December 16, 2019 /06:25 PM / By Meristem Research /
Header Image Credit: Meristem
AfCFTA: Towards Connected Development
On 29th April 2019, Nigeria signed the African Continental Free Trade Agreement (AfCFTA), in the process satisfying the ratification threshold of twenty-two (22) African Union member states for the agreement. The goal was clear - to increase intra-African trade by eliminating cross-border tariffs and non-tariff barriers to trade.
In August, barely three months after signing the agreement, Nigeria shut its land borders to neighboring countries (Benin, Niger, Cameroon), restricting the movement of goods and people within and outside its territory. Initially, the directive was a partial ban on imports and exports via the land borders, with the air and sea channels remaining open. Shortly after, the Federal Government (FG) ordered a complete closure of the border to expedite achievement of the objectives.
Border closure is not novel to Nigeria, given that several countries (who are also members of the AfCFTA -Kenya, Rwanda and Sudan) have treaded similar paths in times past. The objectives for this vary amongst countries: from health precautions, to security issues, diplomatic clashes and economic concerns.
For Nigeria, the mandate sought to check smuggling, reduce importation, foster a more robust security apparatus and encourage local innovation, but inadvertently defeated a critical aim of the AfCFTA - to facilitate regional integration via the free transfer of goods, technology and knowledge.
Petroleum Products Vending Restriction: Worthy of Cheer?
to the initial directive on border closure, the FG upped the ante by outlawing
the discharge of petroleum products to retail stations within twenty kilometers
(20km) of its land borders, to buttress its stance, nip the illicit trade in
petroleum products in the bud, discourage round-tripping and save
Nigeria's PMS consumption per capita (population basis: 198mn people) is currently 0.28 litres per day. We examined data from developed economies (US and UK), Emerging markets (China) and SSA peers (South Africa & Egypt) to place Nigeria's PMS consumption in context.
Of the 6 countries examined, Nigeria recorded the worst scores/ranking on the CIP Index - highlighting lagged industrialization and subdued business activity. The fact that per capita PMS consumption is also the lowest in the observation group supports this assertion. Moreover, we can argue that Nigeria's consumption numbers should be even lower, when other relevant factors including quality of road infrastructure (and impact on vehicle longevity), size of industrial base and fuel efficiency of engines in use are considered.
Consumption (proxied by average truck-out volumes), grew steadily from c. 50.88mn in 2014 to c. 54.84mn in 2019 (Year-to-date), with a slight drop-off in 2016 when the price cap was raised to NGN145/litre. Meanwhile, Department of Petroleum Resources (DPR) data highlights that there are c. 2,200 retail stations along Nigeria's land borders and Nigeria's capped PMS price is the lowest amongst major economies in the West African sub-region.
The price disparity clearly creates ample room for (risky) arbitrage, especially with the existence of porous borders. Marketers can obtain PMS at subsidized prices from the NNPC and proceed to distribute same at margins of c. NGN225 (ex-other costs) to Nigeria's West African neighbors - escalating the country's already-excessive under-recovery costs. Indications from the data on PMS consumption and imports point to some early success of the restriction directive - an opportunity to significantly cut the subsidy bill. However, we opine that there are healthier solutions - more stringent licensing requirements and effective, technology-enabled border policing will certainly do better than limiting supply to the affected areas. Eventually, individuals and businesses in and around border communities also need fuel for commercial and domestic ends.
Sky-High Inflation Rate
On the cost end, the embargo has begun to materialize in the form of
pressured prices of food items such as rice, oil and frozen foods, amongst
others. The Federal Government's mandate to halt the supply of petroleum
products to border communities also triggered the rise in the price of fuel in
these vicinities. The convergence of these translated to sky-high inflation
factors rate as seen in the month of September: 11.24% and October - 11.61%.
To a very large extent, the rise in inflation rate is expected to persist as we approach the festive seasons. Intense demand on staples, such as rice, vegetable oil, frozen foods and pepper amongst others will trigger a continued rise in inflation rate. Coupled with that is the upward review of Nigerian worker's minimum wage from NGN18,000 to NGN30,000. The implementation of the new wage is scheduled for December 2019 and it is expected to stimulate consumer spending and boost the overall economy eventually.
We have established the inflationary impact of these measures on the domestic economy, however, there the negative impact of this border closure flows beyond Nigeria's borderline. Shutting the doors at neighboring countries with which it signed a free trade agreement pushes it farther from achieving the regional integration agenda. For Benin economy, whose major agricultural produce export is to Nigeria (about 20% of its national GDP), great loss has been incurred from rotten agricultural produce. Also, the social wellbeing of Nigerians who live in border communities in Nigeria has been hampered by the loss of their means of livelihood as they have been unable to move their goods into neighboring countries, whom they transact with.
Despite the aforementioned, a number of market players have been able to milk in gains in the period since the closure. Pasta producers for instance, have benefited from the mandate, reporting increased patronage, as individuals have begun to substitute pasta for Asian produced rice. Individuals are also beginning to patronize local rice millers and poultry and maize farmers. From this perspective, the border closure walks towards achieving the intended objectives of rejuvenating the Nigerian economy (GDP Q2 -2.12% and Q3 - 2.28%) and creating employment opportunities.
Nonetheless, insulating domestic private sector players does not in itself stimulate innovation- competition does. Trade protectionism can only go so far, and market players require much more, as access to cheap credit and availability of affordable infrastructure (electricity etc.) also help business thrive. Technically, Nigeria's closure of its borders would only offer temporary solutions. By the time the borders are reopened in January 2020, it will be a return to old habits as the quality and pricing of domestically produced commodities remain uncompetitive.
The Way Forward
It is quite evident that the border closure stands in stark contrast to
the principal objectives of the AFCTA. Consequently, regional trade and
cross-border investments are in dire straits, limiting the overall
competitiveness of the continental market. Expectedly, there is some pushback
from entrepreneurs in neighboring countries that are caught in the economic
cross-fire. News reports from Ghana suggest that traders are shutting down
foreign-owned businesses, in defiance.
Taking cues from China, the closure of the Chinese borders came at a time when the resources and technology needed to make the nation self-sufficient were readily available. Moreover, it is clear that border closure was insufficient as a tool to drive Chinese economic success. Rather, intentional efforts at diversification, a critical emphasis on technology-based education, deliberate infrastructural development and the general enhancement of domestic capacity facilitated self-sufficiency and worked parri-passu with the border closure initiative to catalyze economic growth. We also opine that it is an imperative for the Federal Government to offer a transition phase before embarking on implementation critical decisions such as a complete closure of the borders - to afford all stakeholders opportunities to plan their affairs and check elevated inflationary pressures that might arise from the closure.
Related News on Border Closure
5. We Don't Have a Rice Problem - Understanding Sovereign Comparative Advantages - Tosin Adeott, Nov 04, 2019
6. Lagos-Ogun Partnership for Economic Development - Thoughts on What Is Possible - Olufemi Awoyemi, Nov 03, 2019
7. FG To Extend Border Closure Till January 31,2020 - Customs, Nov 04, 2019
8. The Economics of the Rice Conversation - Between A Rock and a Hard Place - Oct 31, 2019
10. Thoughts on Nigeria's Rice Bubble - Fasua - Oct 25, 2019
11. Border Closure Takes Its Toll on The Price Of Rice - FDC, Oct 22, 2019
12. Inflation Succumbs to Border Closure and Money Supply Growth - Spikes to 11.24% - FDC, Oct 16, 2019
13. Border Closure Hitting the Price of Rice - CSL Research, Oct 04, 2019
14. Border Closures May Only Offer Temporary Subsidy Reprieve - CardinalStone Research, October 11, 2019
15. Effects of Closing the SEME Border - Coronation Research, Oct 15, 2019
16. Border Closures Begin to Take Toll on Prices - CardinalStone Research, Oct 15, 2019