Should Nigeria ban the importation of Tomato Paste?

The Minister of Agriculture and Rural Development, Chief Audu Ogbeh, recently announced that the Federal Government will place a final ban on the importation of tomato paste before the end of 2019.1 The rationale is to boost domestic production of the commodity. This also ties in with the protectionist stance and the “produce what you eat and eat what you produce” mantra of the Buhari administration. You may ask, “why is this important or why should I care?” 
For starters, Nigerians’ “obsession” with tomatoes cuts across tribe, religion and class. Tomatoes are a major ingredient in almost everything we eat, starting from the famous Jollof rice, to different traditional soups and stews, etc. Given that the demand for tomato is both price and income inelastic, an increase in price will be passed down to the final consumers – you and me.
One of the pillars of “Buharinomics” is protectionism – essentially hampering free trade by imposing huge tariffs on imports or refusing to sign free trade agreements. This protectionist sentiment is evidenced in the Federal Government declining to sign monumental trade agreements such as the African Continental Free Trade Agreement and the Economic Partnership Agreement with the European Union. It is also seen in the huge tariffs imposed on some commodities such as rice and tomatoes.
The principles of macroeconomics and microeconomics confirm that comparative advantage occurs when a country can produce a commodity at a relatively low opportunity cost and therefore sell the commodity cheaper than other countries. The theory of comparative advantage states that if countries produce the commodities they have the comparative advantage in and trade, then economic welfare will increase. In other words, countries should produce the goods they have a comparative advantage in and trade with other countries.

Nigeria consumes approximately 2.3 million metric tonnes of tomatoes annually; meanwhile, it produces about 1.8 million metric tonnes annually.4 The gap of roughly 500,000 metric tonnes is bridged with imported tomato paste. About 45 per cent of the domestically produced tomatoes are destroyed before they reach the market or dinner table. The reasons aren’t farfetched – bad roads, exposure to weather elements for extended periods, poor handling of the crop post-harvest, inadequate storage facilities; the list is endless. All these factors are especially important because of the fragile nature of the fruit and its short shelf life. Already, there are not enough domestically produced tomatoes to go around and the country must import to fill the gap. To further exacerbate the situation, the FG is planning to finally ban the importation of tomato paste.

This is not surprising as tomatoes and tomato paste are already part of the 41 items ineligible for foreign exchange at the CBN window. It was particularly troubling when Nigeria had an exchange rate crisis in 2015/2016. Erisco – a tomato processing company – shut down operations and laid off about 1,500 workers only after eight months of operation partly due to an FX shortage. This was also part of the reason that the Dangote tomato processing plant was temporarily shut down in 2016. Furthermore, as part of the new tomato policy of the FG (announced in April 2017 and “implemented” in May 2017), the tariff on tomato importation was increased from 5 percent to 50 percent with a $1,500 levy per tonne of imported tomato paste.

Despite these costs, imported tomato paste still floods the domestic market for two major reasons: one there is a huge supply deficit in the economy and two, the country’s borders are porous. Assuming the Nigerian borders were not porous, the current tariffs on tomato paste would have caused tomato prices to increase significantly. However, this was not the case as a basket of tomatoes averaged N10,000 in 2017 with little or no price oscillations; currently, it costs approximately N6,000. With a complete ban on the importation of tomato paste and concentrate, prices will spike because domestic supply is not growing as fast as the demand for the product.

Currently, there are only a handful of tomato processing plants in the country with Dangote being the largest. Another reason Dangote shut down operations in 2016 was that there were not enough domestically produced tomatoes to service the giant processing plant.6 This is despite contracting about 5,000 local farmers to supply fresh tomatoes.7 During the 2016 tomato “crisis” in Nigeria, a pest, “tuta absoluta,” wiped out about 80% of the tomato farms in Kaduna (one of the largest tomato-producing states in Nigeria). The price of a basket of tomatoes jumped from N5,000/basket in April 2015 to N25,000/basket in April 2016. The price of tinned tomatoes also increased significantly due to the decrease in supply. Taking all these factors into consideration, imagine a total ban on the importation of tomato paste. The price of jollof rice and other delicacies that require the use of tomato as an ingredient will go through the roof!

Nigeria has one of the lowest tomato yields in the world at 5.47 tonnes/harvested area, compared to the global average of 38.1 tonnes/ harvested area.9 It is common knowledge that most of the tomatoes in Nigeria are grown in the North and transported via road to the South where the market is – at least 10 hours. The tomatoes are gathered in baskets mounted on each other and packed into lorries like sardines. It is no wonder that almost half are destroyed before they reach the market. Banning tomato importation will create monopolies or oligopolies – where one or a few large firms dominate the market and control prices. Banning tomato importation may not only increase the price, but it will also increase smuggling through our porous borders and encourage corruption.
Banning tomato paste without addressing yields, porous borders, transportation, and manufacturing is not an optimal policy choice for the country.
However, it is not all gloom and doom, Nigeria can actually produce enough tomatoes to meet domestic demand and even export the surplus, but this requires some structural changes and a strong commitment by the government to improve the tomato value chain.
Currently, Nigeria is the second largest producer of tomatoes in Africa and the 14th largest in the world so there is hope. First, the type of tomato grown in Nigeria is weak and has a low yield. The government can invest in and subsidize a stronger tomato species for local farmers. The private sector can also invest in obtaining better tomato species. For instance, Dangote has acquired some greenhouses to grow disease-resistant, high yielding tomatoes.10 The goal is to improve the yield of Nigerian tomatoes and to sell the hybrid tomato species to local farmers. Another important factor is to reduce tomato waste. India and Florida (the second largest tomato producing state in the U.S., after California), use plastic crates and chlorine water dump tanks to transport tomatoes which have been found to reduce waste. The government can also incentivize the private sector to invest in tomato processing plants by granting tax holidays, import duty relief, soft loans etc. Finally, and most importantly, the government should demonstrate a strong commitment to infrastructure development – road and power in particular. Once these changes are in place, there would be no need to ban the importation of tomato paste, the invisible hand would bring the domestic market to equilibrium.
The following is an excerpt from Financial Derivatives Limited, titled Economic Bimonthly Update