On Sunday, July 8 2019, Nigeria’s President, Muhammadu Buhari, signed the African Continental Free Trade Agreement (AfCFTA), joining over 50 countries in ratifying what is considered the largest free trade agreement in any continent in the world.
The agreement is expected to encourage trade in Africa by removing tariffs for over 90% of goods trading between member countries. It is also expected to lead to the free movement of people within the continent enabling a single market for air and road transport.
It has taken Buhari over 6 months to ratify this deal after widespread consultations considering that it could have varying implications for millions of businesses around the country. Nigeria’s population and size of its economy give it a superior advantage and ironically also makes it vulnerable to the downsides of the agreement.
So, how exactly does this deal affect manufacturers, SME’s, micro businesses and Startups and the economy in general? Here are a few pointers.
Gross reduction in tariffs: The cornerstone of the AfCFTA is the promise for zero tariffs for over 90% of goods traded between African countries.
- This means manufacturers in Nigeria can produce goods locally get it across our borders and sell in markets beyond Nigeria, without having to pay any duty.
- Tariffs by design are set to inhibit freedom of goods making it less competitive for exporters with a high cost of production when compared to locally made goods.
- By eliminating them, businesses in Nigeria can reduce the cost price of their goods making them even more competitive across markets.
Creates new markets: One of the major complaints we get from businesses is their inability to compete with foreign-made goods sold locally. They often complain of cheaper foreign imports with better quality. In fact, even when they are cheaper, these goods fail to compete for quality.
- However, with AfCFTA, these manufacturers can export to poorer African countries with a lower taste for quality products.
- The more they export, the better they get at production allowing them to compete with their local rivals.
- This is the same model countries like South Korea and Taiwan used for years.
Attracts foreign investments: Last year, Nigeria attracted about $1.2 billion in Foreign Direct Investments up from the $981 million received in 2017. However, when compared to foreign portfolio investment of $12.1 billion, you realise there is a huge room for improvement. A lot of factors are often blamed for Nigeria’s low foreign direct investments.
- These are poor infrastructural development, limited economies of scale, weak purchasing power and challenges with ease of doing business.
- The AfCFTA could help mitigate some of these challenges in so many ways.
- For example, by having access to markets beyond Nigeria, the investors can set up manufacturing hubs within Nigeria and from here export goods to member nations of the AfCFTA.
- This increases FDI into Nigeria creating a knock-on effect on the exchange rate of the country.
Transportation Boom: One sector keen to benefit from the AfCFTA is the transportation sector.
- Nigeria’s transport sector is one of the fastest growing posting a GDP growth rate of 19.5% in the first quarter of 2019.
- When disaggregated, all sub-sectors aside Road transport, are either posting low single digits growth or are negative.
- This provides an opportunity for rail, air and water transport to grow.
- To enable goods to move from one end to the other, billions of dollars in investments will be spent on building road networks that connect landlocked nations, bridges across rivers and lagoons, rail lines and more airports.
- Travel agents, transporters, airlines, logistics companies etc. stand to gain immensely.
Reduce unemployment: As mentioned, one of the key tenets of the AfCFTA is allowing the freedom of people across borders.
- When people move, it means they can secure quality jobs within our outside their country.
- A larger job market also bodes well for businesses, especially startups looking to secure talents from any corner of Africa.
- The more jobs we create and export, the lower the unemployment rate of the country.
Importation of raw materials: After the CBN Governor Godwin Emefiele banned the use of forex for 41 imported items, local manufacturers, for whom the policy was expected to help cried that they could no longer access raw material inputs hugely required to produce locally.
- Since Nigeria’s manufacturing sector has gone from 3.39% in the first quarter of 2018 to 0.81% in the same period this year.
- The AfCFTA could help alleviate this challenge as Nigerian businesses can reach out to resource-rich African countries for raw material inputs.
- Nigeria is also rich in natural resources and can now access new markets for exports.
Service Export: Nigeria’s burgeoning service industry could earn a major windfall if everything goes right with the AfCFTA.
- Less advanced neighbouring African countries can rely on services from Nigeria to boost their local economy.
- Nigeria can export services like insurance, finance, logistics, legal, accounting, construction, real estate development and other consultancy based services, the same way these services are currently imported into the country.
- A simple example is Nigeria’s growing betting industry. Appetite for sports betting is surely beyond Nigeria, and who better to help set it up than Nigerians?
While we savour the opportunities of the AfCFTA we are also mindful of its potential downsides. Here are some key examples;
Increased smuggling: Due to its large population size, Nigeria is a dumping ground for smuggled goods across the country. The AfCFTA could worsen this situation if do not ensure cooperation between Nigeria and neighbouring countries are stiff enough to disincentivise smuggling.
Poor regulation: Nigeria’s knack for ineffective regulations could also work against the benefits of AfCFTA. For the agreement to work, countries are expected to put in place flexible regulations that should aid trade such as reducing bottlenecks to ease of doing business.
Loss of jobs: Just as we AfCFTA can create jobs for the local economy, it could also lead to loss of jobs. This is because citizens of poorer African countries could migrate to Nigeria and compete for jobs with locals at even lower pay.
Small companies may die: Perhaps the greatest challenge of AfCFTA is whether SME’s and Startups will be able to compete with larger and more financially superior companies. This agreement breaks up barriers that would typically protect the local smaller players from being annihilated by larger corporations.
Lack of enabling laws: We often complain about Nigeria’s weak laws and its inability to protect small businesses against things like property rights, intellectual property theft, strong monopolies and labour rights. Most African countries are even weaker than Nigeria when it comes to these laws, thus increasing the risk of doing business across the continent.
Lower government revenue: Eliminating tariffs could wipe out hundreds of billions of naira in custom duties earned by Nigeria. The impact of this on government’s revenue cannot be overemphasized. If the government does not mitigate this by attracting increased export proceeds from the sale of goods to other African countries then we could be toast.
(Nairametrics)
