African Continental Free Trade Area (AfCFTA) Agreement and Nigeria’s Economic Development:

Prospects and Challenges

By Professor Nazifi Abdullahi DarmaDepartment of Economics

University of Abuja.

Paper Presented at NIQS 28th Biennial Conference/Election, Held at Civic Centre, Lagos.

November 19-23, 20192

Outline of the Presentation

Objectives of the Presentation

Introduction

What is AfCFTA and its contextualization

Objectives of AfCFTA and its implementation phases

Africa’s economy, size and openness

Trade and non-trade barriers in Africa

Implications of AfCFTA on Nigeria’s Economic Development and prosperity

Challenges for Nigeria and mitigating strategies

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Introduction

•Over 40 (out of 55) representatives of member countries of the African Union (AU)on March 21, 2018 signed the African Continental Free Trade Area (AfCFTA)agreement

•Once fully implemented, the AfCFTA is expected to cover all 55 African countries,with an estimated combined current GDP of US$2.5 trillion, and a population ofover one billion, 60 percent of whom are below the age of 25 years (Abrego et al.2019)

•Even without this free trade agreement, the African continent has in recent timesbeen recognized as a land of vast unexploited opportunities (Leke et al., 2018)

•The AfCFTA which is a kind of trade integration agreement can support therealization of the continent’s economic promise. It has the potential to raise Africa’slow productivity and promote higher investment, thereby helping to increase incomelevels and reducing poverty

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Introduction (Cont’d)•The push for the AfCFTA is taking place against the backdrop of increasedskepticism about multilateral trade agreements and a global backlash against freetrade.

•Yet, trade integration has long been seen by African policy makers as a mechanismfor raising potential growth and reducing poverty in the continent (Yongzheng andGupta, 2005)

•Several trade and regional economic integration groups have been formed over theyears. The AfCFTA is the most ambitious initiative in this vein. This is because itemphasizes on two dimensions of integration that have received little attention:free movement of services and capital and the provision of regional public goods(such as “hard” infrastructure like roads, and “soft” infrastructure which is theregulatory environment)

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Introduction (Cont’d)

•By seeking to deepen economic integration of the African continent throughcreation of a single continental market with free movement of business, peopleand investments, the AfCFTA is a testament to the power of cooperation and ashared vision (Abrego et al., 2019)

•The potential implications of the agreement on Nigeria’s economicdevelopment and challenges are examined in this paper after putting theagreement into context and examination of stylized facts on African economies

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Contextualizing AfCFTA

•African countries are heterogeneous along many dimensions that count forsuccessful economic integration. This diversity is considered to be greater inAfrica than in other regions and is both a source of richness and handicap in thequest to integrate and industrialize

• Because of economies of scale, successful industrialization also depends oneconomic integration

•The boundaries as inherited are often artificial as they split ethnic groups anddisregard natural boundaries like rivers and mountains. These diversities ofAfrican continent points to tradeoffs which calls for integration

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Contextualizing AfCFTA (Cont’d)

Integration in regional economic communities (RECs) usually covermeasures that go beyond obligations taken in World TradeOrganization (WTO) and multilateral negotiations.

They either go deeper in provisions of the WTO or they coverprovisions not covered at the WTO (AfDB, 2019). These are the mainissues that gave rise to AfCFTA

The size of trade among African countries is one of the lowestamong all regional trading blocks, representing less than 10% of theiroverall trade volume

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The AfCFTA General Objectives•Deepening economic integration in Africa in accordance with AU Agenda 2063

•Liberalizing intra-African trade/market for goods and services through successivenegotiation

•Lay foundation for the Creation of a continental customs union

•Enhancing competitiveness

•Contributing to the movement of capital and persons and facilitating investment

•Promoting sustainable and inclusive socio-economic development, gender equality andstructural transformation; and

•Promoting industrialization through diversification, regional value chain developmentand food security.

•Resolving the challenges of overlapping memberships in regional economic communities(RECs)

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The AfCFTA Specific Objectives •The agreement has seven specific objectives aimed at realization of the generalobjectives

• Eliminate tariffs and non-tariff barriers to trade in goods progressively

• Liberalize trade in services progressively

• Cooperate on investment, intellectual property rights and competition policy

• Cooperate on all trade-related areas

• Cooperate on customs matters and the implementation of trade facilitation measures

• Establish a mechanism for the settlement of disputes concerning members’ rights andobligations; and

• Establish and maintain an institutional framework for the implementation andadministration of the AfCFTA.

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Outlook on Africa’s GDP Growth Rate

•According to the African Development Bank (AfDB) in its publication titledAfrican Economic Outlook (2019), Africa’s gross domestic product (GDP)growth rate reached an estimated 3.5 percent in 2018, about the same as in 2017and up from 2.1 percent in 2016. The GDP growth is projected to accelerate to4.0 percent in 2019 and 4.1 percent in 2020.

•However, the continent’s economic growth is not fast enough to addresspersistent fiscal and current account deficits and unsustainable debt. Therefore,there is need for the continent to move to a higher growth path and increase theefficiency with which growth generate jobs.

•The above outlook according to AfDB (2019) calls for integration, not just fortrade and economic cooperation, but for the delivery of regional public goods.

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Outlook on Africa’s GDP Growth Rate (Cont’d)

This is important especially as research has revealed that five trade policy actionscould bring Africa’s total gains to 4.5 percent of its GDP ($134 billion a year)

These five trade policy actions are:

Elimination of all of today’s applied bilateral tariffs in Africa.

Keeping rules of origin simple, flexible, and transparent.

Removing all tariff barriers on goods and services

Implementation of the World Trade Organization’s Trade FacilitationAgreement to reduce the time it takes to cross borders and the transaction coststied to nontariff measures.

Negotiating with other developing countries to reduce by half their tariffs andnontariff barriers on a most-favored nation basis.

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Africa’s Size, Income, and Openness •In terms of size, seven countries have populations of less than 1.5 million, and onehas over 100 million. Between these two extremes, there is a wide distribution ofcountries

•Although Africa contains 16 percent of the world’s population, it has only 5 percentof its income. Half of African countries (27), with 44.6 percent of Africa’s totalpopulation, are categorized as low income

•The remainder is distributed between lower-middle-income (18 countries, with 45.9percent of the population), upper-middle-income (8 countries with 9.5 percent ofthe population), and high-income (1 country with 0.01 percent of the population)

•Countries’ openness to trade varies, with gross exports and imports ranging from 38percent to 140 percent of GDP. Finally, 15 African countries, with about 17 of thetotal population and 7 percent of GDP are landlocked (Abrego et al. 2019)

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Tariff and non-tariff barriers to trade in Africa

•The intra-African trade agreements have facilitated, to a very large extent, agradual lowering of tariffs on goods

•Effectively applied tariffs have come down in the last two decades, from over 20percent in 1997 to 11.8 percent in 2016. It should be noted, however, that theapplied effective tariffs vary considerably between countries. Those countries thatare already part of a regional trade agreement (RTA) generally have significantlyreduced effective tariffs, which are low on average

•In contrast, non-tariff barriers (NTBs) in Africa are high and prevalent, andrepresent a critical obstacle to trade. NTBs can be classified in three broadcategories: (i) non-tariff trade measures (NTMs); (ii) infrastructure gaps; and (iii)other trade-related transactions costs (Abrego et al. 2019)

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The Two Phases of Implementation of the AfCFTA

The AfCFTA is being implemented in two phases (Abrego et al. 2019; and AfDB,2019)

Phase I provides a framework for the liberalization of trade in goods and servicesthrough elimination of tariffs and nontariff barriers in goods and services. For trade ingoods, the agreement sets the path for eliminating tariffs on 90 percent of productcategories

Countries can implement tariff reductions over a longer period in the case of sensitivegoods, or maintain existing tariffs for the remaining 10 percent of product categories(tariff lines)

On the liberalization of trade in services, member countries have also agreed to arequest-and-offer approach, based on seven identified priority sectors: logistics andtransport, financial services, tourism, professional services, energy services,construction, and communications 15

The Two Phases of Implementation of the AfCFTA(Cont’d)

•Phase II of the AfCFTA covers competition policy, investment, andintellectual property rights

•Negotiations for Phase II are scheduled to begin soon, with an expectedconclusion date of 2020

•Phase I of the AfCFTA came into force on May 30, 2019, 30 days afterthe 22nd ratification instrument was deposited with the Chairman of theAfrican Union Commission

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Implications of AfCFTA on Nigeria’s Development

Nigeria, being the largest economy in Africa stands to gain a lot from the AfCFTAespecially in terms of a larger market for goods and services from Nigeria

Investment opportunities to Nigerian business community and more opportunities foremployment through industrial expansion and increased trade

Facilitation of moving 100 million Nigerians out of Poverty due to more trade andassociated employment generation

Coordinated infrastructural development that promotes trade, development and socialcohesion

Reduction in the cost of exports and import within Africa

Opportunity for improvement in the export revenues

Improvement in the balance of payment (BOP) position of the economy

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Potential Challenges AfCFTA Poses to Nigerian economy

•Unrestrained importation with dubious source of origin

•Threat to national security and sovereignty and light arms smuggling

•Distorted national industrial policy and under competitiveness of local goods

•Increased rate of unemployment due to dumping

•Terms of Trade within Africa may be affected as the volume of Nigeria’sexports of non-oil products to other African countries is not significant

•Nigeria’s potential gains from AfCFTA may be limited by inadequatedomestic industrial policies to take advantage of the opportunities.

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Challenges to the Success of AfCFTA•Africa’s weak institutional capacities especially regulatory framework

•Weak Financial sector and financial deepening and inclusion in Africa

•Basterdized security infrastructure and mechanism

• Low industrial production as a proportion of GDP as African trade will be moresophisticated with increased share of industrial goods in total trade rather than agri-foodexports or commodities especially with advances in Artificial Intelligence

•Lack of coordinated economic linkages and Inadequacy of input from the businesssector ( National Development Planning to the rescue)

•Common currency harmonization challenges

•Inadequate intermodal transport and other related infrastructure

•Distorted power supply system and idleness (potentials for renewable energy notexploited maximally)

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Challenges to the Success of AfCFTA (cont’d)Mixed success within Regional Economic Communities Regrading Free Movement of People

At the regional level, EAC and ECOWAS have achieved the most in this area. The freemovement of persons was one of the key elements of cooperation under the East AfricanCommunity. Under Article 104 of the EAC Treaty, the Partner States agreed to adoptmeasures to achieve free movement of persons, labour and services and to ensure theright of establishment and residence of their citizens within the community.

Similarly, in 1979, ECOWAS adopted a Protocol relating to Free Movement of Persons,Right of Residence and Right of Establishment. In 1983, ECCAS also adopted a Protocolon Freedom of Movement and Rights of Establishment of Nationals of Members States,although free movement has still only been implemented between four Member States.

Other RECs have been less successful. In SADC, a Protocol on Facilitation of theMovement of People, which has similar aims to EAC and ECOWAS, was concluded in2005. Nine Member States have signed the Protocol but only four have ratified it,insufficient to bring it into force. In COMESA, a Protocol on the Free Movement ofPersons, Services, Labour and the Right of Establishment and Residence has beenadopted but has only been signed by four Member States.

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Conclusion

All African countries would fare better with well-designed integration than without it. Trade is no longer aboutmanufacturing a product in one country and selling it elsewhere, it is about cooperating across borders and timezones to minimize production costs and maximize market coverage. Reducing the supply chain barriers to trade(such as inadequate border administration, high transport and communication costs) could increase global GDP upto six times more than removing tariffs (AfDB, 2019). This could have motivated the AfCFTA as it is not onlyconcerned about tariffs but also about other bottlenecks to supply and demand across borders within Africa.Therefore, it is expected to result in improvement in trade, economic growth, job creation, poverty reduction, andgeneral sustainable development. Nigeria could take advantage of this through domestic policies that will enhancethe production of quality products for exports particularly where it has comparative advantages.

Nigeria and indeed the whole of Africa needs to improve on customs efficiency and other administrative proceduresrequired for international trade need an overhaul to improve efficiency. The reduction in the cost and time necessaryto create new businesses is important. Also, concerted efforts are required to increase financial depth and inclusionin Africa to bring it on par with other regions, as well as promoting access to trade financing or bank funding tocreate or expand businesses.

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Conclusion (Cont’d)

In order to optimally reap the expected gains, AfCFTA members should adopt a well-articulated andphased program for reducing all NTBs to the maximum extent feasible. The NTB reduction programshould include addressing a broader array of barriers that hinder trade, including infrastructure gaps,and an improvement in the business environment in Africa. The quality of ports, air transportation,and other measures of infrastructure where efficiency is relatively low in Africa compared with otherregions, need to be addressed.

To fully realize welfare benefits from the AfCFTA, member countries need to ensure success of thefree movement especially the free movement of business people.

Nigeria stands a better chance to gain from AfCFTA in view of its resources, large market, economicsize, and political influence in the continent. Hence, AfCFTA would result in positive impact onNigeria’s development if the country position itself to take optimum advantage of the agreement and ifadequate measures are put in place to mitigate the challenges .

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Thank you all for listening and may Allah bless Nigeria and Nigerians

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