| Trade Investment |    3255 VIEWS  |
| Trade Investment | |
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Monday, July 08, 2019 / 10:59AM / By CSL
Research / Header Image Credit: Asorock
Over
the weekend, the president as earlier announced, signed the African Continental
Free Trade Area (AfCTA) agreement at an extraordinary summit of the African
Union (AU) in Niger Republic. The signing comes one year after the presidency
expressed unwillingness to give assent to the agreement due to concerns around
the negative implications it could have on the domestic economy. Admittedly,
certain benefits may accrue to Nigeria from the trade deal, on a balance of
factors however, the negatives greatly outweigh the positives. Although, the
presidency expressed readiness to put measures in place to mitigate the
negative impacts on the Nigerian economy, we struggle to see how such mitigants
can be enforced.
The
AfCTA trade deal creates a borderless market for African products. Negotiations
have been on since 2013 and a deal was finally drafted. 44 countries initially
assented to the deal but membership has now increased to 54 countries. The
agreement requires immediate removal of tariffs on 90% of goods while an
additional 10% of goods classified as "sensitive goods" would be
negotiated on a later date.
Nigeria’s
industrial development remains a far cry from the potential it carries, a
condition which has been exacerbated by poor government policies on industrial
and business growth. In our opinion, signing the trade agreement introduces
undue competition for local manufacturers who are struggling to achieve
production efficiency and market reach. This may ultimately lead to a loss of
local employment creation opportunities to other African countries who are
making giant strides in industrial development. While we believe operating a closed
economy and encouraging trade protectionism is not conducive for continental
growth, we are also of the view that local manufacturers still need some form
of protection from external competitors who have more favourable operating
environments in their respective countries.
In
addition, we are concerned about Nigeria becoming a dumping ground for low
quality foreign products as well as further loss of Foreign Direct Investments
(FDI). Nigeria’s estimated population of c.200m remains one of the biggest
attractions for foreign businesses. However, Nigeria’s notoriously unfavourable
operating environment has forced many investors to shut down operations in
favour of other emerging African frontiers such as Ethiopia, Rwanda,
Seychelles, Kenya and Mauritania. However, this hasn’t doused interest in
Nigeria’s populous market. We believe the AfCTA deal will provide opportunities
for foreign manufacturers in those African countries to have better access to
the Nigerian market without having to set up operations in Nigeria. With Asian
and European companies setting up operations in other African countries,
exporting goods to Nigeria might become easier with AfCTA, hence further
weakening local industrial growth.
Furthermore,
we note that African leaders have a notorious history of reneging on trade
agreements. The most notable that concerns Nigeria is the Ecowas Trade
Labourisation Scheme (ETLS) which was more of a customs union arrangement
designed to allow free movement of goods and labour among member countries.
Currently, several countries (such as Benin and Burkina Faso) have put in place
bans on importation of some commodities from African countries. A prominent
example is these countries’ decision to import cement from faraway China than
import from close by neighbour such as Nigeria. While Nigeria’s exports to
African countries represents about 21% of total exports as at Q1 2019 with
potential to rise under the AfCTA agreement, we believe on a balance, imports
(17% of total imports in Q1 2019) from other African countries would accelerate
faster than exports which does not bode well for local producers.
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