Mothercloud News

• Government may be losing N25 billion in revenue leakage on a single input
• Customs Service insists on improved oversight, yet concerns persist
• NEPZA challenges Customs to uphold enforcement duties

Free Trade Zones: A Boon or a Breeding Ground for Economic Misconduct?

Nigeria’s Free Trade Zones (FTZs) were established to attract investment, create jobs, and boost exports. However, concerns are mounting over regulatory gaps and unethical practices that may be eroding the intended economic benefits. Originally designed as export processing zones (EPZs), these hubs are increasingly seen as conduits for tax evasion, creating an uneven playing field for local businesses.

While duty waivers granted to FTZ operators are legal and intended to foster industrial growth, they come at a steep cost to government revenue. Ideally, these losses should be offset by economic gains from exports and job creation. However, industry insiders suggest that many operators are circumventing regulations to flood the local market with finished goods—avoiding taxes and creating unfair competition for businesses outside the zones.

Regulatory Gaps and Compliance Failures

Investigations reveal that some companies exploit their FTZ status by smuggling products into Nigeria without paying required duties. This practice allows them to undercut businesses that operate outside the zones and adhere to full tax obligations. Despite efforts by regulatory bodies, petitions regarding these infractions persist, with accusations of collusion between politically connected individuals and foreign-owned firms operating in the zones.

The Nigeria Customs Service (NCS), tasked with enforcing FTZ regulations, is under scrutiny for alleged negligence and lax oversight. Reports suggest that while NCS maintains a presence in all 14 active free trade hubs, enforcement remains weak. Some officers are accused of turning a blind eye to smuggling activities in exchange for financial incentives.

Customs, on the other hand, claims to be strengthening its oversight. According to its spokesperson, Abdullahi Maiwada, the agency has restructured its operational framework by creating new commands, such as the Ogun 2 Command for Guangdong Free Trade Zone and Port Harcourt 3 Command for oil and gas free zones, to enhance monitoring and compliance.

Massive Revenue Losses and Economic Implications

The scale of revenue loss due to regulatory loopholes is staggering. Ethanol, a key industrial input, is a prime example. Nigeria’s annual ethanol consumption stands at 1.2 billion liters, with local production meeting only 30% of demand. About 840 million liters are imported yearly, 20% of which is brought in through FTZs—duty-free. Given the 10% duty on ethanol, this loophole alone costs the government approximately N25.2 billion annually.

Similarly, palm olein imports, which reached 475,000 metric tonnes in 2023, also benefit from FTZ tax waivers. The estimated losses from FTZ operators avoiding the 35% duty on palm oil run into tens of millions of dollars.

Beyond revenue leakage, the abuse of FTZ privileges places local manufacturers at a severe disadvantage. While businesses outside the zones pay full import duties on raw materials, FTZ operators benefit from duty-free imports, enabling them to sell products at lower prices in the local market.

Call for Reform and Stricter Enforcement

Experts argue that a policy shift is necessary to restore fairness and accountability. One proposed reform suggests applying import duties uniformly and granting refunds only for products that are genuinely exported. This would prevent abuse while preserving the benefits FTZs are meant to provide.

Despite these concerns, the government remains optimistic about FTZs. Trade and Investment Minister Dr. Jumoke Oduwole recently highlighted their contribution, stating that they have attracted over $300 billion in investments and generated more than N650 billion in government revenue.

However, critics warn that without stronger enforcement and transparency, FTZs could become more of a liability than an asset. The Nigeria Export Processing Zones Authority (NEPZA) maintains that most FTZ operators follow due process and insists that it is Customs’ duty to ensure compliance.

“If goods are entering the Nigerian market from free zones without proper duty payment, then regulatory agencies need to do their job. If they fail, the responsibility falls on them,” said NEPZA’s Head of Corporate Communications, Dr. Martins Odeh.

Meanwhile, the Comptroller General of NCS, Adewale Adeniyi, recently acknowledged the problem, admitting before the House of Representatives Finance Committee that full compliance with FTZ regulations remains a challenge.

Conclusion

Free Trade Zones have the potential to be powerful economic drivers, but unchecked exploitation threatens their integrity. The government must tighten oversight, enforce existing laws, and consider policy adjustments to prevent revenue losses and ensure a level playing field for all businesses. Without decisive action, FTZs risk becoming a hotbed for economic subversion rather than a catalyst for growth.