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Thursday, March 22, 2018 / 11:17 AM / Tope Babalola, Proshare
Prelude
On Wednesday, March
21st 2018 economic integration in Africa took a leg up as leaders of
the continent established a continental free trade zone. In specific, 44
countries signed up for the continental free trade zone. Many economists within
and outside the region considered it a watershed moment in the economic annals
of the continent. The region seeks to leverage on its $2.5 trillion
economy.
Fig 1: Clustered Nominal GDP and
Consumption of Developing Continents
Source: UNCTDA
Moreover, with a
population of 1.2billion, the second biggest continent in the world behind Asia
coupled with a nominal household consumption of $1.53 trillion.
Obviously, the continent remains an attractive market for investors.
In recent times,
integrated economic blocks have used their large market as a negotiating tool
in trade. The further pooling of African economies improves the
continents bargaining power on the international stage.
In a region where
there are many unknown unknowns coupled with structural deficiencies, some of
us have mastered the art of cautious optimism.
Nigeria:
Standing Up Trade at The Altar
In a twist of
events Nigeria who was in the fore front of advocating for the Continental Free
Trade Area (CFTA) suddenly developed cold feet at the tail end.
Interestingly, the
nation’s chief negotiator was the chairperson of the negotiating technical committee.
Furthermore, the
headquarters of the continental free trade zone (CFTA) was to be sited in
Nigeria. Evidently the events in the last few days depict a
classic tale of a spouse leaving his prospective bride at the altar.
Well the bride was
going to get married, even though this particular spouse seems unsure.
Nigeria was not the only spouse showing up at the altar of trade in Kigali.
The sudden cold
foot was premised on the need for wider consultation by policy
maker’s in-order to present a more robust Nigeria input to the
deal.
Moreover, there has
been hostility towards Nigeria’s membership in the CFTA from certain
quarters. Such quarters pointed out that the deal will be injurious to
the economy, as the nation will be open to predatory trade attack.
The effect will
trigger a dwindling in output, eventually adding fuel to an already high
unemployment. It will be unkind to admit, it’s completely untrue.
Structural:
Kicking The Can Down The Road
Presently, the
inherent structural flaws like rigid factors of production, acute price
discrimination, huge infrastructural glut and the inability to take account of
the appropriate real effective exchange rate (REER) by monetary policy.
This porous dynamic
has robbed Nigerian goods of their price competitiveness. On the short
run making it hard to optimize the opportunities attached to such membership,
regardless the continent is riddled with market deficiencies.
In candid terms,
Nigeria is not the only country suffering from such structural distortion and
high export concentration. Therefore, it’s not surprising to see Nigeria
as one of the region’s major exporter.
This underline the
reality that most countries within the region do not have the capacity to carry
out deep predatory trade attacks.
Fig 2:
The External Economy of Major African Countries
Source:
UNCTAD
The structural
contours identified are not only a downside risk to the external economy but
also to the domestic economy. As they have consistently subdued
investment and dented growth potential.
Regardless, the
inability to address such flaws will continue to put the economy at risk of
structural unemployment, making output grow far below its
potential. Given the on-going reality, reforms are inevitable, thereby avoiding
them. Only amounts to kicking this particular can down the road.
The CTFA provides
an ample opportunity to carry out such reforms, eventually preventing the
nation from reaching the point whereby the same reforms are prescribed by the
external market.
More importantly
taking on such reforms will boost the nation’s huge economics of scale and how?
As the evolving scenario emerges it forces the current operating environment to
become more competitive and innovative. This gradually put the nation on a more
outward oriented footing as witnessed in some South American countries.
Closing
Down The FDI Gap
Multinational
Enterprises (MNE) are more inclined to invest in a country which is a signatory
to several trade partnerships. It provides them the opportunity to have access
to a large market pool, at relatively little or no cost.
Relatively low
friction across boarders reduces pressure on the profit earned by MNE;
signatories to free trade area provide an upside potential to such firms.
Concurrently, beefing
up the foreign direct investment (FDI) entering the host country.
Countries like Mexico and Brazil have benefited immensely from trade
partnership, through an astronomical increase in FDI
Nigeria was gifted
an opportunity to leverage on the huge market. With the intent of
cementing the nation’s position as a strategic gateway to African markets. That
would have further enhanced the nation’s chances of foreign direct
investment.
Presently, Nigeria
account for 15.4% and 17.23% of the continent population and GDP. In contrast
Nigeria accounts for just a paltry size of the continents foreign direct
investment pool, which is 1.7%. Certainly, such paltry amount is
unacceptable and if policy makers fail to take any proactive step.
Nigeria might lose
this particular opportunity to close down on the FDI gap. Sadly, such inability
will put Nigerian trailing behind a country like Morocco that is on an outward
oriented developmental path.
Fig 3; FDI Received
Among Some Economic Blocks
Source:
UNCTDA, NBS
Homogenous:
The Need to Create Trade
There is a
relatively weak intra trade among African countries. For instance,
the total amount of trade among African stood at $63.206 billion in 2016; which
is just 17.22% of the total African exports. The relatively low chunk of intra
trade is due to the identical economic structure, they have the same
endowments.
Most exports steam
from resource or primary factors of production, therefore, there is limited
scope to trade among African countries. It best explains the lean exports of
agricultural, fuel and metal products among African countries. The underlying
pattern creates little room for trade creation.
Therefore,
reigniting manufacturing capacity and resolving the persistent anaemic refining
sector allows Nigeria to fill the vacuum.
Therefore, such
opportunity can best exploited by tending toward outward development, which
aligns with the economic and recovery plan (ERGP) on the long run. The
CTFA provide the right challenge to Nigeria, with regard creating trade within
Africa.
Fig 4;
Intra-Group Trade
Source:
UNCTDA
Conclusion
Nigeria has played
an important role in the hatching of CFTA; it will be painful to have Nigeria
lose the leadership role. Especially for a country that desperately needs to
drive gross capital formation, such policy hiccups are unwanted.
The flip-flop over
the weekend has shown that policy makers have failed to learn from the events
of the past three years and what? The inability to open up the economy and be
consistently proactive sealed our fate into a recession!!!
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