News

Independent study on the potential benefits of the African Continental Free Trade Area (AfCFTA) on Nigeria: Study report

Independent study on the potential benefits of the African Continental Free Trade Area (AfCFTA) on Nigeria: Study report
Photo credit: AP | Abbas Dulleh

05 Jul 2018

This report documents the results and findings from an independent study to assess the potential benefits of the African Continental Free Trade Area (AfCFTA) agreement on Nigeria. It is an attempt to contribute to knowledge by bridging the existing gap in this area; one that has become topical in Nigeria’s recent economic landscape.

Executive summary

Regional integration is inevitable for economic transformation and sustainable socio-economic development in Africa. On one hand, it is a development strategy aimed at aggregating Africa’s small countries into one large market that can deliver economies of scale, improved competitiveness, foreign direct investment (FDI) and poverty reduction. On the other hand, regional integration helps in addressing non-economic problems such as recurring conflicts and political instability as well as increasing the continent’s bargaining power in the multilateral front.

Despite the recent shift in the growth poles of the global economy from developed countries to emerging and developing countries, Africa lags behind and remains marginalized. This is partly because the continent remains a fragmented bundle of small resource-rich but commodity-dependent economies. For Africa to optimize its resource endowments and translate them into welfare gains for its teeming population, regional integration is inevitable. The eight regional economic communities are at various stages in the integration process, and it is not certain that all the obstacles could be addressed in order to achieve the African economic community (AEC) in line with the timelines of the Abuja Treaty. Meanwhile, African leaders and policymakers are showing more interests and making stronger commitments toward fast-tracking the AEC. To this end, the leaders agreed to establish the African Continental Free Trade Area (AfCFTA) by 2017 as a step toward this objective.

This study aims to assess the harmony between the AfCFTA and Nigeria’s economic and industrial goals; evaluate the economic benefits and costs of the agreement to the Nigerian economy looking at output, trade and welfare; and harness the perspectives of the private sector on the benefits and costs of the agreement to businesses in all sectors and the overall macroeconomy.

The study was conducted using a mixed methodology that involved: 1) opinion polling of Nigerian businesses of all sizes from all sectors to harness their perspectives on AFCFTA; 2) in-depth face-to-face interviews with key stakeholders such as business leaders, policy experts and leaders of organized labour about the agreement; 3) simulation of trade and monetary effects, and 4) meta-analysis of welfare and job effects of the agreement.

AfCFTA and ERGP 2017-2021

The cornerstone of the AfCFTA is promotion of industrialization, sustained growth and development in Africa. The agreement is being pursued based on its potential to “boost intra-African trade, stimulate investment and innovation, foster structural transformation, improve food security, enhance economic growth and export diversification, and rationalize the overlapping trade regimes of the main regional economic communities”.

Similarly, the broad vision of the pdf Economic Recovery and Growth Plan (ERGP) (6.59 MB) of Nigeria is to turn around the country’s economic performance and lay the foundations for sustained inclusive growth. As summarized below, the congruence between AfCFTA and ERGP plan lies in their focus on industrialization, export orientation and improved economic competitiveness.

Study Conclusions

The Nigerian government cited the need to consult widely with stakeholders as the reason for withholding consent to the AfCFTA last month, in March 2018. This study employed various techniques to measure perspectives of a wide range of stakeholders about AfCFTA. The report shows overwhelming expectation of positive impacts of AFCFTA on businesses and the economy, and stakeholders engaged in this study support the agreement with a sound majority.

The pessimism toward the agreement is driven mainly by the lack of strong industrial base and the potential that the nascent industry could collapse under the weight of international competition; and the issue of smuggling, counterfeiting and dumping of substandard products into the country. While this pessimism is acknowledged, respondents to the surveys offered measured counter-optimism on these issues.

On the issue of industry, respondents overwhelmingly expect an enlargement of the industrial base arising from the benefits of expanded markets, inward foreign direct investments and regional infrastructure projects that will contribute substantially to closing the infrastructure gap. Business leaders also caution against conflating the onset of AfCFTA with smuggling and dumping of sub-standard products, which are currently prevalent in the country. Instead, government is encouraged to invest more effort in managing the country’s borders to tackle the problem.

In general, businesses in all sectors see tremendous opportunities in the agreement both in terms of its expected impact on individual businesses and the macroeconomy. They expect the agreement to help them overcome their top business challenges namely power supply, access to credit, roads, taxes and tariff, port reform; open new markets for their products; and strengthen their competitiveness.

Recommendations and Policy Considerations

Key recommendations from this study are as follows:

  • Government and policymakers need to listen and comprehend the subject of AfCFTA the way businesses and stakeholders appreciate them, given that they are located at the spots where the rubber meets the road on trade and economic growth.

  • Clearly, Nigeria stands to benefit more from the AfCFTA with better business environment and improved infrastructure. In this regard, more concerted efforts are required to bridge the internal infrastructural inadequacies especially in areas of power supply and access to credit, which most businesses identify as their top challenges.

  • Nigeria needs to take Continental leadership of the regional infrastructure projects to lead other African countries toward bridging the continental infrastructure gaps. Road and rail connections to neighbouring countries needs to be facilitated by ECOWAS or other bilateral protocols to boost regional trade and enhance mutual economic benefits.

  • Policymakers should see the AfCFTA as an opportunity for Nigeria to pursue and achieve its goals of export-led growth as elaborated in the ERGP (2017-2021) and set up the institutional capabilities needed to take advantage of the offers contained in the agreement while minimizing the threats it may pose.

  • The likelihood of AfCFTA contributing to accelerating or impeding Nigeria’s industrialization depends on government policy response to its provisions, and the system of assessment, monitoring and evaluation put in place by the government to guide its implementation.

  • Based on the foregoing, the Nigerian government should sign the AfCFTA and follow the action with a set-up of the policy institution necessary for its successful implementation.

Key considerations for policymakers include the following:

  • Position industrialization and export-led growth at the centre of the country’s economic policies and galvanize stakeholders around it;

  • Conduct regular studies on the structure, progress and challenges of industry value-chains with a view to making adjustments and providing policy support necessary to reposition the industrial sector on the path to competitiveness;

  • Conduct regular studies on comparative export opportunities for Nigerian businesses in the African continent and elsewhere and share the knowledge with business associations and institutions; Insulate the policy-making institution and instruments from the unstable political environment to allow for development of focused, forward-looking policies that are essential for the goals of ERGP 2017-2021 and the benefits of AfCFTA;

  • Develop, reinforce and implement an active industrial policy that takes full advantage of the provisions of the agreement and provides opportunities and support for learning and growth of the SMEs sector.

  • Newer models for funding infrastructure needs to be considered such as Public-Private Partnership (PPP) arrangements, Build, Operate and Transfer (BOT) arrangements, Sukuk funds, and other options.

  • Customs and border patrol needs to be strengthened in order to minimize smuggling and dumping of substandard products. Similarly, regulatory agencies such as NAFDAC and SON need to be strengthened to enable businesses take advantage of export opportunities under the AfCFTA.

Part III – Benefits of AfCFTA to Nigeria

Trade, growth and monetary benefits of AfCFTA

Key concerns driving the resistance to the AfCFTA is whether the expected gains will be realized without suffocating our struggling industries. This is also tied to the theoretical argument of whether trade agreements lead to trade creation or trade diversion. The fear of losing the supposed protection of less-competitive domestic producers operating in inclement business environment underscores the opposition from trade unions. But liberalization, usually through a Schumpeterian-type process of disrupting and recreating at a larger scale, brings about economic benefits that far outweigh the short-term costs. This is even more effective with global trade which provides added incentives for competition and innovation as well as the continuous search for new opportunities and markets.

In order to appreciate the size of the expected increase in Nigeria’s trade through the AfCFTA, it is important to examine the magnitudes of recent growth in international trade. Export growth lagged behind import growth globally and the same pattern is observed in the developed countries. Second, developing countries experienced export growth relative to imports: imports growth in 2015 was sustained in 2016 but export growth rose from 0.6% to 2.8%. In Africa, imports reversed from 0.7% growth in 2015 to contraction of 4.6% in 2016 while export growth improved from 0.6% to 2.9%. Sub-Saharan Africa’s experience was slightly different with contraction of imports in both 2015 and 2016 by 0.3% and 6.6% respectively while exports reversed from growth of 0.7% to contraction of 0.3%. It is expected that implementation of AfCFTA will help sustain and improve the African performance and boost trade in the Sub-Saharan Africa sub-region.

Estimates (of elasticities) presented in Table 10 support the argument that Nigeria’s membership of the AfCFTA will indeed create trade between Nigeria and the rest of Africa. The estimates show that a 1% decrease in tariff rate imposed or faced by Nigeria in trading with the rest of Africa will increase trade in all cases by more than 1%. The boost in trade is most noticeable between Nigeria and the rest of Sub-Saharan Africa, although South Africa is the greatest contributor to such trade; trade would increase by only 1.21% if South African effects are removed. The second largest economy in Africa claims similar status when comparing the impact of tariff reduction on Nigeria’s trade with Africa including and excluding South Africa: trade would increase by 1.45% with South Africa effects unadjusted but only by 1.17% with South Africa’s impact eliminated. The estimates further reveal that South Africa has greater impact on Nigeria’s trade than all ECOWAS countries combined. Following tariff reduction, Nigeria-Africa trade would increase by 1.21% if ECOWAS effect is adjusted and by 1.17% with South Africa effect adjusted. Africa is strategically important to Nigeria’s economic growth as Africa’s economic output undoubtedly shapes Nigeria’s trade with the continent.

The tariff rate and government revenue move in opposite direction, on 1 to 2.5 basis. This means that a fall in revenue in the short term due to tariff impositions by Nigeria, as being proposed to be the aftermath of CET, would be more than offset by rise in revenue generated through increased trade in the longer term. Therefore, fiscal policymakers need not worry about the revenue implications insofar as the loss of revenue from tariff reductions on imports is offset by gain in revenue generation from increased imports or trade.

The inverse relationship between weighted tariff and weighted exchange rate between Nigeria and Africa is also pro-intuitive. A fall in Nigeria’s tariff promises to increase imports which in turn is associated with depreciation of the naira. Results in Table 5 indicate that a 1% fall in tariff rate would decrease the real effective exchange rate by 0.3%. The relationship is significant. Notably, a decrease in the real effective exchange rates improves trade competitiveness of Nigeria’s exports.

This report was compiled by a consortium of academics and research institutions for the Nigerian Office for Trade Negotiations. The authors are Dr. Bell Ihua, Professor Martin Ike-Muonso, Dr. Olumide Taiwo, and Mr. Sand Mba-Kalu.

Source Federal Ministry of Industry, Trade & Investment, Nigeria
Website Visit website
Date 05 Jul 2018
Share on