Strategising to Optimize Trading with AfCFTA: What SMEs Must Know

Proshare

Saturday, Aug 07, 2021 / 02:07PM / by Olufemi AWOYEMI with inputs from Proshare Research / Header Image Credit: Ecographics


...as we trade more among ourselves, African businesses will become bigger, more specialised, and more competitive internationally.  - Paul Kagame, Chairperson of the AU and President of Rwanda

 

AfCFTA and SMEs... An Independent Survey Finding

The Africa International Trade & Commerce Research, GIGI, and NOIPolls (2018) conducted a survey on Potential Benefits of the African Continental Free Trade Area (AfCFTA) in Nigeria.

 

The survey sampled 512 companies across all geopolitical zones of Nigeria: 70% are small-scale businesses (10-49 employees), 20% are medium-scale businesses (50-199 employees) and 10% are large businesses (200 or more employees).

 

The survey made the following findings:

  • 94% of the businesses in Nigeria are aware of AfCFTA and the signing of the agreement. The awareness is uniform across firm sizes and sectors.
  • 55% of the businesses believe Nigerian business environment is currently hostile (unsupportive).
  • Power supply, taxes and tariffs, access to credit, and road infrastructures are the top four challenges of the Nigerian business ecosystem.
  • The sampled businesses believe the top three advantages of AfCFTA are a better business environment, promotion of local business, and business expansion.
  • The top three disadvantages of AfCFTA are the influx of sub-standard goods, discouragement of local businesses, and loss of revenue for Nigeria.
  • The top three sources of uncertainty are possibilities that AfCFTA will boost the economy, the need for time to understand its impacts, and the chances of the collapse of local industry.
  • Overall, 78% of the businesses believe that AfCFTA will make a positive impact on local businesses; 10% believe that the impact will be negative while 12% believe it will have no impact.
  • Over 50% of the businesses believe the country does not have the infrastructure necessary to reap the benefits and gains of AfCFTA.

 

The consensus among researchers and analysts is that the benefits of AfCFTA for businesses and the economy depend on what and how each party handles the unique opportunities.



Proshare Nigeria Pvt. Ltd.


 

What the Data Says about SME's in Nigeria

SMEs are the backbone of many developed economies: they are important contributors to employment, output growth, and trade expansion. The National Bureau of Statistics (NBS) and the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) indicates that SMEs in Nigeria accounts for about 96% of registered Nigerian businesses, employ about 75% of the national labour force and contribute 48% to the country's Gross Domestic Product (GDP).

 

According to Kale (2019), between 2013 and 2017, Nigerian SMEs contributed about 50% to the nation's GDP, accounted for about 50% of industrial jobs and about 90% of manufacturing enterprises.



 Proshare Nigeria Pvt. Ltd.



  • In terms of business types, the composition of SMEs is different depending on the business type and staff requirements. The MSMEs national survey 2017 shows that education, manufacturing, and wholesale/retail trade make up 68% of small-scale enterprises in Nigeria while manufacturing, wholesale/retail trade, and human health & social works make up 68% of medium-scale enterprises.
  • In terms of ownership structure, SMEs ownership is unevenly distributed with 65% own by a sole proprietorship, 21% by private limited liability, 6% by faith-based, and 5% by partnerships.
  • While micro businesses are mostly owned by young Nigerians within 26 - 50 years, SMEs are majorly owned by older Nigerians with 36 years and above accounting for over 88%.
  • In terms of education, 51% of SMEs' owners have a bachelor's or Masters' degree while 72% of SMEs' employees have at least an NCE/ND certificate. Thus, both owners and employees are educated alike.
  • In terms of employment, males accounted for 57% of jobs in SMEs while 43% are women. The educational sector is the only sector with far gender parity in jobs while manufacturing employs 3 times more men than women.
  • In terms of startup capital, 75% of SMEs startup with a capital of less than N10million, and the majority of micro-scale enterprises startup with capital less than N50,000.
  • In terms of source of capital, the majority of SMEs had personal savings as the common source of capital. Only 49.5% of SMEs had access to bank credits, majorly from commercial banks.
  • In terms of financial and support services, 65% of SMEs in Nigeria have no business plan and 64% are uninsured which contributes to a high rate of failure and lack of access to capital.
  • In terms of priority areas, access to finance, power, water supply, and tax rate reduction top the priority area of assistance for SMEs in Nigeria.

 

The Birth of the African Continental Free Trade Area (AfCFTA)

The ideal of Continental Free Trade Area (CFTA) in Africa was conceptualised during the 18th Ordinary Session of the Assembly of Heads of State and Government of the African Union (AU) in January 2012. The Union adopted the decision to establish the African Continental Free Trade Area in 2017. Ultimately, the AfCFTA agreement was signed in March 2018 by 44 countries and became effective in May 2019. The basic tenet of the negotiation and agreement is to progressively eliminate tariffs and non-tariff barriers in trade among the member states (see Table 1).

 

Table 1: AfCFTA Meaning in Actual Terms.

Headline

Summary

Concept

AfCFTA is a free trade area where African businesses, traders, and consumers will no longer pay tariffs on a large variety of goods that they trade with other countries in the continent.

 

Objective

To deepen African economic integration through a single market for goods and services and promote industrial development through diversification and regional value chain development.

 

Trade Facilitation

Businesses constrained by non-tariff barriers, such as excessive customs procedures or burdensome paperwork, will have a platform through which such barriers are reduced significantly.

Capacity

AfCFTA is the world's largest free trade area since the formation of the World Trade Organization. It covers a market of 1.2 billion people with a GDP of $2.5 trillion, across all 55 member states of the African Union.

 

Scope

AfCFTA covers trade in goods and services; and trade dispute resolution; investment; intellectual property rights; competition policy; and e-commerce.

 

Specifically, the AfCFTA negotiations are in three phases. Phase I, the foremost negotiation which officially entered into force on May 30th, 2019, covers protocol on trade in goods, protocol on trade in services, and protocol on dispute settlement. January 1st, 2021 marked the official start of trade in goods under AfCFTA. However, negotiations on some issues of Phase I are still ongoing such as rules of origin, schedules of tariff concessions, and schedules of commitments on priority service sectors (business services; communications; finance; tourism, and transport). The Manufacturers Association of Nigeria (MAN), a key stakeholder, represents that the phase 1 is about 97 per cent completed; even as it notes that member country like Ghana has entered into an agreement with the EU that kicked off on July 1 based on a 80/20 rule and not the 90/10 rule AfCFTA expects.

 

Phase II of the AfCFTA negotiation covers intellectual property rights; investment; and competition policy. The Phase II negotiation will complement the existing agreement on Rules of Origin and Tariff Concessions. Phase III negotiation, covering E-commerce, is set to commence immediately after the finalisation of Phase II issues into protocols. The broad scope of the AfCFTA negotiations underscores the intended depth of the African economic integration. These last two phases will provide to be very crucial for the new economy sovereigns in Africa, especially Nigeria seeks to build competitive advantages in. It would involve a lot of heavy lifting to get us to speed.

 


Proshare Nigeria Pvt. Ltd.



Notably, the AfCFTA is in furtherance of the Abuja Treaty which led to the formation of the Africa Economic Community on June 3rd, 1991. The Treaty had among its objectives; the strengthening of Africa's regional economic communities; establishment of a free trade area; common external tariff and common market; gradual removal of obstacles to the free movement of persons; goods; services; capital and the right of residence and establishment.



Proshare Nigeria Pvt. Ltd.


 

According to UNIDO (2019), when effectively implemented, AfCFTA should spur the industrial revolution of Africa, as well as boost trade and investment between countries and existing regional economic communities. It should generate prosperity for citizens and traders in line with the 2030 Agenda for Sustainable Development and the Africa Union's Agenda 2063 "The Africa We Want".

 

AfCFTA's Opportunities for Trade Optimisationi Map.

Proshare Nigeria Pvt. Ltd.


 

More promises of the AfCFTA:

  • The expansion of Nigerian banks across Africa will facilitate cross-border transactions in multiple countries. It will also provide opportunities for Nigeria's FinTech companies to provide technical services and consultancy for the continent.
  • Increasing trade through the AfCFTA will motivate reforms that boost productivity, job creation, and reduce poverty.
  • AfCFTA will introduce regulatory measures such as sanitary standards, product standards and regulations, and rule of origin compliance to curb predatory practices.
  • AfCFTA provides an opportunity to harmonise regulation in important trade-related policy areas that have not been substantially addressed at the regional level such as investment, competition, intellectual property rights, and e-commerce.
  • According to World Bank (2020), AfCFTA at implementation will increase the volume of intra-African trade by 81% by 2035 and increase the volume of total African exports by 29%.
  • By fostering regional value chains and production networks and boosting intra-African trade, AfCFTA is expected to drive Africa's structural transformation.
  • AfCFTA implementation will also increase wages by 10%, with larger gains for unskilled workers and women. That is, AfCFTA is expected to address gender inequality in Africa by increasing employment opportunities for women and helping to lower the gender wage gap on the continent
  • World Bank (2020) estimated that AfCFTA will increase total exports by almost 29%, intra-Africa manufacturing trade will increase by 110%, and manufacturing exports to the rest of the world will rise by 46%.
  • The World Bank also estimated that with the implementation of the AfCFTA agreement, agricultural trade would represent 49% for intra-African trade and 10% for extra-Africa trade. The gains in services trade would be much smaller at about 4% overall and 14% intra-African trade.

 

Optimising Trade in the AfCFTA... Strategies for SMEs

Small businesses are catalysts for sustainable development. According to Ogunyemi (2017), the following features make SMEs the key drivers of the market and economic development:


I. SMEs' production activities are labor-intensive… they use a high quantity of human resources thereby promoting employment and reducing inequality in income distribution.

ii. They encourage entrepreneurship.

iii. Low startup capital is needed.

iv. They promote technological development through inventions, adaptations, adoptions, and modifications.

v. They are the foundation and catalyze for industrialization.

vi. They foster diversification of industry and enhance even development.

vii. They increase productive capacities and provide linkages between micro and large-scale businesses.

viii. They promote homegrown entrepreneurship and businesses through expansion and diversification.

 

Proshare Nigeria Pvt. Ltd.

 

SMEs as in larger businesses in Nigeria have what it takes to compete in the international market, but without the requisite awareness and strategy, it may be difficult to benefit from any available opportunities. Thus, to ensure that SMEs fully take advantage of the African Continental Free Trade Area, SMEs need to understand what the AfCFTA entails, what future negotiations cover, and how to position the business to harness the evolving opportunities. To do these, the SMEs need to assess the opportunities, develop workable strategies, and address the challenges that may battle their way to success.

 

The opportunities under AfCFTA have presented themselves. The trick is with the business owners, the investors, and the government representation to strategise or re-strategies to optimise the trading opportunities with the AfCFTA. The quest becomes a game of strategy. Just as bigger countries may benefit more from selling industrial goods to a wider market and smaller countries may benefit more by feeding the regional value chain, SMEs need to understand where they can fit in. AfCFTA gives SMEs the opportunities to grow beyond the domestic market. First, to the regional market and then climb the ladder to the continental and global market.

 

Eventually, the quest to optimise trade with AfCFTA will be based on competitive among SMEs of member countries and the outcome will depend on whose strategy is tighter. This is because SMEs across African countries supply closely similar primary products and face almost similar challenges. For Nigerian SMEs to optimise trade under AfCFTA, few key strategies necessarily come to play.

 

Prioritise Information and Collaborate with Policymakers

According to Gordon Gekko of Wall Street, the most valuable commodity in the 21century is information. The opportunities you are aware of, you can harness, the ones you are not aware of, you miss out. Many efforts are underway at the continental and national levels to position SMEs in Africa to tap into the benefits and opportunities of the AfCFTA. According to ITC (2018), more than 40% of African companies identify lack of access to information and absence of inquiry points as factors affecting the business environment across the continent.

 

The AfCFTA secretariat has a trade observatory platform which is a central repository providing exhaustive qualitative and quantitative trade data and information for the private sector to make data-based business decisions. The AU Commissioner for trade and industry, Amb Albert Muchanga also noted that the AfCFTA secretariat had requested the United Nations Economic Provision for Africa (UNEPA) to undertake a study of how SMEs can be mainstreamed into the AfCFTA. The purpose is to facilitate their growth in terms of training on bookkeeping, business registration, tax compliance, marketing, and how to make returns, all of which such SMEs can leverage to assess finances. SMEs that are updated on requisite information can take advantage of such training.

 

In Nigeria, the Presidential Steering Committee (PSC) has launched a SMEs aggregation module that would facilitate the formalization of operators in the informal sector to enable them to enjoy tax rebates and value chain priority available for participants in the AfCFTA. The PSC is also working with several federal government agencies, including the Nigerian Export Promotion Council, the NEXIMBANK, and the Bank of Industry (BoI), among others to help mobilise local businesses to increase their capacity in readiness for the continental African economic bloc. These formalizations and engagements with public sector agencies strengthen the capacity of SMEs to harness available opportunities. 

 

The policymakers' role in this is to create an enabling environment that promotes the development of regional value chains and builds the foundations for comprehensive continental integration. SMEs that intend to optimise trade under AfCFTA should constantly engage and collaborate with the policymakers to update and review developments on the AFCFTA implementation and start of trade. 

 

Produce What Africans Need

Trade thrives when countries manufacture or process what their trading partners demand. This, however, is not the situation amidst Africa countries with many African countries manufacturing or processing goods for markets outside the continent and the continental input-output matrix remains full of wide gaps that signify a lack of complementarity of production or processing activities across the continent.

 

The continent has underperformed in terms of trade relations within its boundary over time. Africa produces what it does not consume and consumes what it does not produce, thereby exporting little or exporting most of its resources to non-African markets and importing most of its goods and services from non-African economies.

 

Following the example of regional integration in Southeast Asia, SMEs should adopt a pan-continental strategy. The pan-continental strategy involves developing businesses that are designed to provide goods and services that meet the continental needs and the standards of countries across the continent.

 

A forward-looking strategy for SMEs "now" will be to research the acceptable standards in different countries across the African continent. This prepares the business for a pan-continental strategy at the start of trade in the country. Aside from giving the business wider acceptance, it is a viable strategy for expansion and new business creation on foreign soil.

 

The African Trade Observatory, the trade information portal, has as one of its priorities the provision of trade statistics and information about exportable goods and services and importable goods and services. The idea is for potential traders to know what is needed and where as well as where they can source resources. According to the AfCFTA secretariat, the portal will provide up-to-date and reliable information. A quick optimization strategy is for SMEs to begin to explore the platform for goods and services with high demand to restructure and redesign their businesses in preparation for trading under the AfCFTA.

 

Make Data-driven Decision Making

Data-driven decision-making (DDDM) is the process of making business decisions based on actual data rather than perception or observation. SMEs that intend to optimise trade under AfCFTA need to set specific business objectives, garner relevant data, analyse the data, and plan their trade strategies based on the conclusions drawn. SMEs that have the plan to introduce their goods and services to foreign markets should research the continental market and leverage the evidence generated within the continent to explore the market.

 

Such an approach introduced SMEs to strategies of adapting to various business climates with different cultures, social, and economic values other than that of their base country. Thus, SMEs that intend to optimize trade in the AfCFTA should prioritise research into the new environment on the continent. A research-based organisation such as Proshare Nigeria will do well in helping to research the market.

 

Challenges of Trade Optimisation for Small Businesses in the AfCFTA

Despite the numerous benefits and opportunities open to SMEs within the AfCFTA, such businesses may still be limited by certain challenges which could undermine their trade optimizations (See Table 2).

 

Table 2: Challenges of trade optimization for SMEs Businesses

Challenges

How they occur...

Production Capacity

Deficiency in human and production capacity compared with larger corporations.

Productivity Issues

Low adaptation to technology and best practices.

Infrastructural Deficits

Inadequate infrastructures and inefficient logistical operations.

Funding Constraints

Difficulties in accessing trade finance hinder participation in trade.

Regulatory Issues

Weak and obsolete law.

Predatory Practices

Rule of origin abuses, smuggling, dumping, IPR infringements, etc.

Foreign competition

Loss of sales to foreign traders with a cost advantage.

Insecurities

Farmers/herdsmen clashes, kidnapping, waterway pirates, terrorism, etc.

Loss of Intellectual Property Right

Weak enforcement of patent laws.

Labour Issues

Labours may work for lesser rights and protections to surviving in the competition.

 

Nonetheless, no challenge is insurmountable. With requisite information and right strategy, these challenges can be resolved. Development and implementation of the right strategies remain the ultimate way forward for SMEs in Nigeria and other African countries to optimise trading with AfCFTA.

 


Proshare Nigeria Pvt. Ltd.

 

 

Closing Thoughts

AfCFTA is an instrument for small and medium scale enterprises in Africa. AfCFTA succeeds when it is leveraged by small-scale businesses, traders, investors, and consumers to trade in the continent. However,...

  • The government still needs to continuously sensitize the private sector on the prospects and opportunities of AfCFTA. The government also needs to continuously negotiate for new opportunities and establish new trade collaborations for small and medium scale enterprises in the country.
  • Given that negotiation for some AfCFTA protocol is still ongoing, active involvement of the small and medium scale enterprises in advocacy will ensure viable inputs that can promote SMEs in the AfCFTA agreements.
  • Government and private sector need to collaborate on strategic actions to identify and boost investment and engagement in target sectors for the nation and the subnational.
  • To fully optimize trade in the AfCFTA, member country has to prioritize the development of implementation strategy. The strategy has to identify the comparative advantageous sector, current business constraints, and how to optimize the AfCFTA opportunities.

 

Proshare Nigeria Pvt. Ltd.

 

References / Acknowledgments

1.      Africa International Trade & Commerce Research, GIGI, and NOIPolls (2018). Potential Benefits of the African Continental Free Trade Area (AfCFTA) in Nigeria. A Study Report for Nigerian Office for Trade Negotiations. Abuja: NOTN.

2.     Ajayi-Kadir, S. J. (2020) Multilateral Trade Agreement and Nigerian Manufacturing Sector: A Study of the African Continental Free Trade Agreement. (Individual Research Project submitted to the National Institute for Policy and Strategic Studies, Kuru, in partial fulfilment for the award of the Member of the National Institute, mni). 

3.     Amb Albert Muchanga (2020). Positioning SMEs in Africa to tap into and benefit from the AfCFTA.

4.     ITC (2018). Promoting SME Competitiveness in Africa: Data for de-risking investment. Geneva: International Trade Centre.

5.     Kale, Y. (2019). Micro, small, and medium enterprises (MSME) National Survey 2017 Report. Lagos: Small & Medium Enterprises Development Agency of Nigeria and National Bureau of Statistics.

6.     NESG (2019a) Impact Assessment Study and Economy-Wide Implications of the African Continental Free Trade Area (AfCFTA) on the Nigerian Agricultural Sector: Policy Brief Series 1. Lagos: NESG.

7.     NESG (2019b) Impact Assessment Study and Economy-Wide Implications of the African Continental Free Trade Area (AfCFTA) on the Nigerian Economy: Policy Brief Series 2. Lagos: NESG.

8.     NESG (2019c) Impact Assessment Study and Economy-Wide Implications of the African Continental Free Trade Area (AfCFTA) on the Nigerian Industrial Sector: Policy Brief Series 3. Lagos: NESG.

9.     Ogunyemi, I. O. (2017). African Continental Free Trade Area: Challenges and Opportunities for Small and Medium Scale Enterprises in Nigeria' American Journal of Business. Economics and Management, 5(4), 30-37.

10.  UNIDO (2019). Africa Industrialization Day 2019. Geneva: United Nations Industrial Development Organisation.

11.   World Bank (2020). The African Continental Free Trade Area: Economic and Distributional Effects. Washington DC: World Bank Group.


Proshare Nigeria Pvt. Ltd.


 

Related to AfCFTA

1.      What SMEs Must Know about AfCFTA: Six #TalkingTrade Takeaways - Olufemi Awoyemi, Aug 08, 2021  

2.     AfCFTA: A Crucial Framework for Progress, Development and Inclusive Economic Growth of Africa

3.     Why Nigeria's AfCFTA Trade Policy Should be Broader - Ogho Okiti

4.     AfCFTA Holds 2nd Quarterly Press Briefing 2021

5.     AfCFTA: Nigeria in Focus

6.     AfCFTA: Revamping Nigeria's Infrastructure for Global Trade

7.     AfCFTA: Business Editors Call for the Identification of Pockets of Competitiveness in Nigeria

8.     AFCFTA Offer Significant Opportunities for the Nigerian Private Sector to Expand

9.     AfCFTA Agreement: Riding Through Phases

10.  Reduction of Import Levy on Cars - Fall Out of AfCFTA

11.   The African Continental Free Trade Area: The Dawn of a New Era

12.  AfCFTA Will Cover a Market of 1.2bn People and a GDP of US$2.5trn

13.  Economic and Distributional Effects of AfCFTA

14.  The AfCFTA Commences January 2021

15.  AfCFTA: Highlights on Current Status

16.  Banks are Pivotal to Success of AfCFTA - Ecobank MD

 

Proshare Nigeria Pvt. Ltd.

 

Related News on MSME Startup

1.      University of Oxford and FMDQ Group Launch Pioneer Global Partnership

2.     5 Amazing Tips Every Small Business Owner Must Follow

3.     Nigeria: AfDB Bolsters Women-empowered Businesses with $50m Loan to FCMB

4.     Ecobank Partners Lagos State Employment Trust Fund To Support MSMEs In Lagos State

5.     AUDA-NEPAD and Ecobank Group Partnership Moves to Finance Phase Under the 100,000 MSMEs Initiative

6.     AfDB Invites Business Enablers to Apply for Funding to Support Women Entrepreneurs

7.     Nigerian Businesses: 618 Bees, Emblue, And Gbemisoke Featured In Global PRCA Case Study

8.     Role of SMEs in Driving Economic Recovery in Nigeria Through Markets and Intellectual Property

9.     JA Nigeria Partners for Growth, Empowers Young People and Grooms Digital Entrepreneurs

10.  Call for Proposals for Small and Medium Enterprises in Nigeria



Proshare Nigeria Pvt. Ltd.



Related Links and News on Trade Investments

1.      Attaining Self-Sufficiency in Sugar Production

2.     President Macron Inaugurates France-Nigeria Business Council

3.     West African Regional Bloc Adopts New Plan to Launch Single Currency in 2027

4.     Top G7 Development Banks Pledge $80bn for African Firms

5.     Trade Deficit Widens to $9.61bn in Q1 2021; Naira Falls

6.     Q1 2021 Foreign Trade Report: Trade Deficit Worsens on the Back of Currency Devaluation

7.     Trade Deficit Widens in Q1 2021 on Increased Imports

8.     Q4 2020: A Sequence of Current Account Deficits

9.     Nigeria's Merchandise Trade Deficit Deepens in Q1 2021 Due to Rising Imports

10.  African Trade Finance Sees $5bn in Portfolio Outflows in Q1 2020 Due to COVID-19

11.   Dangote Vs BUA; The Sugar Wars Unredacted

12.  Trade Hub Launches a Virtual DealRoom Connecting Investors to Fast-Growing Impact Businesses

13.  Economic Diversification: Emefiele Woos WTO Says Nigeria Needs Help to Reset Its Economy

14.  How Nigeria Can Benefit From WTO

15.  Ecobank Reiterates Its Commitment As "The Partner Of Choice For Export Trade"

16.  NBCC Trade Expo: Nigeria Committed to Increasing Trade Relations with the UK

17.  Ecobank Partners NEXIM Bank, Unveils Trade Opportunities for Exporters

18.  Ngozi Goes to WTO - OpEd by Dr Reuben Abati

19.  DG Elect Dr. Ngozi Okonjo-Iweala Expresses Gratitude to the WTO General Council

20. Dr. Ngozi Okonjo-Iweala, New WTO DG: The Uneven Road to Co-Opetition

21.  NIPC Releases Report of Investment Announcements, 2020

22. Revised Trade Policy Vital to Attracting Investments into Nigeria - Wilson Erumebor

23. US Expresses Strong Support for Dr. Ngozi Okonjo-Iweala as Next DG of WTO

24. Enoh T. Ebong Appointed as USTDA Acting Director

25. FG Reopens Four Major Land Borders

 


 Proshare Nigeria Pvt. Ltd.




Proshare Nigeria Pvt. Ltd.

READ MORE:
Related News
SCROLL TO TOP