Airport Free Trade Zones: Implications for Industrialization and Economic Diversification in Nigeria

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Sunday, June 27, 2021   /07:00 AM /  By FDC Ltd  / Header Image Credit:The Sun Nigeria

 

Nigeria's federal government recently declared five of its international air-ports as free trade zones to encourage increased investment inflows and international trading activities.9 While these are not Nigeria's first free-trade zones, the move is expected to further bolster the government's diversification drive with significant implications for industrialization.

 

Significance of Airports as Free Trade Zones

A free trade zone is a specific area within a country that is approved for tariff free international trading activities. This implies that, as long as the business activities remain within the con-fines of the free trade zone, the import, processing, manufacturing and export of goods or services are exempted from applicable tariffs such as customs' fees, import and export duties etc.10 According to the Nigeria Export Processing Zone Authority, there are 25 active free trade zones in Nigeria out of a total of 44 designated free trade zones.11 Free trade zones im-prove the attractiveness of a country to investors considering the tariff free conditions attached.

 

Implications for Businesses and Investors

Investors and businesses typically benefit from free trade zones through reduced operating costs due to the tariff waivers. However, the location of the free trade zone around an airport will provide investors with an added advantage of improved access to the international market. The recent designation of the five international airports as free trade zones will reduce domestic lo-gistic costs for businesses and encourage investment inflows into the country. A lower cost of operation will encourage economies of scale and promote increased economic activity within and around the airports, which will in turn impact positively on businesses operating in the free trade zones. Furthermore, airports as free trade zones, will create a diversified transport system for companies, which could reduce Nigeria's port crisis. Nigeria is grappling with congestion at its two main ports, Apapa and Tin Can Island, resulting in several road hazards and traffic con-gestions, particularly in Lagos, its commercial capital.12

 

Expected Impact on the Economy

The Nigerian government has been seeking to attract investors into the economy to support the development of its non-oil sector in order to reduce the country's dependence on oil. Nigeria depends on the oil sector for approximately 50% of its fiscal revenue, and the sector accounts for about 90% of its total export earnings. The designation of airports as free trade zones is expected to attract foreign direct investment (FDI) into the country. FDI inflows into Nigeria fell by 21.21% to $2.6 billion in 2020 from $3.3 billion in 2019.13 The anticipated uptick in FDI will promote industrialization and facilitate non-oil sector growth, which is vital for economic diversification. It will also enhance job creation, which will address another daunting challenge in the  Nigerian economy, unemployment. Nigeria's unemployment rate rose to 33.3% in Q4'20 from 27.1% in Q2'20

 

Furthermore, the recent move is supportive of international trading activities in Nigeria, particularly exports. This will position Nigeria to benefit from the anticipated rebound in the global aviation industry after the severe impact of COVID-19. Air transport accounted for approx. 0.10% of Nigeria's GDP in 2020 down from 0.14% in 2019.15 Nigeria will also benefit from improved regional trade activities especially through the African Continental Free Trade Agreement. In-creased exports earnings due to the boost in export activities will aid exchange rate stability and facilitate economic recovery.

 

Potential Challenges

Harnessing the benefits of free trade zones is highly dependent on a country's ability to attract investors. While the tariff waivers attached to free trade zones are expected to improve a country's attractiveness to investors, other operational challenges could weigh on investor confidence. Foremost among these issues is poor infrastructure development. The level of infrastructure development in a free trade zone such as good road networks and electricity supply, impact on investors' willingness to enter a market. Another challenge is insecurity. Nigeria's insecurity problem involving frequent kidnappings and terrorist attacks will continue to be a deterrent to investors. The Nigerian government is expected to step up efforts to ensure good security and necessary infrastructure are in place in the newly designated airport free trade zones.


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