August 17, 2020 / 02:00
PM / by FDC Ltd / Header Image Credit: Flickr
The African Continental Free Trade Area (AFCFTA) is an attempt by African nations to boost intra-African regional trade, which is currently estimated at 15%. It aims to operate a single market for goods and services, just like the EU with a population estimated at more than 1.2billion and integrating 55 countries. The agreement is currently signed by all but one African nation, Eritrea out of Africa's 55 nations, with a view to be the largest free trade area in the world since the creation of the World Trade Organization in 1995.
Specifically, the Nigerian government signed the Agreement Establishing the African Continental Free Trade Area ("AfCFTA Agreement") on July 7 2019. The Agreement has been postponed from its initial commencement date (July 1) as most African states grapple with the covid-19 pandemic. This raises the question of whether this is the right time to postpone the agreement, considering the economic impact of either decision especially in this covid19 period and contribution of trade to Africa's economy. Total trade accounts for about 53.64% of Sub-Saharan Africa's GDP. The postponement may have a temporary positive impact on fiscal revenue, as African countries will retain their trade revenue from import tariffs in the short term. But this will be at the expense of businesses especially in this pandemic period.
The AfDB already predicts that Africa could see a deeper GDP contraction (-3.4%) in 2020 but will rebound (3.0%) in 2021. Most African states will still be exposed to external shocks from their international trade with other foreign countries, which will significantly impact their external reserves, export earnings and budget size especially for resource-dependent nations. Postponing the implementation date of AfCFTA will also see fiscal deficit and debt burden widening further as government trade earnings from free trade is lost thereby constraining government revenue.
Furthermore, African countries may face a financing need of about $110 billion in 20204 thereby raising the necessity of promoting trade and developing new areas of growth to increase government revenue, boost intra-regional trade and reduce the reliance on external debt.
On the other hand, moving forward with the implementation of AfCFTA is expected to boost both trading volumes and government's export earnings of African states as well as help aid the recovery from the negative economic impact of the covid-19 pandemic. Overreliance on production and imports from Europe and China will be decreased thereby reducing the exposure of African countries to demand and supply shocks with external trade.
Free trade, which involves full or partial removal of import restriction, will lower the cost of importing raw materials and inventories by businesses thereby lowering their trading and operating costs. Lower production cost will be transferred to the consumer in the form of lower prices of goods and services, which in turn boosts real income, and consumer spending which have a positive impact on aggregate demand.
Consumer welfare and businesses will generally be positively impacted. Moreover, this agreement will promote economic liberalization, integration, economic recovery from negative impact of covid-19 pandemic and other economic benefits among African nations.
Benefits of Going ahead with AfCFTA to Nigeria
Increase in intra-regional trading activities with other African nations
According to the African Development Bank (AfDB), the AfCFTA "will stimulate intra-African trade by up to $35 billion per year, creating a 52% additional trade by 2022 and a vital $10 billion decline in imports from outside Africa."7 Over years, Nigeria's exports to other African nations have surpassed its imports from these nations. This signifies that increased intra-African trade is positive for Nigeria as it could increase its export to other African nation to about 36% thereby raising Nigeria's export revenue.
Foreign Direct Investment
Removing barriers to entry into Nigeria market will result in the influx of private investors into the country thereby raising Nigeria's foreign direct investment. Nigeria received $5.85 billion capital importation (inflows) in Q1'2020 out of which FDI accounted for only 3.66% ($214.25 million). Increased access to market will help foreign investors set up manufacturing hubs within Nigeria thereby increasing FDI and export to member nations of the AfCFTA. More FDI inflows will help boost external reserves, which is favourable for exchange rate.
The transportation sector is one of the sectors that is poised to benefit immensely from AFCFTA. Movement of people, goods and services is expected to increase with free trade, which will increase the demand for transportation services. This provides opportunities for rail, water and air transport to grow as well as raise their contributions to GDP output.
Now is the time for AfCFTA to begin as the economic cost of postponing this agreement far outweighs its benefits. To lose the momentum for this free trade agreement now would be a serious setback. Regional cooperation, collaboration and connectivity are important to effective implementation of this agreement. Specifically, AfCFTA is a good trade agreement to Nigeria, which would help aid economic liberalization and the country's recovery from covid-19 in the medium term.