President Tinubu’s Executive Order for Tax Waiver on Pharmaceutical Input

A game changer or mere soothing balm?
On 28th June 2024, President Bola Tinubu signed an Executive Order to remove import duty/tariffs, and value-added tax on specified machinery, equipment and raw materials for production of pharmaceuticals, diagnostics, and medical devices such as needles and syringes, biologicals and medical textiles. The objective is to increase local production of
healthcare products, reduce production costs, and enhance local manufacturers’ competitiveness.

The Executive Order requires the Ministers of Health, Finance, as well as Industry, Trade and Investment, to collaborate for development of a harmonized implementation framework — “expediting regulatory approvals and reducing bottlenecks.” According to the Coordinating Minister for Health and Social Welfare, Muhammad Ali Pate, the Nigeria Customs Service, National Agency for Food and Drug Administration and Control, the Standards Organization of Nigeria, and Federal Inland Revenue Service “will ensure swift implementation, with special waivers and exemptions effective for two years.” The Order also encourages establishment of market-shaping mechanisms such as framework contracts and volume guarantees, to encourage local manufacturers.

The action comes against the backdrop of high cost of pharmaceuticals (and healthcare generally), caused by devaluation of the Naira, seemingly intractable inflation, significant infrastructural deficit and departure of multinational pharmaceutical firms such as GSK and Sanofi, from Nigeria. Many Nigerians have found it increasingly difficult to afford basic healthcare over the past years, but the difficulty has been exacerbated in the past year. The President’s recent action is consistent with the January 2021 demand by the Manufacturers Association of Nigeria to the previous administration (under President Muhammadu Buhari) to grant a waiver of import duties on “active pharmaceutical ingredients, other raw materials required to manufacture essential products and food-related items for one year.” No action was taken at the time.

"The President’s action is consistent with the January 2021 demand by the Manufacturers Association of Nigeria to the previous administration."

Implications

• Reduced Cost of Doing Business
  • The exemption of affected products from import duty and taxes immediately reduces the cost of doing business for the local manufacturers but further investigation is required to determine the quantum of previous production cost that was comprised of taxes. This will help to evaluate the potential impact on final price of the impacted products, as well as ascertain whether the incentive will, ultimately, lead to reduced cost of the finished products.
• Importers vs. Local Manufacturers’ Competitiveness
  • The quantum of taxes that have been waived on pharmaceutical input/raw materials could make importers of affected finished products uncompetitive versus local players. Assuming the other costs arising from infrastructural deficiencies in Nigeria do not erase the gains from the incentive, the Executive Order could cause importers of finished products to change their business model. They could be forced to transition into importation of raw materials and involve themselves in local manufacturing, rather than simply importing the finished products.
• Increased Local Production and Value Addition
  • As the incentive targets raw materials and other pharmaceutical input, an increase in local production of pharmaceuticals, diagnostics, and medical devices should follow - and translate into greater employment levels and economic benefits across the value chain. If applied properly, this could help to drive down the skyrocketing unemployment numbers and poverty levels across the country.
• Competition vs. External Players
  • The incentive has the potential to strengthen local industries’ ability to compete against external players, especially in view of Nigeria’s recent participation in the AFCFTA Guided Trade Initiative. Reduction in the cost of production should enhance local manufacturers’ ability to compete against international players both in the local and international markets. Government should also continue to encourage patronage of local manufacturers.
• Public Health Protection - Against Harmful Medical Alternatives
  • Many low-income Nigerians are increasingly patronizing local herbs/herbal medicine practitioners due to the high cost of medicine and medical care. As the practitioners typically operate without regulatory oversight and their patrons constitute a large chunk of the Nigerian population, there is a concomitant threat to public health. If diseases or other threats to health were to arise, such occurrence could quickly escalate to the level of a national security concern. With the unending migration of medical practitioners abroad, Nigeria is not best placed to defend against significant threats to public health, especially if such threats spread rapidly across the nation. The incentive will help to enable access to some medicine, enhance medical care, and, at least, turn some of the population away from unlicensed medical practitioners.
• Revenue Loss
  • The government has not disclosed how much the treasury typically receives from the importation of the named items, but the waiver will initially impact expected revenue receipt for the specified period - at least until the expected gains from the incentive are realized. This means that the government, which already has a significant and increasing budget deficit, could look to other sources to generate revenue to cover these incentives, such as banks' windfall tax.

Concerns

• Financing, Devaluation & FX Challenges
  • In view of the central bank’s implementation of contractionary measures over the past months, local manufacturers may struggle to secure financing that will enable them to capitalize on the incentive. Although the federal government has secured over US$1 million to support local medicine production in Nigeria, greater investment in the sector is required. The manufacturing sector is also impacted by currency devaluation, instability in foreign exchange rates, as well as limited access to the official foreign exchange market. Significant political will and diligence are required to remove or mitigate key financing and foreign exchange hurdles.
• Infrastructural Deficit
  • While the tax waiver is a commendable step, the government must make a concerted effort to identify and resolve the infrastructural deficits that increase the cost of doing business or impact service delivery. The industry suffers from electricity challenges, ports inefficiencies, poor road infrastructure, supply chain disruptions, etc. If the relevant infrastructure is not in place, the full extent of the Executive Order's potential benefits will not be achieved.
• Employment
  • As local manufacturing is expected to grow, it is essential that an assessment is conducted to ascertain whether the labor needs of the factories can be filled by local talents and, if so, that the roles are taken by Nigerians. If this is not done, foreigners may take on the roles and there would be no impact on our employment numbers. It is advisable, therefore, for the Health Ministry to work together with the Ministry of Labour and Employment, as well as the Ministry of Interior, to ensure that skilled Nigerians are fully utilized.
• Regulatory Approvals
  • It is pleasing to note that the Executive Order also directs key regulatory agencies to take urgent steps for the fulfillment of the presidential directive, but much more sensitization and supervision of the staff need to be done. It is important that relevant officials appreciate the need to ensure the fulfillment of the Executive Order, enable local manufacturers to thrive, and conduct their operations in a cohesive, responsible manner for the betterment of public health.

Timing

The Executive Order, which follows the October 2023 approval of a presidential initiative to unlock the healthcare value chain, is a good move to drive the administration's medical industrialization agenda. The level of political will exercised, the commitment displayed by key stakeholders—especially within the public sector—and the nature and timing of decisions will determine whether the order ends up as a game changer or a mere soothing balm.

Based on the issues raised above, as well as the prevailing circumstances, we do not expect to see any real impact of the Executive Order until at least one year, i.e., around June 2025.

Key Recommendations

• Greater clarity is required from the government regarding the affected pharmaceutical input. This may already be set out in the Gazette to be published in due course, but given the urgency of the situation, an exhaustive list of affected items should be published on a government website and other media that are accessible to the public. There should also be transparency in the implementation of the incentive.
• More urgent steps should be taken by the government to secure sustainable financing for industry players so that they can maximize the potential benefits of the incentive. Significant funding is required to expand local production of pharmaceuticals, diagnostics, and medical devices.
• The specified MDAs and industry players need to quickly identify the regulatory processes that must be expedited and develop a plan of action to remove all bottlenecks within a short timeframe. Sensitization and supervision of relevant personnel of MDAs should be conducted to ensure fulfillment of the Executive Order.
• Government across all levels must make a concerted effort to identify and resolve the infrastructural deficits that increase the cost of doing business or impact service delivery. If the relevant infrastructure is not in place, the full extent of the Executive Order’s potential benefits will not be achieved.