The Morning AfCFTA: How New Trade Agreement Will Make or Break Nigeria

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SPECIAL REPORT

Africa has always been promising with great potentials not fully harnessed by the countries inhabiting the continent but exploited by those outside it. But with the launch of the African Continental Free Trade Area (AfCFTA) on January 1, 2021, and Nigeria signing its agreement after an initial hesitation, how will Africa’s most populous nation and largest economy on the continent fare? Bayo Akinloye examines what to expect

It was a grand occasion characterised by a flurry of activities. Pages of papers ruffled due to constant thumbing in the decorous hall peopled by Africa’s most powerful men. There was excitement in the air as their optimism outweighed their pessimism. A historic moment was about to climax. For the first time in many years, many African heads of state decided to become united and unified on trade terms. Africa and the world waited for the icing on the cake.

It was phase one of the African Continental Free Trade Area Agreement (AfCFTA) being adopted by African Union (AU) heads of state and government at its 10th Extraordinary Summit in Kigali, Rwanda, on March 21, 2018. There were graceful grins and gleeful greetings as everyone signed up for the trade agreement. In that crowd, one face became expressionless.

It was Nigeria’s President Muhammadu Buhari. Po-faced, he held his pen firmly. Everyone in the chamber looked with bated breath awaiting the leader of ‘Giant of Africa’ to seal the deal. But creases crowded his forehead and you could sense indiscernible threads of sweat line them up. Until that moment, as always, Nigeria was a significant player in bringing AfCFTA to life. However, at this moment, Buhari was worried. Perhaps, understandably so: he pulled out of the agreement signing ceremony at the last minute, following agitations from the private sector that the agreement would make Nigeria a dumping ground for goods and services in Africa.

Prof. Yemi Osinbajo, his deputy, later explained why the country had refused to sign the agreement, saying: “Due to the prevalence of dumping on the continent and the potential for its escalation, one may argue that free trade in Africa may not necessarily be fair. Our decision to delay the signing of AfCFTA and to extend consultations is to ensure that our participation does not adversely impact on the progress that we have made to date.”

Not everybody agreed with him though. “Today without the CFTA, do we have dumping? Do we have smuggling? Do we have counterfeiting? They are rampant, right? This has nothing to do with the free trade agreement. For a country that is porous, whether you have a free trading agreement or not, for as long as your border patrols, laws, and implementation of policies are lacking, these sorts of things will continue to happen.

“So, dumping happens even in developed countries and where ever there is a gap. Criminals exist everywhere, and they will look for loopholes and try to use them. This for me is a completely separate thing from a free trade agreement. It has nothing to do with it,” explained an executive at a multinational manufacturing fast-moving consumer goods company.

Everybody Wants Nigeria on His Team

By July 7, 2019, in Niamey, Niger Republic, Buhari was more than ready to append his signature. It was exactly 10:47 am (as reported by the president’s spokesman, Femi Adesina) when Buhari appended his signature to the agreement at the 12th Extraordinary Summit of the African Union (AU) on the launch of the Operational Phase of the AfCFTA and thus Nigeria officially joined the free trade area.

“Nigeria wishes to emphasise that free trade must also be fair trade,” said the president, adding, “As African leaders, our attention should now focus on implementing the AfCFTA in a way that develops our economies and creates jobs for our young, dynamic and hard-working population. I wish to assure you that Nigeria shall sustain its strong leadership role in Africa, in the implementation of the AfCFTA. We shall also continue to engage, constructively with all African countries to build the Africa that we want.”

By December 5, Nigeria deposited its instrument of ratification of the AfCFTA agreement, becoming the 34th member state to formally ratify the treaty. The deposit came an hour before the opening of a summit of African heads of state where they proclaimed the Johannesburg Declaration formally fixing trading to start on January 1, 2021.

“We can confidently say that Africa is on track to deliver a commercially viable continental market on 1st January 2021,” said the AU Commission’s Trade and Industry Commissioner, Albert Muchanga, who received the instrument from a Nigerian delegation at the AUC’s headquarters in Addis Ababa.

Everybody wants Nigeria on their team because of the sheer size of its market, population, and political swag. But what will life be like, economically, for Africa’s most populous country with the largest economy after joining the AfCFTA bandwagon?

The Morning AfCFTA

The AfCFTA agreement entered into force on May 5, 2019, after the treaty was ratified by 22 countries (the minimum number required under the treaty) out of the 54 that agreed to be members of the bloc. Eritrea is the only country that has yet to make any commitment to the continental body. Trading was earlier scheduled to start on 1 July 2020 but it was postponed for six months because of the COVID-19 pandemic.

On paper, the AfCFTA provides the opportunity for Africa to create the world’s largest free trade area with the potential to unite more than 1.2 billion people in a $2.5 trillion economic bloc and “usher in a new era of development.” It has the potential to generate a range of benefits through supporting trade creation, structural transformation, productive employment, and poverty reduction.

It is little wonder that the federal government declared January 2021 as a month to campaign for the importance of the AfCFTA in Nigeria. Nigeria’s Minister of Industry, Trade and Investment, Adeniyi Adebayo, made the declaration, calling on Nigerians, particularly industrialists to take advantage of the opportunities to promote made-in-Nigeria products.

In 2017, intra-African trade was estimated at $135 billion, growing by nine percent year-on-year from $124 billion in 2016. The growth was primarily driven by South Africa, Namibia, Zambia, and Nigeria, which jointly accounted for over 37 percent of intra-African trade in 2017. In 2017, Namibia and Zambia became the second and third largest contributors to intra-African trade. respectively.

However, Nigeria remains one of the main drivers of intra-African trade, with its total intra-African trade growing by eight percent in 2017, from a contraction of 27 percent in 2016.

“While there has been a recent increase in intra-African trade, the rates are still significantly lower than other continents. In order to boost economic growth and prosperity on the continent, it is imperative that African countries improve trading with each other, and invest in infrastructure to drive trade,” PwC said in a report, ‘AfCFTA: Thriving in a New Africa.’

2030 Agenda for Sustainable Development

AfCFTA is a flagship project of Agenda 2063 of the AU — Africa’s own development vision. It was approved by the AU Summit as an urgent initiative whose immediate implementation would provide “quick wins, impact on socio-economic development and enhance confidence and the commitment of Africans as the owners and drivers” of Agenda 2063. The expected cumulative effect of AfCFTA is to contribute to the achievement of the United Nations 2030 Agenda, in particular, to the Sustainable Development Goals, from targets for decent work and economic growth (Goal 8) and the promotion of industry (Goal 9), to food security (Goal 2) and affordable access to health services (Goal 3).

By supporting African industrialization and economic development, AfCFTA can also help to reduce the continent’s reliance on external resources. This would allow Africa to better finance its own development, which is recognized under Goal 17.

“Of utmost importance, however,” said the AU, “is Goal 1 and keeping the pledge that ‘no one will be left behind… starting with the furthest behind first.’ For this, it is crucial that Governments across Africa implement measures to accompany AfCFTA, such as the African Union’s Boosting Intra-African Trade Action Plan, but also that the African private sector step up to invest in, and take advantage of, the opportunities arising from AfCFTA.”

Regional integration is considered inevitable for economic transformation and sustainable socio-economic development on the continent, serving as a development strategy aimed at aggregating Africa’s small countries into one large market that can deliver economies of scale, improved competitiveness, foreign direct investment, and poverty reduction. In addition, it is expected to help in addressing non-economic problems such as recurring conflicts and political instability as well as increasing the continent’s bargaining power on the multilateral front.

AfCFTA and ERGP 2017-2021

The cornerstone of the continental free trade agreement is the promotion of industrialization, sustained growth, and development on the continent with the expectation that it will “boost intra-African trade, stimulate investment and innovation, foster structural transformation, improve food security, enhance economic growth and export diversification, and rationalize the overlapping trade regimes of the main regional economic communities.”

Similarly, the broad vision of the Economic Recovery and Growth Plan (ERGP) of Nigeria is to turn around the country’s economic performance and lay the foundations for sustained inclusive growth underscoring the relationship between AfCFTA and ERGP. It is little wonder that the Nigerian Office for Trade Negotiations commissioned an independent study on the potential benefits of the AfCFTA for Nigeria.

Signposts for AfCFTA Future

In the NOTN report, a total of 512 companies were polled from all geopolitical zones of the country of which 70 percent were small businesses (10-49 employees); 20 percent medium-sized businesses (50-199 employees); and 10 were large businesses (200 or more employees). A further breakdown of the companies indicated that 40 percent were manufacturers, 25 percent services businesses, and 15 percent engaged in wholesale and retail trade.

Of the remainder, 10 percent were in agriculture and nine percent in the export sector. In terms of output, 68 percent produced final goods, 30 percent produced intermediate goods while 28 percent produced primary goods.

According to the NOTN’s independent report, only 25 percent of the companies participated in international trade (exports); ranging from 19 percent of small companies to 55 percent of large companies. Overall, the rate of exporting among manufacturing companies “is very low” at 24 percent. For export destinations, nine African countries (Ghana, Cameroon, Niger, South Africa, Togo, Benin, Chad Mali, and Cote d’Ivoire) are among the top 15 export destinations for Nigerian businesses “in decreasing order of dominance,” with Ghana being the most frequent destination.

The silver lining in the cloud may be that Nigerian manufacturers trade more with other African countries than the rest of the world.

“Thus, a dismantling of barriers to free trade across Africa is likely to be beneficial to Nigerian manufacturing,” the report pointed out. Sadly though, regarding the country’s business environment, 55 percent of the businesses rated it as hostile (either ‘unsupportive’ or ‘very unsupportive’); comprising 58 percent of small businesses, 46 percent of medium businesses, and 48 percent of large businesses. Power supply, access to credit, roads, taxes, and tariffs “are the top four challenges in decreasing order of importance to Nigerian businesses.”

For AfCFTA, Nigerian Businesses Say ‘I Do’

According to the NOTN report, 69 percent of businesses believed AfCFTA would be advantageous to the country. Only 20 percent believed AfCFTA would be disadvantageous to Nigeria and 11 percent were unsure about how AfCFTA will affect the business environment. The study listed the top three advantages of the free trade area as “better business environment, promotion of local business, and business expansion.”

On the other hand, the top three disadvantages are the influx of sub-standard goods, discouragement of local businesses, and loss of revenue for Nigeria.

Akpan Ekpo, a professor of Economics and Policy, University of Uyo and Chairman, Foundation for Economic Research and Training (FERT), does not think Nigeria’s ready for the AfCFTA leap.

He told THISDAY: “I do not think the country is ready. To benefit from any free trade arrangement, the domestic economy must be resilient to shocks, build relevant infrastructure, show signs of industrialization, and alter the structure of the economy from consumption to production. There is a need to put in place and implement policies that would enable the economy to benefit from the global value chain…the challenge is how to harmonize the policies and provide strategies on how best to implement the same for the benefit of the economy.”

Another economic expert did not share that pessimism. Sheriffdeen Tella, a professor of Economics at the Olabisi Onabanjo University, noted: “The government has signed the agreement and the next thing is to encourage the private sector to participate in the scheme. It is a largely private-sector scheme, not government and I am sure our private sector is already looking at the project to key into it. I read about Dangote Company already has a plan for the AfCFTA. Many other companies could be silently working on this too.”

No Pain, No Gain: Examining Both Sides of AfCFTA Coin

According to the Lagos Chamber of Commerce and Industry Director General, Muda Yusuf, the rise or fall of AfCFTA in Nigeria will depend on the sectors.

He explained: “There are some sectors that would be vulnerable to this agreement. But on the whole, if Nigerian entrepreneurs have access to larger markets, it would be very advantageous to them. We are talking about a market of about 1.2 billion people. This is huge and Nigerians are generally very enterprising.”

Overall, 78 percent of the businesses polled believed that AfCFTA would make a positive impact on local businesses; 10 percent believed that the impact would be negative while the remaining 12 percent believed it would have no impact. While 56 percent of them agreed Nigeria “does not have the infrastructure necessary to reap those benefits and gains,” there is an understanding among business leaders that the country should not wait until the infrastructure gap is fully closed before participating in the AfCFTA.

Sixty-five percent of the businesses surveyed expected AfCFTA to help them overcome their “top challenges” while 22 percent expected it to accentuate them; 34 percent of large companies expected AfCFTA to accentuate their challenges, compared to 25 percent of medium companies and 18 percent of small companies.

The companies that expected AfCFTA to ease their business challenges cited “improvement in the ease of doing business that they expect to accompany the trade agreement (32 percent); expected improvement in infrastructure (24 percent); and enlargement of markets for Nigerian producers 17 percent).”

Among exporting companies, 84 percent expected AfCFTA to increase their volume of exports.

That enthusiasm was shared by 91 percent of small companies and 100 percent of agriculture and trade businesses as exporters of agricultural commodities “view Nigeria as competitive within the continent and believe that CFTA will give them access to do business in African countries that are otherwise not easily accessible.”

A one percent decrease in tariff rate imposed or faced by Nigeria in trading with the rest of Africa will increase trade in all cases by more than one percent, noted NOTN, adding that a fall in revenue in the short term due to tariff elimination by the country, as being proposed to be the aftermath of AfCFTA, would be offset by rise in revenue generated through increased trade in the longer term.

Similarly, a reduction of Nigeria’s weighted tariff against exports from other African countries by one percent would boost economic activity by 0.6 percent, boost non-oil revenue by 2.5 percent and improve exchange rate competitiveness by reducing the real effective exchange rate by 0.3 percent.

“The effect of AfCFTA on welfare is positive on aggregate. A 0.05 percent welfare gain is expected, which translates to an estimated $260 million in 2018 values. The positive effect is largely driven by measures complementary to full tariff removal. Precisely 64 percent of the effect size is driven by estimates that complement full tariff removal with the removal of non-tariff barriers,” stated the report.

It, however, added: “AfCFTA focusing entirely on tariff removal is less beneficial to Nigeria, rather, an extension to non-tariff barriers accrues important benefits to the country. Wage effects of job creation in the CFTA are expected to be small; Nigerian agriculture will gain more in job creation than other sectors from CFTA, and the benefits will accrue mostly to unskilled workers.

“Allocative efficiency and capital accumulation are expected to significantly improve, which will augment labour productivity. This explains the expected $447milllion in labour market gains.”

The labour force is expected to increase from 83.1 million in 2018 to 119 million by 2030 with new entrants increasing from 2.3 million to 3.6 million as an average of 3.3 million jobs are expected to be created annually over the period 2018-2028 (rising from 2.5 million in 2018 to 4.3 million in 2030); broad unemployment rate (discounting underemployment) is projected to decrease from 30.2 percent in 2016 to 16.7 percent in 2030 while the narrow unemployment rate is projected to drop from 11.7 percent to 6.5 percent over the same period.

Tella acknowledged that the existence of the free trade area challenges producers to be competitive, that is, producing good quality outputs; being innovative and expansive.

He explained: “The participants see the bigger market as an opportunity to produce more and capture a large proportion of the market with attendance growing incomes. The larger the quantity of the goods produced, the lower the unit cost. That is what free market areas provide and what producers want to take advantage of. The implication is that the expansion of the businesses means expansion in employment opportunities for the people and the subsequent increase in labour incomes.

“So, what more is required in recession than employment generation to earn income and lift people out of poverty? The government itself will be able to get more income tax from workers which will improve its revenue.”