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Incentives as Stimulus for Economic Growth: A Case for EEG

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Wednesday, August 17, 2016 10:22am /Ade Adefeko*

debut my column this week with an issue close to my heart albeit unfortunately surrounded by misgivings and misrepresentation. But before I proceed to delve into the subject matter proper, let me invite you to join me through this Tuesday Musings where I would articulate my views on topics relating to leadership, gender, youth, agri- business, sports, and public policy as I believe intrinsically that LEADERSHIP is about public good and not about self-preservation.

In my humble capacity as Chairman of NACCIMA EXPORT Advocacy group, NEXAG, my constituency consists of millions of growers, processors and manufacturer-exporters engaged along the non-oil export value chain. Many of these entities are small scale and quasi SMEs in nature and scope and most barely managing to survive in this season of economic hardship. I speak for Idris Adamu, the two-hectare cotton grower in Katsina, Abubakar Ubandoma, the sesame grower in Gombe and Efetobo working on her rubber plantation in Sapele.

There are 11 million of them. The Federal Government has spoken to the fact that it intends to promote non-oil exports against the backdrop of dwindling oil prices (sub 40 dollars) and low production and exports-1.4 to 6 million barrels per day. And no government policy speaks better to this at least for now than the EXPORT EXPANSION GRANT (EEG). The legal framework for export promotion was introduced in 1986. The policy consisted of 18 export incentives.

However EEG remained the most effective one till date. Surprisingly, it went largely unexploited until in 2004 when the Obasanjo administration gave it the real impetus to boost agro-allied non-oil sector. The policy underwent a comprehensive review by PWC and based on inputs from various government agencies and the organized private sector, a robust policy was announced in 2006.It contained a comprehensive assessment criteria and a number of checks and balances to prevent abuse.

At the macro level, ever since the inception of the redesigned EEG scheme in 2006, non-oil export revenue steadily increased from USD 700 million in 2005 to USD 3 billion in 2013. The new policy attracted substantial new investments in export processing as well as significant increase in employment.

This is one of the best performing sectors in Nigerian economy with exports of processed agricultural commodities like cocoa, cashew, sesame, cotton, ginger, shrimps and rubber as well as leather, textiles and plastics and therefore it is important that this sector as a whole is not allowed to become comatose. Recently, Nigerian Export Promotion Council (NEPC) published a comprehensive report on the impact assessment of the EEG policy.

It clearly highlighted the positive impact the policy had on increase in forex earnings, employment generation, and value addition. The report also assessed the negative effect caused by policy disruptions and the dent on Nigeria’s image as a reliable trading partner.

That non-oil exports started declining since 2014 due to uncertainty and poor implementation of EEG policy is rather unfortunate. Non-oil exports have crashed to about USD1.5billion from its peak of about USD3bil in 2013. This should be a wake-up call for the Federal Government to ensure that policies targeted at non-oil exports are implemented effectively. But seemingly what we are seeing is neglect and hostility towards non-oil exporters from the government functionaries who perceive the incentive as a ‘dash’ to the private sector.

Why does Nigeria need export incentives? Incentives are essential to cushion the impact of infrastructural disadvantages and high cost of doing business. Studies carried out by UNIDO and World Bank have shown that Nigerian exporters suffer a cost disadvantage of 30 per cent over other developing countries. Therefore, it is apparent that EEG mitigates the cost disadvantages. Most developing countries, including China which is the world’s largest exporter, and India, give incentives to boost their production and exports.

Exporters borrow from the banks at 15-20 per cent interest and delay in reimbursement of EEG claims for several years has exposed their businesses to peril. Non-oil export sector businesses are largely in the agro-allied sector and highly employment intensive. Protracted delay and uncertainty poses a risk to the Nigerian economy and aggravates the unemployment in the society.

The non-oil exporters are stuck with unutilized NDCC (Negotiable Duty Credit Certificate-an instrument through which the grant is disbursed) amounting to about N120 billion in their hands and another N75 billion worth of claims are lying with NEPC waiting for processing. This is imposing a very heavy financial burden upon the exporters as many factories have closed down and yet many more are on the verge of closure unless some corrective actions are taken by the government.

A common refrain one hears from government functionaries even at the higher levels is the purported abuses of the EEG scheme. This is very unfortunate considering that the government should not feign helpless to administer its own policies. It should interest the readers to know that EEG scheme was subjected to eight major probes leading to disruptions during 2004-12.

These were carried out by inter-ministerial committees, National Assembly, investigative agencies and reputed international audit firms. None could come up with a concrete proof or the so called abuses or charged any single exporter. Should we throw the baby away with the bath water?

The Federal Government has made repeated pronouncements of its genuine intention to attract foreign direct investments (FDI). We make bold to say that the best way to attract FDI is to provide a conducive environment for existing investors and businesses in the country. If investors have to suffer uncertainty and delay in collecting the incentives which are clearly laid down under the existing policy – like EEG – then it is a strong negative signal for any potential investor.

As per the existing policy EEG is issued in the form of Negotiable Duty Credit Certificate (NDCC). NDCC is a sovereign financial instrument of FGN for payment of any customs duty and excise. In actual fact, however, substantial volumes of NDCC certificates are still lying unredeemed with exporters. This practice of not honoring the obligations of government as contained in the govt policy severely undermines the trust and credibility of Nigerian government and acts as a deterrent to new investment.

OPS (organized private sector) is also aware that a comprehensive review of EEG policy is being done with participation of all stakeholders by Ministry of Trade and Investment. We believe that until the time this review report is considered and any changes made – the existing scheme should be allowed to run to demonstrate government’s commitment to create and sustain a conducive business environment.

Many exporters I have interacted with have suggested pragmatic solutions: The government should disburse the claims in full. However, looking at the fiscal challenges the government is facing, it can stagger the redemption over a period of 2-3 years to mitigate the liquidity crunch. Customs may be asked to start accepting NDCC’s in monthly instalments

The unutilized certificates may be converted into long tern maturity bonds to overcome liquidity constraints. The government needs to come out and announce the new scheme without further delay. Non- oil exporters and investors deserve to know what policy framework they would be operating in. The government should hold stakeholder fora and solicit inputs and participation from industry bodies like MAN, NACCIMA, OPEXA, NESG the likes.

What gives me a bit of comfort is the pronouncement by the Vice president at the LCCI POLICY DIALOGUE that the scheme will not be scrapped but will be revamped. However, I make bold to say that the government should demonstrate good faith by redeeming the backlog and in doing this reflate the economy.

*Ade Adefeko is the Chairman of NACCIMA EXPORT Advocacy group

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