Can Nigeria benefit from African free trade?
A strong coordination of reforms to boost economic growth, including the elimination of extant policy contradictions to the growth objective, would be needed for the country to realise the potential benefits of signing up to the African Continental Free Trade Area.
On July 7, 2019, President Muhammadu Buhari signed the agreement establishing the African Continental Free Trade Area (AfCFTA). The government and many stakeholders in the country had been dubious about the agreement. The concern was that the trade pact would open up our domestic market to imports that can harm the local manufacturing industry. For this reason, the President bid his time as he held more consultations on the continental free trade initiative to determine if Nigerian would sign up to it.
Given the extended consultative process, which lasted for over one month from when the agreement entered into force on May 30, 2019, following its adoption in March 2018, it is unarguable that the country did not sign up in a hurry. Indeed, Nigeria and Benin Republic were the last two countries to sign the agreement. They brought the number of the signatories to 54 countries, out of the entire 55 member countries of the African Union (AU). Only Eritrea has yet to sign the agreement.
However, with the launch of the operational phase of AfCFTA scheduled for July 2020, it is pertinent to ask if Nigeria is actually ready to harness the potential benefits of the landmark trade agreement.
This question also applies to all the individual countries that have signed the agreement, and even the continent as a whole.
During the first phase of its operation, AfCFTA will eliminate 90 per cent of tariffs on intra-Africa trade. The revenue loss to each country due to the elimination of tariffs on imports may not be significant. Trade between African countries accounted for 17 per cent of Africa’s total trade volume in 2018. However, the loss of revenue to the Nigerian government – like its African peers – has to be offset by improved trade volume for the country. This requires productivity expansion to happen.
But there are currently myriad obstacles to productivity growth in Nigeria. They include lack of skilled manpower, inadequate infrastructure, epileptic supply of grid electricity, decline in foreign direct investment (FDI), and high cost of credit. A combination of these factors could render the prices of Nigerian products uncompetitive in their target African markets. Or the country may be unresponsive to external demand for its products.
As the country was counting down to the operational take-off of AfCFTA, the National Assembly passed the Finance Bill 2019 in November. The bill, which is now awaiting presidential assent at the time of writing, has increased various taxes and introduced new ones. This is expected to further raise the prices of made-in-Nigeria products; and, even worse, the taxes could further squeeze businesses out of existence.
The need to make Nigerian products cost-competitive under the AfCFTA trade regime should serve as one additional reason for President Buhari to review the Finance Bill. The administration of President Donald Trump in 2017 introduced massive tax cuts as part of measures to boost the productivity of the US economy, raise disposable income of households, increase domestic investment, and enhance the international price-competitiveness of US products. Beyond achieving these objectives, the tax cuts have also been instrumental to US labour performance, with the economy now at full employment.
Another major constraint to increasing Nigeria’s trade with other African countries is the absence of trade infrastructure. Evacuating products from manufacturing plants efficiently, or transporting imported inputs from the Lagos ports to other parts of the country, is a daunting challenge. Even more challenging is the absence of a direct maritime link to transport Nigerian cargoes to other African countries.
The challenges of Nigerian economic growth and trade infrastructure warrant a closer attention. They are further discussed below to ensure they are addressed squarely by policymakers, instead of hoping that the benefits of AfCFTA would be a self-fulfilling prophesy. This article will also reintroduce in this edition of Financial Nigeria magazine the Sealink Project, which is being facilitated by Nigerian Export-Import Bank (NEXIM Bank).
Nigeria’s growth challenge
In the 10 years to 2014, Nigeria achieved impressive average real GDP growth rate of 6 per cent. This was during the commodities super cycle, during which many African commodity exporters also recorded impressive growth. The economic expansion was largely driven by China’s own superlative economic growth. China required commodities, including crude oil, from African countries to fuel its growing export-manufacturing industries.
In the last four years, however, China’s double-digit economic growth has slowed to average 6 per cent. Consequently, demand growth for crude oil and other commodities has slowed. Moreover, China’s economic transition is afoot. The number one polluter in the world is also now the largest investor in clean (renewable) energy. Oil prices are, thus, well below their historical highs attained in the five years before and after the global financial crisis in 2008-2009.
This has proved very challenging for fiscal policy and economic growth in Nigeria. After the five consecutive quarters of negative growth from Q1 2016 to Q1 2017, economic recovery has been weak. The country’s 2020 growth outlook is around the band of 1-2 per cent; the same as in 2019.
To unstick the growth momentum, there is the need to boost private sector investment and improve FDI flows. However, a combination of disjointed domestic policymaking and monetary easing by the major central banks, which has been fuelling investment in government securities, has continued to dampen global FDI flows. According to the World Investment Report 2019 by the United Nations Conference on Trade and Development (UNCTAD), FDI to Africa was $46 billion in 2018, a growth of 11 per cent. This investment growth did not only buck the global trend, it also upended two previous years of decline in FDI flows to Africa. Even then, FDI to Nigeria plunged by 43% to $2 billion in 2018, compared to a year earlier.
The government has since 2016 tried to bridge the domestic investment gap by borrowing to finance infrastructure projects. Many reforms to improve the ease of doing business have also been undertaken; the country has consequently risen by several notches on the World Bank’s Ease of Doing Business Index. These efforts, unfortunately, have not been effective in raising economic growth above 2 per cent.
Therefore, raising productivity growth as required for AfCFTA to be beneficial – and not harmful – to the country, perhaps requires an extraordinary intervention. A strong coordination of reforms to boost economic growth, including the elimination of extant policy contradictions to the growth objective, would be needed for the country to realise the potential benefits of signing up to the African Continental Free Trade Area.
Trade Infrastructure
According to UNCTAD, Africa’s export to the rest of the world totalled $760 billion between 2015 and 2017. Comparatively, this was 18.5 per cent of the exports value of Europe, 14.7 per cent of America, and 11.1 per cent of Asia. Not only is Africa’s trade with the world underwhelming at 2 per cent of total global trade; as earlier noted, intra-Africa trade was 17 per cent of the total trade between Africa and the world in 2018.
Nigeria’s external trade pattern was a strong influence on the low intra-Africa trade. Crude oil exports to outside the continent, has continued to account for over 90 per cent of Nigeria’s foreign trade.
The country is not unwilling to trade with Africa and the rest of the world in non-oil merchandise as much as it is unable to cost-efficiently trade. For instance, sea cargoes between one African country to another, including Nigeria, mostly require to be first shipped to Europe where they would be transhipped to their final port destinations. Due to this, logistical costs are estimated to account for 60 per cent of many merchandise that originate in one African country and traded in another, because of lack of direct maritime links between the countries.
The high cost of intra-Africa trade will not be dented much by removing tariffs without developing the trade infrastructure, including direct maritime connections. AfCFTA has now made public and private sectors support for initiatives to deliver infrastructures for intra-Africa trade highly imperative.
Sealink Project
One such initiative to provide Nigeria and other African countries with trade infrastructure is the Sealink Project. The Sealink Project was mooted about seven years ago by NEXIM Bank. The Bank, Nigeria’s export development finance institution (DFI), has continued to facilitate the operational take-off of the initiative.
As originally conceived, Sealink will provide direct maritime connections between countries of West Africa and Central Africa. After years of continued development, the maritime service is set to launch by the end of Q1 2020.
The Sealink Project is a special purpose vehicle (SPV), created as a public private partnership (PPP). NEXIM Bank is facilitating it as part of its efforts to deliver its statutory mandate of promoting Nigeria’s non-oil trade.
Last month, NEXIM Bank and the Sealink Project held a consultative forum with the Manufacturers Association of Nigeria (MAN), in Lagos. The forum brought together representatives of Nigerian manufacturers and exporters. Mrs. Dabney Shall-Holma, the Chairperson of the Sealink Implementation Committee, at the parley, identified both manufacturers and exporters as the “critical off-takers” of the Sealink.
Also, at the event, Mr. Hope Yongo, the Technical Adviser to the CEO of NEXIM Bank, said the Sealink Project was conducting a survey of the manufacturers and exporters to determine their needs. This aims to customise the Sealink fleet to small and large cargo ships and barges to optimise cargo transportation cost. The Sealink Project is now a critical factor in Nigeria’s – and indeed Africa’s – readiness for AfCFTA.
Conclusion
Despite the scepticism that has met AfCFTA, the initiative is very important to Africa’s economic growth and development. Regional trade is pivotal to regional economic prosperity. Comparative trade data shows exactly why Africa is the least developed region of the world. Intra-Africa trade was 17 per cent of the region’s total trade in 2018, while the comparative figures for America, Asia, Europe and Oceania were 47 per cent, 61 per cent, 67 per cent and 7 per cent, respectively.
President Buhari has inaugurated the National Action Committee for the Implementation of the African Continental Free Trade Area. The multiagency committee shows the seriousness with which the government views the AfCFTA agreement. But for the committee to be successful with its mandate, its recommendations must be mainstreamed into broader economic policy.
AfCFTA is ambitious. But it requires key reforms and assiduous implementation to succeed in the countries that have signed up to the trade agreement. It also needs effective dispute resolution.
Despite the scepticism that has met AfCFTA, the initiative is very important to Africa’s economic growth and development. Regional trade is pivotal to regional economic prosperity.