Continental Free Trade Zone: An Epic Tale of Developing Cold Feet

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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
Proshare Nigeria Pvt. Ltd.
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
Proshare Nigeria Pvt. Ltd.
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
Proshare Nigeria Pvt. Ltd.
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
Proshare Nigeria Pvt. Ltd.
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!!!

Proshare Nigeria Pvt. Ltd.

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