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Monday, January 13, 2020 /04:17 PM / By The Nigerian Economic Summit Group / Header Image By: The Nigerian Economic Summit Group
The
African Continental Free Trade Area (AfCFTA) represents one of the most
ambitious attempts of the African Union Heads of States and Governments to
economically unite African peoples and economies. It also represents a bold
attempt by the African Union Heads of States and Governments to provide or at
the least, experiment with an "African solution" to "an African" problem. The
AfCFTA is the first step in the implementation of African Union (AU) Agenda
2063: the "Vision" for an integrated, prosperous and peaceful Africa. The
proponents of the Continental Free Trade Area project, who interestingly are in
the majority, are deeply convinced of the potential of the AfCFTA to broaden
and strengthen the scope for intra-African trade as well as improve the
well-being of African people. The antagonists of the drive towards the
establishment of a continental free trade area in Africa, unfortunately, do not
agree with the proponents. The antagonists believe the AfCFTA will be damaging
to participating countries' economies. This group specifically argues that the
AfCFTA will severely decrease government revenue, thereby worsen the fiscal
stance of many African countries. They also argue that it will exacerbate firm
losses and that the exposure of domestic firms to foreign competition will
reduce demand and profitability, which in turn will have an adverse effect on
productivity.
Given
the huge market potential in Africa, there is a tremendous possibility that
AfCFTA will become an African success story. However, the amount of success
that is achievable in this "African Project" will depend to a large extent on
the quality of preparation that is infused to the negotiation and
implementation of the AfCFTA agreement by African countries. Although Nigeria
signed the AfCFTA framework agreement in July 2019, the initial reluctance of
the Nigerian Government to sign the agreement was borne out of the concern of
different segments of the Nigerian economy regarding the possible harmful
consequences of joining the AfCFTA. There is the underlying fear among
policymakers in Nigeria that AfCFTA could easily be transformed from a free
trade area into a free transfer of resources arrangement from one economy to
the other.
It
is against this background that the Nigerian Economic Summit Group (NESG)
commissioned the Centre for Petroleum Energy Economics and Law (CPEEL) at the
University of Ibadan, Ibadan in conjunction with Equilibria Consult, to conduct
an evidence-based study that has the overarching objective of assessing the
potential impact of AfCFTA on the Nigerian economy.
The
NESG commissioned study is specifically aimed at determining the potential
impact of the AfCFTA on key macroeconomic variables such as aggregate output,
aggregate export, aggregate import, government revenue, investment, and
composite prices. In addition, the study also aims specifically at determining
if government intervention, by way of an increase in its infrastructure
spending will help improve any potential gains or minimize losses associated
with AfCFTA implementation. Besides, the objective also includes; quantifying
the welfare impacts of the AfCFTA on Nigerian households; ascertaining which
sectors would gain/lose as well as factors reallocations resulting from the
free trade agreement. The study adopts the Computable General Equilibrium (CGE)
methodology to achieve its objectives. The analysis was done under six policy
simulation scenarios including - linear cut in tariff over the ten-year AfCFTA
implementation period; front-loading tariff liberalization, backloading tariff
liberalization, linear cuts in tariff combined with 10 percent of locally
produced substitutes categorized as sensitive goods and protected from
liberalization, linear cuts in tariff combined with 10 percent exogenous
increase in government investment; linear cut in tariff combined with 5 percent
increase in labour supply and 5 percent increase in foreign capital inflow.
The
study has some interesting findings with wide-ranging implications for the
Nigerian economy. For instance, the results indicate that the AfCFTA will be
trade-diverting as Nigeria's imports from non-African countries will be
substituted by imports from African countries. Government revenue will decline
in all but one of the scenarios of the AfCFTA when foreign investment inflow
and increased labour supply is assumed. Government revenue declined by 0.21
percent when linear cut to the tariff is applied and when the tariff cut is
back-loaded. The decline in government revenue is only marginally lower (0.20%)
when the tariff cut is front-loaded. However, during the first period of five
years, when the government is assumed to increase its investment by 10 percent,
government revenue increased by 0.42 percent before declining by 0.13 percent.
The losses in government revenue are more likely to have resulted from the
decrease in tariff revenue - as taxes on imports constitutes a major source of
government non-oil revenue. It was noted, however, that government revenue was
positive in both the first and second period of the AfCFTA implementation when
foreign investment inflow and an increase in labour supply was assumed.
The
African Continental Free Trade Area implementation in Nigeria is expected to
create the phenomenon of trade-diversion and this will be more prominent in
Nigeria's imports from West African countries and South Africa. Investment is
expected to decline in all simulations. The decline in investment is lowest
when considerations are made for sensitive products during the implementation
of the AfCFTA. With the exclusion of sensitive products (SIM 3), the total
investment is expected to decline by -0.15 percent compared with -0.16 percent
when there are no considerations for the exclusive list.
The
implementation of the AfCFTA has positive impacts on Nigeria's exports. If
linear cuts are applied to tariff elimination, aggregate export will increase
by 0.02 percent in both the first and second five-year implementation periods
respectively. If the tariff elimination is back-loaded, aggregate export is
expected to increase by 0.01 percent and 0.03 percent in the first and second
implementation periods respectively. Even when tariff elimination is
front-loaded, aggregate export will still increase by 0.02 percent in both the
first and second five-year implementation periods respectively. When sensitive
products are protected from tariff cuts, aggregate export will also increase by
0.02 percent in both the first and second five-year implementation periods
respectively.
The
simulation results indicate that the AfCFTA tariff liberalization will cause a
negligible decline in the household's income. The decline in household's income
will be more severe for rural-rich households and urban-rich households. The
poor households in both urban and rural households will only experience a
marginal decrease in income (averaging about 0.01 percent for both rural and
urban poor households). The expected decrease in income of rural and urban rich
households will be an average of about 0.02 percent for each household type.
However, when government intervention and inflow of foreign investment, as well
as the increase in labour supply, are simulated, the tide of negative household
income changes is reversed. The above results strongly suggest the existence of
opportunities and potential risks associated with the AfCFTA agreement. The
results also informed some key policy recommendations that include the
following:
Overall,
one thing that is certain is that AfCFTA would turn out in one of two outcomes;
a winwin outcome for all African countries, or a zero-sum game in which case
the gain of one country becomes the loss of another, or the loss of one country
becomes the gain of another.
Download Here - Impact Assessment Study and Economy-Wide Implications of AfCFTA PDF Report
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