Pondering the AfCFTA effects on economy, jobs
Some of the fears regarding the African Continental Free Trade Area (AfCFTA) agreement stemmed from arguments about Nigeria becoming a dumping ground for goods from the rest of the continent, especially from countries with advanced manufacturing capabilities like South Africa and Morocco, given the nation’s infrastructure challenges and poor capacity utilisation.
AfCFTA is planned to boost intra-Africa trade. At full participation of all the continent’s economies, the trade bloc has a market size that is well over 1.2 billion people and an estimated Gross Domestic Product (GDP) of about $3trillion. The scheme is also riding on an assessed potential of the continent to leverage on its strengths – large and youthful population, huge resource base, and the availability of abundant labour, which could be tapped by focusing on labour intensive industries and engaging in light manufacturing.
According to a recent study co-sponsored by Afreximbank, some African countries are importing certain products from outside the continent at huge costs, while the same products are available at much lower costs in nearby African countries.
The report noted that the fact that Africa was able to support the current level of overall trade with its existing infrastructure means that infrastructure was not necessarily the major issue, but rather how to make more trade intra-African.
A senior official of Nigeria’s indigenous rating agency, Agusto&Co, Jimi Ogbobine, sees the deal from both sides of the divide, but affirmed a net benefit for the country if strategically followed.
Describing the ideals of the AfCFTA, he said: “Sao Tome and Principe, an island nation in the Gulf of Guinea, is just about 775 kilometers from Lagos. That should only take about an hour in a direct flight between Lagos and Sao Tome. For now, such a flight time between these two neighbouring nations could largely be defined as an illusion. In reality, the shortest flight time between Nigeria and Sao Tome and Principe may take over seven hours, with as much as three to four stop-overs across the continent.
“Veteran travellers would simply recommend a more bizarre flight from Nigeria to Europe, precisely Portugal – which has historical ties to the island nation as colonialists – and then a flight to Sao Tome and Principe, rather than the round trip across Africa. This dizzying flight path between neighbouring African states epitomises the structural bottlenecks stacked against intra-African trade. When daunted with such complexities, businesses and nations on the continent simply resort to their historic colonial ties, like in the case of Sao Tome and Principe and in more recent times, China, which is proving that the good old cliché on the piper’s paymaster dictating the tunes still stand.”
Analysts at Afrinvest Securities Limited, in a report obtained by The Guardian said: “By signing the trade agreement, we expect Nigeria to sustain its trade within Africa.”
According to the United Nations Economic Commission on Africa, intra-African trade is likely to increase by 52 per cent under the AfCFTA and will double upon the further removal of non-tariff barriers.”
Going by CBN estimates, Nigeria’s informal exports to the West African sub-region is as much as $1billion, while data from the United Nations Conference on Trade and Development (UNCTAD) put formal trade figures at more than $3.1 billion as at 2017.
Afrinvest report added: “Similarly, trade with Africa reached $6.6 billion in 2017. Nigeria’s trade surplus with Africa and ECOWAS was $1billion and $900 million respectively in the first quarter (Q1) of 2019. This represents 35.2 per cent of Nigeria’s total trade surplus in the quarter, with weak intra-African trade at 19.2 per cent of total trade.
“There is still work to be done around the standards and processes of the agreement, thus full implementation of the agreement would extend into the medium-term. Upon implementation, the AfCFTA would lead to the removal of tariffs on 90 per cent of goods produced by 2020, while 10 per cent of traded goods is expected to be phased in later.”
For the International Monetary Fund (IMF), the planned removal of tariffs on 90 per cent of goods would over time lead to a 16 per cent or $16 billion increase in regional trade in Africa, which would give regional trade a significant boost of about 64 per cent, if non-tariff barriers are finally resolved.
Already, the World Bank records as at 2015, showed that African countries have among the highest non-tariff trade costs in the world, estimated at over 250 per cent.
With the regional trade initiative, there would soon be ease to non-tariff barriers to trade on the continent, starting from red tape – improving the time to export and import; removal of quotas and licenses; improving customs services like clearance procedures; and easing of rules of origin, among others.
The Managing Director, Afrinvest Securities Limited, Ayodeji Ebo, agreed that the scheme is expected to lead to cheaper consumer and industrial goods, which would drive improved wellbeing and promote the industrial sector.
“There is also the case for economies of scale as firms try to sell to the bigger African market, leading to increased efficiency. We expect countries to support industrialisation to make the best use of the bigger African market as exports in much of Africa is currently of low value due to weak processing.
“To compete, efforts to bolster competitiveness through structural reforms, human capital and infrastructure investment are expected to intensify,” he said.
Despite the growing list of benefits, worries remain over the observed weak domestic competitiveness of Nigeria, which could lead to loss of jobs and income, due to cheaper imports.
The immediate counter-argument is that Nigeria is not alone in the infrastructure challenge of the continent. Still, the narrative of who is worse off remains unresolved.
Of course, these concerns deserve greater attention from the country’s leadership. There is no gainsay that trade creates long-run benefits that outweigh short-term pains. Researches and practices in several jurisdictions attest to these.
According to Ogbobine, structural inhibitions are not unknown to policymakers on the continent; hence the drafting of AfCFTA comes as a part of palliatives to fundamental challenges.
To him, AfCFTA creates a single continental market for goods and services as well as a customs union with free movement of capital and business travellers.
Ogbobine added, “While African nations have been bullish about free trade agreements with Western states like the African Growth Opportunity Act (AGOA), which is a free trade agreement between signatory African states and the United States, eliminating tariffs on eligible goods exported from the continent to the US, there has been less enthusiasm with intra-continental free trade agreements.
“While regional blocs such as East African Community (EAC) and the Economic Community of West African States (ECOWAS) have been in the frontline in pushing for sub-regional trade integration, the results are still less than exciting.
“Trade divisions have been well exploited by global giants especially China, which has greater footprints across the continent simply because it has been able to build complex trade infrastructure with individual nations. By operating ineffectually in the silos of regional economic blocs, African nations have not been able to tap trade opportunities among themselves, but also left their flanks open to western nations, thus worsening the trade imbalance of the continent,” he added.
Barely 24 hours after official take off of AfCFTA, the region’s largest trade bank – Afreximbank, unveiled a $1billion financing tagged: ‘AfCFTA Adjustment Facility.’ The stabilisation facility came as a further boost for the implementation of the world’s largest free trade zone and to be made available to member countries to sustain efforts in achieving the more than $3trillion trade value on the continent.
Specifically, AfCFTA Adjustment Facility, as the name implies, comes as a support to any initial fiscal imbalance arising from the implementations, as well as firm up arrangements to raise the capacity of the participating countries and contribute to the regional trade integration process.
Afreximbank President, Prof. Benedict Oramah, had at the 2019 yearly meetings of the bank in Moscow, Russia, hinted of the plans, in collaboration with the African Union (AU).
Oramah told delegates at the 12th Extraordinary Summit of African Union (AU) Heads of State, in Niamey, that there are series of initiatives to support the implementation of AfCFTA.
“This facility will help countries to accelerate the ratification of the AfCFTA. You have started a movement. You must not look back. This movement is now unstoppable,” he said.
Besides, the bank launched the Pan-African Payment and Settlement System (PAPSS), the first continent-wide payment digital system focused on facilitating payments for goods and services in intra-African trade in African currencies.
“We have launched the Africa-wide digital payment infrastructure – the Pan-African Payment and Settlement System (PAPSS) – that we developed in collaboration with the African Union.
“It is a platform that will domesticate intra-regional payments, save the continent more than $5billion in payment transaction costs per annum, formalise a significant proportion of the estimated $50billion of informal intra-African trade, and above all, contribute in boosting intra-African trade,” he said.
Oramah added that by making it possible for Africans to pay for intra-regional trade in their local currencies, the digital platform would deal a fatal blow to the underdevelopment of Africa caused by defragmentation of its economies.
“Our goal is to reduce, significantly, the foreign currency content of intra-African trade payments. No people have achieved meaningful development when their economic progress depends on others.
“To renew focus on industrial and value-chain development across the continent in trying to boost trade and investment, it is imperative that we address the economic costs of effecting so many payments in scarce foreign exchange. Making cross-border payments easier, cheaper and safer is an obvious critical step in creating an Africa we want,” he said.
The National Association of Nigerian Traders (NANTS) is leading the calls for increased funds for the Micro, Small and Medium Enterprises (MSMEs) and improved business environment for Nigeria to benefit from AfCFTA agreement.
NANTS President, Ken Ukaoha, said: “The financial sector needs to buckle up – the Central Bank of Nigeria (CBN) and commercial banks need to wake up to the reality facing Nigeria in signing the agreement and channel more funds to MSMEs.
“After everything, the committee, which comprised all stakeholders including labour, manufacturers and chambers of commerce, MSMEs and different government agencies concluded that Nigeria had to sign the agreement. This is to enable Nigeria to join in the enlarged market, which has over 1.2 billion people.
“We need to understand that there is no trade agreement that comes on a platter of gold. For every country represented therein, the agreement must come with shocks, cost, and benefits as well.
“The economy, overall, will experience some initial shocks to fine-tune some sectors to increase productivity. If import duties would be reduced courtesy of AfCFTA, there must be shocks somewhere. However, we are not looking only at trade in goods, but also trade in services, where Nigeria has advantage.
“We also have to understand that our basket of commodity for export is not too rich, but this time, it needs to be attractive, surplus and well packaged,” he said.
While these concerns may not be entirely misplaced, they are debatable. For instance, Nigeria has long been a member of the Economic Community of West African States (ECOWAS), but has not become a dumping ground for goods manufactured in the region. Instead, it has been a dumping ground for goods that originate from outside the region, including those smuggled through neighbouring countries.
The development is mainly driven by structural bottlenecks – inefficiencies in the port and poorly conceived trade and tariff policies that leave Nigeria vulnerable to smuggling. In more than two years, for example, the Apapa Ports gridlock has remained unsolved.
For Ogbobine, AfCFTA is a trade agreement that not only opens up Nigeria’s borders, but also opens up the borders of the other signatory countries. Thus, while Nigeria will be receiving more volume of goods from the other countries, manufacturers in Nigeria will gain an upside, as they will be able to access a wider market across the continent on the same terms.
Undoubtedly, the Nigerian production sector had been under pressure for years. The major concerns worth reemphasising are the harsh lending regime of Nigerian banks to grow production, erratic power supply, poor road network and an almost unending struggle with the taxation system and allegations of multiplicity.
From the chambers of commerce to the individual industrialist, unless these issues are resolved, the nation’s economy and its products will not compete favourably with global peers, even on the continent.
And as the head of the Nigerian Export Promotion Council (NEPC), Segun Awolowo said, there are 22 non-oil sector products identified by the Federal Government for export, worth about $30 billion in yearly earnings, but the challenge is to follow through.