Beyond Signing: What does the African Continental Free Trade Area ‏mean for Nigeria? (2)

In last week’s edition we took a precursory look at the African Continental Free Trade Area agreement (AfCFTA) as it affects the different member states of the African Union. We also explored some thoughts on why Nigeria’s current administration is hesitant about entering into the agreement and the resultant implications on the Nigerian economy.

This week, we will consider how different sectors of the economy can surmount the dangers of signing the agreement and how they can plug into the opportunities inherent.

The current status of the AfCFTA

49 countries out of the 54 African countries have signed the AfCFTA; however there are fears that the 2019 date for the commencement would not be met. Of the 49 countries that have signed the agreement, only 7 countries have ratified the AfCFTA in their respective parliaments which is a pre-requisite for the commencement of the agreement. According to the pact, countries are expected to ratify in parliament the agreement within 120 days of signing before it comes into effect 30 days after. The African Union (AU) has set a target of 30 countries ratifying the agreement before December 2018 but this is unlikely to be met.

What Nigerian Businesses Are Saying

According to the Potential Benefits of the AfCFTA on Nigeria report by the Nigerian Office for Trade Negotiations 2018;

  • 69% of businesses believe AfCFTA would be advantageous to the country; While 20% of businesses believe AfCFTA would be disadvantageous to the country; and 11% are unsure about how AfCFTA will affect the business environment. To them, better business environment as a result of improved local production and business expansion is the main advantage. On the other hand they believe that there could be influx of sub-standard goods into the market thereby causing a loss of revenue for businesses and the government;
  • Among exporting companies, 84% expect AfCFTA to increase their volume of exports; the enthusiasm is shared by 91% of small companies and 100% of agriculture and trade businesses. Importantly, exporters of agricultural commodities view Nigeria as competitive within the continent and believe that AfCFTA will give them access to do business in African countries that are otherwise not easily accessible;
  • 53% of businesses are not convinced that AfCFTA provisions will be strong enough to discourage dumping or smuggling of substandard products into Nigeria. This belief is shared mostly by businesses in agriculture (64%) and least by businesses in the services sector (47%) who are generally least affected by such issues.

In view of the above, Nigerian businesses regardless of the challenges faced namely; power supply, access to credit, roads, taxes and tariff, port reform amongst others view the tremendous opportunities in the signing of the AfCFTA Viz-a-Viz the impact on individual businesses and the macro-economy of the country above the negatives.

The Journey Ahead

Prior to the AfCFTA signing by other member countries, the Federal Government of Nigeria launched the Economic Recovery and Growth Plan (ERGP) 2017-2021 with 3 broad objectives of;

  • Restoring growth by focusing on achieving macro-economic stability and economic diversification;
  • Investing in the people of Nigeria by increasing social inclusion, creating jobs and improving the human capital base of the economy and;
  • Building a globally competitive economy by investing in infrastructure, improving the business environment and promoting digital led growth.

The key execution priorities in order to achieve the stated objectives are: stabilizing the economic environment; achieving food and agricultural security; ensuring energy sufficiency; improving transportation infrastructure; and driving industrialization. Therefore, if growth as planned is actualised year on year, the disadvantaged position the stakeholders envisage can be changed.

The AfCFTA synergises with the ERGP in that, an enlarged regional market will provide incentives for increased Foreign Direct Investment (FDI) that can be used to boost productivity allowing Nigerian businesses to exploit new frontiers and improve on their value chain propositions in the sectors they play in. In addition, technological transfer across countries will lead to reduced cost of innovation that can assist Nigeria in building a globally competitive economy.

It is important to note that AfCFTA will have benefits and costs to the economy. The balance of these components will go a long way in determining the aggregate magnitude and direction of the welfare effect. With respect to the benefits, trade liberalization will lower commodity prices and offer the consumer expanded choices. Nigeria needs a viable manufacturing sector to grow its market share of the new markets thereby creating incentives for manufacturing growth and economies of scale which will lead to higher profitability and further lowering of prices.

On the side of costs, the AfCFTA effects are realized through tariff revenue and perhaps wage losses. The decline in tariff revenue is the most obvious direct implication of AfCFTA by the elimination of tariffs on imports. Current analysis by financial experts show that Nigeria might be losing 60% of its revenue generated from the ports as a result of this. The direction of wage effect on the other hand is less clear. In many instances, trade liberalization improves competitiveness through lower labour cost, especially for the low-skill workers in tradable sectors. Skilled workers could benefit or lose depending on the effect of market competition on relative prices of labour and capital.

In conclusion, if Nigeria eventually signs the AfCFTA agreement she will experience the pros and cons as with other countries. However, with proper economic planning and a commitment to remove the bottle necks currently faced by local businesses, the fears expressed by the government and relevant stakeholders would fade into opportunities to utilize the comparative advantages that marks Nigeria as the giant of the African continent.

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