Following the ratification of the African Continental Free Trade Agreement by The Gambia on April 2nd and the deposit of instruments of ratification by the Saharawi Republic on April 29th, the agreement, which outlines the African Continental Free Trade Area (AfCFTA), came into force last Thursday. This paved the path for the agreement to enter its operational phase following a summit on July 7th. The continental trade pact seeks to remove tariffs on 90% of the goods and services traded between the signatories to the agreement and gradually eliminate other non-tariff barriers to trade on the African continent.
As of January this year, 49 out of 55 African nations had signed the framework agreement on AfCFTA, in effect creating the largest free-trade area in the world, in terms of participating countries, since the creation of the World Trade Organisation (WTO) in 1995. In so doing, the signatories took the biggest step towards advancing intra-African trade, creating employment opportunities and fostering integration on a continent that was fragmented by colonial imperialists during the Berlin Conference between 1884-85.
Regrettably, and despite the opportunity to get rid of the colonial legacy and unnatural borders that have divided the continent, Africa’s largest economy by GDP and population, Nigeria, which took over the processes leading to the AfCFTA agreement from Egypt, and even led the way at the ministerial level, unexpectedly opted out of signing the agreement on March 21, 2018. Other countries yet to sign the agreement include Benin Republic and Eritrea. But it is Nigeria’s absence from the free-trade bloc that has been the most conspicuous and set tongues wagging over the shortsightedness of the administration in not recognising the potential in the free-trade treaty.
Egged on by the Manufacturers’ Association of Nigeria (MAN) and the confounded labour unions, President Muhammadu Buhari said at the time of abstaining from the signing that Nigeria would not do anything that would undermine local manufacturers and entrepreneurs. The president of the Nigeria Labour Congress (NLC), Ayuba Wabba went on to describe the AfCFTA as “an extremely dangerous and radioactive neo-liberal policy initiative… that seeks to open our seaports, airports and other businesses to unbridled foreign interference never before witnessed in the history of the country”. Yet, Nigeria currently has the largest concentration of people living in extreme poverty in the world, with the worst hit group being children and teens under the age of 15. Worse still, this number is growing. Definitely, something has to give.
But all hope was not lost when shortly afterwards the Nigerian government assured the African Union, the driving force behind AfCFTA, that its non-participation was a delay, not a withdrawal, and promised to sign the agreement soon. It noted that more consultation was needed with local businesses in order to ensure private sector buy-in to the agreement. Eventually, an impact assessment report on AfCFTA, as demanded by the president, was presented to him by the former Minister of Industry, Trade and Investment, Dr. Okey Enelamah. Yet, no word has been heard from the presidency on if Nigeria will key into the continent’s largest trade pact before it’s too late.
It must be said, however, that the issue of AfCFTA did feature in the 2019 campaigns. The presidential candidate of the opposition Peoples Democratic Party, Alhaji Atiku Abubakar, who is pro-business, did promise to make Nigeria a member of the free-trade bloc. But with his loss at the polls and the country in transition mode, concerns persist over the delay on Nigeria’s participation in the regional trade bloc. Much of the delay has been blamed on the perception among manufacturers and the unions that the free-trade era will usher in massive dumping, crippling of tenuous industries, job losses, loss of economic clout in the region, and even the erosion of existing customs and border controls. Some have also argued that Nigeria is not ripe for AfCFTA because of the prohibitive cost of doing business in the country brought on by inadequate power supply, the infrastructure deficit, rising insecurity and inaccessible seaports. But my take on all the issues that have been raised by MAN and the labour unions is that they are grossly misplaced.
First and foremost, by joining the trade pact, we have nothing to fear about the loss of sovereign, military or regional clout. AfCFTA is a basic trade agreement – it is neither a customs union nor a single market. For Nigeria to be prosperous, we need to trade and invest with Africans. With the population of the African continent inching towards 2.2 billion people by 2050 and populations shrinking in the rest of the world, this presents an opportunity and market for Nigerian companies to capture market share right from the formation of the free-trade area on the continent. Besides, the only way to be prosperous is to produce higher value added goods and services in Africa that will be bought by Africans.
Indeed, just last Friday, the advisory partner with PricewaterhouseCoopers (PwC), Dr. Andre Nevin rightly added on the breakfast show on Arise TV, the broadcast arm of the THISDAY Media Group, that what the country needs is a manufacturing sector that is 10-15 times bigger than the manufacturing sector that we have today to be prosperous. So it is not today’s manufacturers that should be our focus. What we should be concerned with is how to create the environment where we have a bigger and more buoyant manufacturing sector.
According to him, “The focus should shift from exporting raw materials to semi and fully processed goods with greater value added, as raw materials only represent 5-10% of the value of finished goods. So if we do not trade with Africans and invest in Africa, we will be poor. Africa has suffered due to colonization and fractionalization of the continent. AfCFTA presents an excellent opportunity to come out as one bloc, which will have economic relations with other big countries and regional blocs. With a potential market of 2 billion people, others will be forced to listen and contend with us just as they do with the EU (European Union).”
Another case to be made for the African free-trade bloc has to do with the trade between the 55 African Union member states currently put at about 18% of total exports from the continent, compared with 69% in Europe, 59% in Asia, and 31% in North America. This is particularly important when considering that manufactured goods make up a much greater proportion of intra-Africa trade than trade with the rest of the world, which is mainly focused on raw materials. Despite this, and the fact that Africa is the second most populous continent, Nigeria’s main trading partners are all in Europe, Asia and the Americas.
It must be added that even the goods and services that make up 18% of intra-African trade are transacted primarily through the informal sector. What this implies is that the Nigerian government has to bring the informal sector, which accounts for 65% of the Nigerian economy, to the formal sector. This can be achieved by eliminating the barriers that restrict the informal sector so that participants can transit to the formal sector. Avenues to do this include bringing down the exorbitant cost of entry by way of multiple taxation, over-regulation, bureaucratic bottlenecks, issuance of visa on arrival to citizens of AfCFTA member states, as well as ease of access in and out of the seaports. As it stands, the seaports in the Apapa area of Lagos are completely inaccessible, thus increasing the turnaround time that it takes for importers and exporters to move their goods in and out of the ports, while those outside Lagos with shallow draughts cannot be accessed by very large ships.
Protectionist barriers as advocated by MAN and labour should also be discarded, as isolationism will make it difficult for local businesses to scale abroad and thus make them less attractive for foreign direct investment. Whereas it is important to acknowledge the downside risk for local businesses and the Nigerian economy, what the government should be concerned with is how to address the problems caused by our infrastructure deficit in order to become competitive. There is no reason for the government’s inability to address these fundamental problems frontally. By staying away from the AfCFTA, we will simply be burying our heads in the sand by not addressing the fundamental issues that make Nigeria uncompetitive. Ultimately, this will impede economic growth.
Moreover, the threat posed by an integrated African market under the continental free trade agreement will force us to raise our competitiveness level. If we can compete within the African continent, surely we can compete globally. As Nevin advocated, “Eventually market forces will defeat the case for market protection and the best way to be ahead of the curve is to prime your economy to be competitive. One of the merits of AfCFTA is that it will force us to look inwards and learn how to swim against the oncoming storm.”
Another consideration for Nigerian policy makers is for the redeployment of the humongous financial resources Nigeria currently wastes on subsidising the cost of petrol that we consume. Just last week, it was revealed that the country had spent N11 trillion on fuel subsidies over a six-year period. For a country recording tepid economic growth and whose citizens are sliding into poverty, that is a monstrous travesty and is reflective of our penchant for wrong-headed decisions. Like I have advocated for years in this column, sensible countries subsidise production, not consumption.
Rather than spend trillions keeping the cost of petrol low, it would make more sense to channel those trillions in the manufacturing and agricultural sectors by way of direct cash transfers, grants, or tax breaks, in order to encourage production and keep prices of consumer goods low. But to ensure that the policy is not abused and in order to guard against long-term supply disruptions, such subsidies to the productive sector should be limited to not more than five years, which is sufficient time for local businesses to stand on their two feet unaided and for a focused government to keep building and improving on its infrastructure.
Even concerns about dumping can be checkmated quite effectively through the deployment of blockchain technology at our ports of entry. Blockchain is an open, incorruptible digital ledger that records commercial transactions between two parties efficiently, in a verifiable and permanent way. By design, a blockchain is resistant to modification of the data. With the introduction of blockchain, the technology will enable customs officials to detect where goods are coming from and where it is determined that they are coming from outside the continent, appropriate tariffs can be imposed.
For Nevin, the solution is to have a better view of the supply chain and make sure that African goods and services can trade freely and other goods cannot. Effectively, the rules for consumer goods coming from AfCFTA member countries will be set by Africa and another set of rules for goods coming from other continents. With this in place, concerns raised by manufacturers such as Dangote Cement that they find it more difficult to sell their goods to Benin Republic because of the tariffs and taxes imposed on their cement than it is for China to export cement to Benin, will be allayed. This is no different from what obtains in the Eurozone area today, where there are no barriers to goods and services traded among members of the EU, but barriers exist for non-members of the union. In reality, this is one of the primary reasons Britain’s exit from the EU has been so contentious, because the ease with which it moves its good and services will cease to exist once it leaves the EU.
Then there is also the case to be made for entrepreneurship in Nigeria. About 49% of Nigerians aged 18-64 are entrepreneurs – almost three times the global average. As evidenced in Lagos’ Alaba International Market, perhaps the biggest new venture incubator in the world, most of these entrepreneurs work in retail. The AfCFTA would give them more options for sourcing and consequently drive their costs down. Non-retail entrepreneurs would also benefit from the ability to build more sophisticated value chains for improved operations.