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.