
By
Manson Nwafor
University of Nigeria, Nsukka
Email:[email protected]
1
This paper reports an analysis of the impacts of ECOWAS regional trade
agreements in Nigeria. Nigeria is located in West Africa with Cameroon, Benin and
Niger Republic as its Neighbors. It has a population of over 120 million people. As
shown in the table and diagram below, Nigeria has had its share of fluctuating
economic performance.
Nigeria belongs to the Economic Community of West African States (ECOWAS).
ECOWAS includes the following countries: Republic of BENIN, Burkina Faso, Republic
of Cape Verde, Republic of cote d’ivore, Republic of the Gambia, Ghana, Guinea,
Guinea Bissau, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal and Sierra Leone and
Togo. Recently the ECOWAS has geared up efforts to further promote regional
integration in the sub region. As a result , the Nigerian government is making efforts to
fully participate in the ECOWAS Trade Liberalization Scheme (TLS).This will involve
removing all tariffs on Intra-Ecowas trade and establishing a Common External Tariff
(CET) with other Ecowas countries. Other groups and agreements also call for a
reduction in tariffs ( as well as non tariff barriers to trade ) by Nigeria and other
countries .These include the ACP-EU, IMF,WB,WTO etc . Compared to tariffs in most
countries, Nigeria’s tariffs are high (IMF [2003]). What will be the impact of the regional
agreement on tariff reduction in Nigeria? This issue will be discussed in the paper.
TABLE 1: SOME ECONOMIC INDICATORS
YEAR
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
REAL GDP GROWTH
RATE
89020.9
91190.7
96186.6
70395.9
70157
66389.5
63006.4
68916.3
71075.9
70741.4
77752.5
83495.2
90342.1
94614.1
97431.1
100015.2
101330
103510
107020
110400
112950
116400
120640
EXTERNAL CURRENT DEBT/GDP
DEBT
GDP
RATIO
-7.3649433
1252.1
2.43740515
1611.5
5.47851919
1866.8
-26.813194
2331.2
-0.3393664
8819.4
-5.3700985
10577.7
-5.0958359
14808.7
9.37984078
17300.6
3.13365633
41452.4
-0.4706237 100789.1
9.91088669 133956.3
7.38587184 240393.7
8.20035164 298614.4
4.72869238 328054.3
2.9773575 544264.1
2.65223322 633144.4
1.31460018
648813
2.15138656 716865.6
3.39097672
617320
3.15828817 595931.9
2.30978261
633017
3.05444887 2557384.4
3.64261168 3121725.8
34540.1
41947.7
49623.3
50456.6
51570.3
56709.8
63006.2
71368.1
72128.2
106833.2
142678.3
222457.6
257873
320247.3
544330.7
691600
911070
1960690
2740460
2835000
2765670
3225990
4842190
0.036250619
0.038416886
0.037619425
0.046202083
0.171017039
0.186523317
0.2350356
0.242413627
0.574704485
0.94342489
0.938869471
1.08062705
1.157990173
1.024378035
0.999877648
0.915477733
0.712143963
0.365619042
0.225261452
0.210205256
0.228883779
0.792744057
0.644692959
INFLATION
16.6
11.8
9.9
20.9
7.7
23.2
39.6
5.5
5.4
10.2
38.3
40.9
7.5
13
44.5
57.2
57
72.8
29.3
8.5
10
6.6
6.9
2
2001
2002
125720 4.21087533
3176291
129830 3.26916958 3780208.9
5545410
5726190
0.572778388
0.660161277
18.9
12.9
Some Economic Indicators
80
1.4
1.2
60
1
0.8
20
0.6
Debt/Gdp ratio
Inflation,Growth
40
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
0
-20
-40
0.4
GROWTH
RATE
INFLATION
DEBT/GDP
RATIO
0.2
0
Year
Source: Central Bank of Nigeria ( 2000 , 2002)
The rest of the paper is organized as follows. Section II discusses the present structure
of imports and import tariffs in Nigeria. Section III gives a picture of poverty. The
methods employed in the analysis are stated in section IV and finally section V
discusses the results and concludes the paper.
STRUCTURE OF IMPORTS AND IMPORT TARIFFS IN NIGERIA
Using the SITC classification system we observe that over 70% of imports are comprised
of chemicals, manufactured goods and machinery .We also note that for the 6 years the
structure of imports did not change.
TABLE 2: STRUCTURE OF IMPORTS (%)
NO
0
1
2
CATEGORY
Food and live animals
Beverage /Tobacco
Crude Materials
1995
11.7
.4
4.2
1998
12.2
.4
4.5
1999
12
.5
4.5
2000
11.8
.7
4.6
3
3
4
5
6
7
8
9
Mineral Fuels
Animals / Vegetable oils etc
Chemicals
Manufactured Goods
Machinery/Transportation Equipment
Miscellaneous Manufactured goods
Miscellaneous Transactions
1.2
1.1
26.4
23.3
27.3
4.1
.2
100
1.4
1.3
23.3
29.7
23.4
3.9
.2
100
1.4
1.4
22.8
29.4
23.7
4.1
.2
100
1.3
1.5
22.7
29
24.1
4
.3
100
Source: Central Bank Statistical Bulletins ( Various Years)
As at October 2002 the structure of import tariffs was as follows (IMF [2003])
TABLE 3: STUCTURE OF IMPORT TARIFFS
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Commodity Type
Raw Materials
Components
Clothing
Luxury Consumer goods Except automobiles
Paper products
Vehicles
Soy meal, soy cake & groundnut cake
Refined petrol prod
Rice
Wheat
Machinery & electrical equipment
Food
Cigarettes & tobacco
Alcoholic beverages
Statutory Tariff (%)
2.5 - 25
5 - 50
55 – 75
30-50
5-100
5-50
35
10
75
15
5-20
5-100
150
100
One interesting observation is that the as at 2002 the weighted average tariffs amount to
17.4. This is in spite of some commodities having tariffs of 100% and means that most
imports are on goods with low tariffs. Off course this refers to the value of imports
rather than the number of items imported. If tariffs are lowered for specific
commodities large imports are expected. Kuji (2002) using partial equilibrium analysis
show that imports of the major categories would increase with reductions in import
tariffs.
DESCRIPTION OF POVERTY IN NIGERIA
Poverty is defined as living on less than 2/3 of the mean monthly household
expenditure (Ajakaiye and Adeyeye [2001]). The percentage of people who live below
this level is termed P0 or poverty headcount. The poverty level has also shown some
fluctuation but has been on the rise for most of the past 2 decades. Between 1980 and
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1985 P0 rose sharply from 28.2 to 46.3%. Fortunately it decreased by 1992. From this
period however, it has been on the increase. From 42.2 in 1992 it rose to 65.6 by 1996
and by the year 2000 it had gotten to 70% (FGN [2000]).
Poverty Level in Nigeria
P0, Population
80
65.6
67.1
60
40
20
46.3
27.2
34.7
42.7
39.2
P0
POPULATION IN POVERTY
17.7
0
1980
1985
1992
1996
Year
Source: Federal Office of Statistics (1999)
To ascertain the distribution of the national poverty levels shown above, we present the
latest disaggregation of the poor by sector of work of the household head.
TABLE 4: SECTORAL DESCRIPTION OF POVERTY
Sector (Occupation)
Contribution to
national Poverty
(1997)
Farming
33.3
Trading and
19.2
Artisans
Public Service
29
Corporate units
4.3
Students/Apprentice 6.4
Others
7.8
Source : Central Bank of Nigeria (1999).
The largest percentage of the poor comprises of public servants and farmers who form
the bulk of the rural population.
METHODOLOGY
To asses the impacts of tariff reduction on the economy we employ 2 models: a
Computable General Equilibrium model and a simple econometric model. The CGE
model has the following features as shown in Devarajan et al (1994). The advantage of
the CGE model is that it allows for intersectoral feedback effects which partial
equilibrium models do not (Dervis et al [1982]).The model has 1 household, 2 sectors, 3
goods and production factors are fixed at the full employment level. As full
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employment of labour and capital is assumed, output is also fixed at the full
employment level.
PRODUCTION AND FACTOR MARKETS.
X = at (bt E rt + (1-bt) Ds rt ) rt
[E1]
1
 Pe  rt1
E/Ds =  bt Pd 
[E2]
 (1bt ) 
Output is modeled as a CET function of exports and domestic supply of commodities so
that the output function represents the production possibility frontier. As production
factors are assumed at the full employment level , the economy operates on the PPF.
The decision to produce the domestic good or export good depends on the relative
prices , Pe and Pd , of exports and domestic goods respectively.E2 captures this
HOUSEHOLDS
The model has one household. Its sources of income include the national income, PxX
Y= PxX + tr Pq + reEr
[E3]
, transfers , trPq and foreign remittances (reEr).The single household spends all its
income ( less savings and taxation) on a single composite commodity , Q , which is a
CES function of imports (M) and domestic for demand good (Dd).There are 3 goods in
the economy : import goods, export goods and domestic goods.
EXTERNAL SECTOR
1
1 rq
 Pd



Pm
M/Dd = 
[E4]

 bq

 1  bq 
B= wmM – weE – ft –re
[E5]
The economy produces an export good , E , which is not consumed domestically and
imports an import good which is not produced domestically. Demand for imports
depends on the relative prices of import goods domestic goods (E4) . Import tariffs are
levied on imports. Because a small fraction of Nigeria’s imports are from ECOWAS
countries ,imports and import tariffs for ECOWAS countries are not differentiated from
those of Non-ECOWAS countries. The current account balance, B , represents foreign
savings.
CONSUMPTION
Cons = Y (1- ty - sy)/pt
[E6]
Consumption is determined by the household income , Y , income tax rate , ty and
savings rate , sy and the sales price of the composite commodity, pt.
GOVERNMENT
Tax = tmWmErM + teEPe + tsPqQd + tyY
[E7]
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Sg= Tax –GPt - trPq – ftEr
[E8]
The government revenue comes from foreign transfers (ft) , import tariffs (tmWmErM),
export tariffs, sales tax (tsPqQd) and income tax (tyY) . Government expenditure is
spent on an exogenous amount of goods (G), and transfers (tr). Government savings
(Sg) is defined as the difference between its income sources and expenditure above.
DEMAND AND SAVINGS.
Total domestic demand is the sum of household consumption (Cn) , exogenous
investment (Z) and exogenous government expenditure (G).
Qd = Cn + Z + G
[E9]
Total domestic supply is the composite commodity Q.
1
Qs= aq (bqM  rq + (1-bq)Dd  rq ) rq
[E10]
Savings in the economy is a sum of household savings (syY) , foreign savings (B) and
government savings (Sg).
S= syY + ErB + Sg
[E11]
PRICES
Pm = Erwm (1+tm)
[E12]
Pm , Import prices are a function of the exchange rate (Er) world price of import s
(wm) and import tariffs ,tm.
Pe= Erwe/(1+te)
[E13]
Pe , export prices are a function of exchange rate, world price of exports (we) and
export taxes, te.
Pt = Pq(1+ts)
[E14]
Pq , the sales price of the composite good (imports and domestic good) , is a function
of the supply price (Pq) of the composite good and indirect taxes ,ts.
Pq = (PmM + PdDd)/Qs
[E15]
Pq , the supply price , is the weighted average of prices of imports and domestic
goods. Pq is also the CPI.
Px = (PeE + PdDs)/X
[E16]
Px , the output price is , the weighted average of the prices of exports and domestic
good.
Er = 1
[E17]
Er , the exchange rate , is the numeraire is so that all prices are relative prices.
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EQUILIBRIUM CONDITIONS
Dd – Ds = O
[E18]
Domestic demand (Dd) is set equal to Domestic supply that is always equal to 1 –
Exports (E).
Qs – Qd = O
[E19]
Qs, supply of the composite good is equal to its demand,
Endogenous Variables
E:
Export good
M:
Imports
Ds:
Supply of domestic good
Dd: Demand for domestic good
Qs:
Supply of composite good
Qd: Demand for composite good
Pe:
Domestic price of export good
Pm: Domestic price of import good
Pt:
Sales price of composite good
Px:
Price of aggregate output
Pq:
Price of composite good
Tax: Tax Revenue
Sg:
Government savings
Y:
Total Income
Cn: Household consumption
S:
Aggregate savings
Exogenous Variables
wm: World price of imports
we: World price of exports
tm:
import tariff rate
te:
Export subsidy rate
ts:
value added tax
ty:
direct tax rate
tr:
government transfers
ft:
foreign transfers to Government
re:
foreign remittances to private sector
s:
average savings rate
Aggregate output
X:
G:
Real Government demand
Balance of trade
B:
Z:
Aggregate real investment
Parameters
at:
Scale for CET
bt:
Share for CET
rt:
Rho for CET
aq:
Scale for CES
bq:
Share for CES
rq:
Rho for CES
THE ECONOMETRIC MODEL:
To asses the possible poverty impacts of tariff reduction we use an econometric model
with the poverty head count as the dependent variable. Analysis from partial
equilibrium models show that decreases in tariff rates will lead to increases in imports
into the country. We therefore treat the imports /GDP ratio, M, as a proxy for average
tariffs. When average tariffs decrease the imports/GDP ratio increases . The
imports/GDP ratio is therefore the variable for isolating the impacts of tariff reduction.
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For a realistic estimation we include other variables that can have effect on poverty as
explanatory variables. The single equation econometric model is specified as follows
P0 = f (M, G, D, I, P)
Where
M = Imports/GDP ratio
G = Growth rate
D = External Debt
I = Inflation
P = Political Stability
Data for the Study
Data on poverty is available from 4 national consumer surveys of 1980, 1985, 1992 and 1996.
The P0 data for 1980 – 1996, which is the period of analysis for the econometric model, was
obtained by interpolating the 4 figures from the surveys. The interpolated figures, interestingly,
Showed a correlation of -.84 with data on real per capita income (RPCI) for the period. This
means that as RPCI was decreasing the poverty level, P0, was increasing. The P variable above
is a dummy variable: 0 for civilian rule (stability) and 1 for military rule (instability). The data
for the econometric model covers the period 1980 to 1996.
The data for the CGE model is based on a 1992 macro social accounting matrix (SAM) with the r
average tariffs adjusted to the 2002 level of 17.4%. The SAM , which was constructed by
researchers at the World Bank , was used as it is the available SAM with all the data needed in
the model.
POLICY EXPERIMENTS
The policy experiment is to reduce import tariffs to
[A] 15%
[B] 10%
[C] 5%
as obtains in ECOWAS countries and to observe the impacts on:
[1] Price level
[2] Household Income
[3] Government Tax Revenue
[4] Imports
[5] Household Consumption
For the simple econometric model we asses the impact of tariff reduction (rise of
imports/GDP ratio, M) on the poverty level. In the CGE model, a change in tariffs
affects the price of imports and consequently the equilibrium level of the domestic
good. The income of the household depends on total output of the economy. Therefore
changes in the equilibrium level of domestic goods and output, in turn , will cause
changes in the income of the household. In this manner tariff reduction affects
household income.
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RESULTS FROM THE MODELS
The CGE model’s results are shown below. The table shows percentage changes in
variables compared to the base case as tariffs were lowered.
TABLE 5: CHANGES IN VARIABLES
Import Tariff
Household Consumption
CPI
Imports
Household Income
Govt Tax Revenue
15.0
0.5
-0.7
1.2
-0.1
-1.9
10.0
1.7
-2.1
4.0
-0.4
-6.1
5.0
3.0
-3.6
6.9
-0.7
-10.5
For the simple econometric model it was observed that a positive and statistically
significant relationship exists between the imports/GDP ratio and political stability on
the one hand and the poverty level on the other hand. The other variables were
statistically insignificant at the 10% level.
From the CGE model we see that as tariffs were decreased from their present level of
17.4% to 5% household income decreased by .1 to .7%. These decreases are very small
but when we complement this with the results from the econometric model we get a
fuller picture. It should be noted that the household income above does not take into
account the income distribution in the economy so while the CGE model reports that
household income does not change appreciably, it says nothing about the distribution
of income and poverty. The single equation model more directly captures this as its
dependent variable is the poverty level (P0). Thus we observe that tariff reduction may
not seriously reduce total household income but would worsen the distribution of
income and increase poverty. From the sectoral distribution of poverty and tariff
structure in tables 3 and 4 we expect that a reduction of tariffs on food from the present
level of 5-100% to 15% and below would impact negatively on agricultural workers
who are 33% of the poor.
One positive effect is that the price level would reduce by .7 to 3.6% depending on the
tariff rate. Imports would increase by 1.2 to 6.9% as tariffs are lowered. This
corresponds to findings from a partial equilibrium study in Kuji (2002). Another
negative effect is that Government taxes would reduce by 1.9 to 10.5% as tariffs are
reduced.
CONCLUSIONS
The ECOWAS regional trade agreement of lowering import tariffs will lead to a mixed
basket of results – some positive and others negative. The government would have to
anticipate these results so that the overall effect is to reduce the poverty level. This
means that government has to put in place policies and infrastructure that will make
tariff reduction pro-poor. The simple econometric model represents first round effects
and excludes intersectoral interactions, the effect of time/ dynamic variables and the
labour market. It is also expected that fuller results would be obtained when the CGE
model reflects dynamic variables and the labour market.
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BIBLIOGRAPHY
Ajakaiye and Adeyeye (2001) The Nature of Poverty in Nigeria. NISER Monograph
Series No 13.
Central Bank of Nigeria(1999) Poverty in Nigeria
Central Bank of Nigeria (2000) Statistical Bulletin
Central Bank of Nigeria (2002) Annual Report and Statement of Accounts
Dervis et al (1982) General Equilibrium Models for Development Policy. Cambridge
University Press
Devarajan et al (1994) Policy Lessons from a Simple , Open-Economy Model
Federal Government of Nigeria (2000) Poverty Reduction Plan
Federal Office of Statistics (1999) Poverty Profile of Nigeria (1980-1996)
IMF (2003) “ Trade and Openness Policies in Nigeria” in country report No. 03/60.
Nigeria: Selected Issues and Statistical Appendix.
Kuji Ltd (2002) Comprehensive Review of the Nigerian Customs and Excise Tariff 1995
– 2001 : Implications for Nigeria of the ECOWAS Common External Tariff and
Nigeria’s obligations/commitments under WTO, ECOWAS, AGOA and ACP-EU
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