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AfCTA… African solution to an African problem

Today the African Continental Free Trade Area (AfCFTA) will ‘top’ discussions at the UK-Africa summit convened by Prime Minister Boris Johnson. The Nigeria Economic Summit Group (NESG), in a study, says AfCTA represents one of the most ambitious attempts of the African Union Heads of States and Governments to economically unite African peoples and economies. Excerpts:

The African Continental Free Trade Area (AfCFTA) represents one of the most ambitious attempts of the African Union Heads of States and Governments to economically unite African peoples and economies. It also represents a bold attempt by the African Union Heads of States and Governments to provide or at the least, experiment with an “African solution” to “an African” problem. The AfCFTA is the first step in the implementation of African Union (AU) Agenda 2063: the “Vision” for an integrated, prosperous and peaceful Africa.

The proponents of the Continental Free Trade Area project, who interestingly are in the majority, are deeply convinced of the potential of the AfCFTA to broaden and strengthen the scope for intra-African trade as well as improve the well-being of African people. The antagonists of the drive towards the establishment of a continental free trade area in Africa, unfortunately, do not agree with the proponents. The antagonists believe the AfCFTA will be damaging to participating countries’ economies. This group specifically argues that the AfCFTA will severely decrease government revenue, thereby worsen the fiscal stance of many African countries. They also argue that it will exacerbate firm losses and that the exposure of domestic firms to foreign competition will reduce demand and profitability, which in turn will have an adverse effect on productivity.

Given the huge market potential in Africa, there is a tremendous possibility that AfCFTA will become an African success story. However, the amount of success that is achievable in this “African Project” will depend to a large extent on the quality of preparation that is infused to the negotiation and implementation of the AfCFTA agreement by African countries. Although Nigeria signed the AfCFTA framework agreement in July 2019, the initial reluctance of the Nigerian Government to sign the agreement was borne out of the concern of different segments of the Nigerian economy regarding the possible harmful consequences of joining the AfCFTA. There is the underlying fear among policymakers in Nigeria that AfCFTA could easily be transformed from a free trade area into a free transfer of resources arrangement from one economy to the other.

It is against this background that the Nigerian Economic Summit Group (NESG) commissioned the Centre for Petroleum Energy Economics and Law (CPEEL) at the University of Ibadan, Ibadan in conjunction with Equilibria Consult, to conduct an evidence-based study that has the overarching objective of assessing the potential impact of AfCFTA on the Nigerian economy.

The NESG commissioned study is specifically aimed at determining the potential impact of the AfCFTA on key macroeconomic variables such as aggregate output, aggregate export, aggregate import, government revenue, investment, and composite prices. In addition, the study also aims specifically at determining if government intervention, by way of an increase in its infrastructure spending will help improve any potential gains or minimise losses associated with AfCFTA implementation. Besides, the objective also includes; quantifying the welfare impacts of the AfCFTA on Nigerian households; ascertaining which sectors would gain/lose as well as factors reallocations resulting from the free trade agreement.

The study adopts the Computable General Equilibrium (CGE) methodology to achieve its objectives. The analysis was done under six policy simulation scenarios including – linear cut in tariff over the ten-year AfCFTA implementation period; front-loading tariff liberalisation, backloading tariff liberalisation, linear cuts in tariff combined with 10 percent of locally produced substitutes categorized as sensitive goods and protected from liberalization, linear cuts in tariff combined with 10 percent exogenous increase in government investment; linear cut in tariff combined with 5 percent increase in labour supply and 5 percent increase in foreign capital inflow.

The study has some interesting findings with wide-ranging implications for the Nigerian economy.

For instance, the results indicate that the AfCFTA will be trade-diverting as Nigeria’s imports from non-African countries will be substituted by imports from African countries. Government revenue will decline in all but one of the scenarios of the AfCFTA when foreign investment inflow and increased labour supply is assumed. Government revenue declined by 0.21 percent when linear cut to the tariff is applied and when the tariff cut is back-loaded. The decline in government revenue is only marginally lower (0.20%) when the tariff cut is front-loaded. However, during the first period of five years, when the government is assumed to increase its investment by 10 percent, government revenue increased by 0.42 percent before declining by 0.13 percent.

The losses in government revenue are more likely to have resulted from the decrease in tariff revenue – as taxes on imports constitutes a major source of government non-oil revenue. It was noted, however, that government revenue was positive in both the first and second period of the AfCFTA implementation when foreign investment inflow and an increase in labour supply was assumed.

The African Continental Free Trade Area implementation in Nigeria is expected to create the phenomenon of trade-diversion and this will be more prominent in Nigeria’s imports from West African countries and South Africa. Investment is expected to decline in all simulations.

The decline in investment is lowest when considerations are made for sensitive products during the implementation of the AfCFTA. With the exclusion of sensitive products (SIM 3), the total investment is expected to decline by -0.15 percent compared with -0.16 percent when there are no considerations for the exclusive list.

The implementation of the AfCFTA has positive impacts on Nigeria’s exports. If linear cuts are applied to tariff elimination, aggregate export will increase by 0.02 percent in both the first and second five-year implementation periods respectively. If the tariff elimination is back-loaded, aggregate export is expected to increase by 0.01 percent and 0.03 percent in the first and second implementation periods respectively. Even when tariff elimination is front-loaded, aggregate export will still increase by 0.02 percent in both the first and second five-year implementation periods respectively. When sensitive products are protected from tariff cuts, aggregate export will also increase by 0.02 percent in both the first and second five-year implementation periods respectively.

The simulation results indicate that the AfCFTA tariff liberalization will cause a negligible decline in the household’s income. The decline in household’s income will be more severe for rural rich households and urban-rich households. The poor households in both urban and rural households will only experience a marginal decrease in income (averaging about 0.01 percent for both rural and urban poor households). The expected decrease in income of rural and urban rich households will be an average of about 0.02 percent for each household type. However, when government intervention and inflow of foreign investment, as well as the increase in labour supply, are simulated, the tide of negative household income changes is reversed. The above results strongly suggest the existence of opportunities and potential risks associated with the AfCFTA agreement. The results also informed some key policy recommendations that include the following:

  • In view of the findings that Nigeria’s GDP will be negatively impacted when the AfCFTA agreement comes into force, and in view of the need to make the economy more competitive; it was recognised that relying on the inflow of foreign saving to grow the economy may not readily pay-off. The study, therefore, recommends that the country should embark on massive infrastructure upgrade and institutional reforms to improve her business environment. The infrastructure upgrade could be realised through the concession of major infrastructural projects (electricity, roads, bridges, airports, seaports, etc.) to the private sector. The concessions must, however, be complemented by strong institutional reforms to effectively regulate the operations of the private sector.
  • Producing highly competitive products in the foreign market also require strengthening government regulations and internal quality control of products produced in the country. The Standards Organisation of Nigeria (SON) and the Nigerian Agency for Food and Drug Administration and Control (NAFDAC) have a crucial role to play in this respect.

These regulatory institutions must be reformed to effectively perform their constitutional regulatory functions.

  • Nigeria needs to maximise the opportunities that are available to it in the AfCFTA agreement by enhancing the space for both domestic and foreign investments. Thus, there is the need to create a more business-friendly environment and reduce existing binding trade constraints in the country that has so far deterred the growth of foreign investment in different sectors of the economy. In addition to providing a reliable transportation system and power supply, the country can restore a business-friendly environment by substantially addressing all major security challenges that have in recent time inundated the country and discouraged foreign investors from doing business in Nigeria.
  • There is a need for measures to counter the expected negative impact of AfCFTA on government revenue. The recommended policy measure here is to combine trade liberalisation with increased drive for the inflow of foreign saving/investment into the Nigerian economy. The government can complement this with a programme of diversification of the Nigerian economy. If successfully pursued, diversification of the Nigerian economy will, in turn, boost the tax revenue base of the Nigerian Government.
  • The Government may begin to undertake deliberate measures that will strengthen sectors including health, education, electricity, transportation, textile, apparel and footwear to maximise the benefits that are likely to accrue to them when the AfCFTA agreement comes into force. This can be done by recognising these sectors as AfCFTA priority sectors for immediate government support. The government support may include tax breaks/rebate, government-backed preferential loan arrangements from commercial banks, etc. For sectors that are expected to suffer the greatest losses (including the chemical, chemical products and electrical; wood and wood products; cement and construction sectors), Government needs to create safeguards or incentives for such sectors. These incentives could come in the form of including the sectors in the sensitive list. This will help delay liberalisation of these sectors to a later period and allow for the adjustment of the sectors to realities of the AfCFTA agreement.
  • Implementation of the AfCFTA is also expected to trigger a surge in imports across sectors of the Nigerian economy. The major concern here is the issue of dumping. Strict enforcement of the Rules of Origin (RoO) should be enshrined as is, in AfCFTA framework document. The relatively large market size of Nigeria makes the economy a target for dumping. To protect the economy from the dumping of inferior and substandard products, the RoO needs to be well strengthened and tightened. This may require the country using the five-year transitional period to negotiate and adjust within the economy. There is also a need to negotiate an effective dispute resolution mechanism that allows for sanctioning of erring parties within the AfCFTA. This mechanism may include a trade court solely for trade dispute resolution within the region.

Overall, one thing that is certain is that AfCFTA would turn out in one of two outcomes; a winwin outcome for all African countries, or a zero-sum game in which case the gain of one country becomes the loss of another, or the loss of one country becomes the gain of another.

  • Nigeria needs to maximise the opportunities that are available to it in the AfCFTA agreement by enhancing the space for both domestic and foreign investment. Thus, there is the need to create a more business-friendly environment and reduce existing binding trade constraints in the country that has so far deterred the growth of foreign investment in different sectors of the economy. In addition to providing a reliable transportation system and power supply, the country can restore a business-friendly environment by substantially addressing all major security challenges that have in recent time inundated the country and discouraged foreign investors from doing business in Nigeria.
  • There is a need for measures to counter the expected negative impact of AfCFTA on government revenue. The recommended policy measure here is to combine trade liberalization with increased drive for the inflow of foreign saving/investment into the Nigerian economy.

The government can complement this with a programme of diversification of the Nigerian economy. If successfully pursued, diversification of the Nigerian economy will, in turn, boost the tax revenue base of the Nigerian Government.

  • The government may begin to undertake deliberate measures that will strengthen various sectors including health, education, electricity, transportation, textile, apparel and footwear to maximise the benefits that are likely to accrue to them. This can be done by recognising these sectors as AfCFTA priority sectors for immediate government support. The government support may include: tax breaks/rebate, government-backed preferential loan arrangements from commercial banks, etc. For sectors that are expected to suffer the greatest losses (including the chemical, chemical products and electrical; wood and wood products; cement and construction sectors) if the agreement comes into force, the government needs to create safeguards or incentives for such sectors. These incentives could come in the form of including the sectors in the sensitive list. This will help delay liberalisation of these sectors to a later period and allow for the adjustment of the sectors to realities of the AfCFTA agreement.
  • Implementation of the AfCFTA is also expected to trigger a surge in imports across sectors of the Nigerian economy. The major concern here is the issue of dumping. Strict enforcement of the Rules of Origin (RoO) as enshrined in AfCFTA framework document. The relatively large market size of Nigeria makes the economy a target for dumping. To protect the economy from the dumping of inferior and substandard products, the RoO needs to be well strengthened and tightened. This may require the country using the five-year transitional period to negotiate and adjust within the economy. There is also a need to negotiate an effective dispute resolution mechanism that allows for sanctioning of erring parties within the AfCFTA. This mechanism may include a trade court solely for trade dispute resolution within the region.

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