Africa’s biggest economy does not seem to be too enthusiastic to ratify the African Continental Free Trade Area, worried that its manufacturing sector will be adversely affected. But, writes Dianna Games, a change from its traditional restrictive stance on trade could open up vast new opportunities.
Nigeria, as Africa’s biggest economy, is set to be a key player in the African Continental Free Trade Area but its challenges in leveraging this opportunity are significant.
Participants at an Economic Commission for Africa workshop at the end of 2019 on Nigeria’s preparedness for the new trade regime highlighted the fact that the cost of doing business in the country and the dilapidated physical infrastructure were among the key priority areas that need to be addressed by the government.
The country has yet to ratify the 55-nation continental free-trade zone, which is expected to create a $3.4trn economic bloc with 1.3bn people across Africa.
The official launch of trading has been shifted from the scheduled date of 1 July this year to early 2021 to enable countries to deal with the Covid-19 crisis; this also allows African countries more time to prepare.
But Nigeria’s enthusiasm for the AfCFTA has been lacking as it grapples with longstanding domestic issues that may affect its success in this regard.
Although it was a leader in the establishment of the Economic Community of West African States (Ecowas) in 1975, it was one of the last countries to sign the AfCFTA agreement.
Nigeria’s Minister for Industry, Trade and Investment, Niyi Adebayo says the country’s National Action Committee of the AfCFTA, which he heads, needs to be sure that Nigerian industries will be protected before it recommends that the President ratifies the agreement.
He says they are also interrogating the rules of origin proposals closely to ensure that the agreement will not mean Nigeria becoming a dumping ground for exports from other regions, routed through African countries. “We are the largest individual market in Africa, so we have to be careful about this.”
High costs of doing business in Nigeria and significant infrastructural deficits, particularly power shortages, mean many local manufacturing and agricultural enterprises are performing below their potential and may not survive with competition.
The Manufacturers Association of Nigeria says the country’s uncompetitive production environment, poor value addition culture, and low capacity utilisation would not serve Nigeria well under the AfCFTA. It says Nigerian manufacturers need to be innovative in terms of adding value, given that many countries have the same products and resources.
Border closure impacts
But Nigeria has other issues to tackle that affect its participation in the world’s biggest free trade zone. One of these is the year-long closure of borders with its neighbours, specifically Benin, which benefits from its proximity to the megacity of Lagos.
Closing the road borders in August 2019 was intended to fight smuggling, which undermined Nigeria’s attempts to become self-sufficient in food production, and to give it the space to stimulate production of essential food items such as rice. It also aimed to stop the leakage of low-priced subsidised fuel from Nigeria into its higher-priced neighbours.
Despite being well-intended, the move has created shortages of staple foods, with local production not yet up to speed to compensate for the sharp reduction in imports in many cases, and food prices have spiked, driving up inflation.
With Nigeria being the economic powerhouse of Ecowas, the regional implications have been significant, particularly for neighbouring Benin, a tiny country whose trade dependence on Nigeria accounts for up to 70% of its GDP.
Other countries, including Ghana, rely on the Abidjan-Lagos highway for access to markets. Businesses inside Nigeria have been forced to rely on the congested ports in Lagos for imported inputs and many traders have lost their livelihoods.
The move has also significantly reduced the volume of non-oil exports to the region. Intra-Ecowas exports account for 45% of Nigeria’s intra-Africa exports – but only 16% of intra-Africa imports.
The closure, vigorously defended by Nigeria as being in its national interest, goes against Ecowas protocols and the spirit of the AfCFTA. Talks on the issue have taken place at the regional level but a date on reopening the borders proved to be elusive, with the global border lockdowns buying Nigeria more time.
According to online trade portal Tralac, Nigeria’s main trading partner within sub-Saharan Africa was South Africa in 2017/18, which accounts for 46% of its total intra-African trade. Nigeria is one of Pretoria’s main sources of crude oil. Other main African trading partners include Côte’Ivoire (15%), Togo (12% and Senegal (7%) while destinations for Nigeria’s exports include Cameroon, Egypt, Namibia and Mozambique.
But African nations are not among Nigeria’s main trading partners globally, which include Brazil, China, India, Japan, the US and the European Union.
The country has relied on trade restrictions since the 1970s to spur industrialisation and increasingly, in the wake of low oil prices, to save scarce foreign exchange.
The items on these lists have changed over the years but where items were removed from the prohibition list, they often attracted high duties and tariffs to serve the same end.
There has been some progress in improving local production as a result of these measures, but the outcomes have been compromised by the lack of supply side mechanisms to enable business to properly benefit from the restrictions. Smugglers have also played a role here by moving into market gaps created by the restrictions to service this import-dependent country.
The share of manufacturing as a percentage of GDP has lingered in the region of 10% for years, rising slightly to 13% in 2018. Economists say that under the right conditions, Nigeria should be able to increase this to over 40% by 2030. It is not yet clear whether the free trade agreement will help or hinder Nigeria’s ability to reach this target.
In acceding to the free trade agreement, there are bound to be many positive outcomes for resilient Nigerian companies. But the country may also end up paying the price of years of relying on restrictive trade policies, rather than investing in productive capacity, to grow the economy.
Following the border closures, use of the port in Lagos, which deals with about 90% of trade into and out of Nigeria, benefited government revenues, with more duties being collected on the increased volume of goods entering the country legally.
However, this was a double-edged sword as the situation also worsened already critical congestion levels at the facility, which was battling to keep abreast of traffic. Over the past year, it has taken goods between 20 days and a month to move through the port, leaving importers facing high demurrage costs.
Efforts to improve the efficiency of goods through the port have been ongoing for decades without much result. The Buhari administration is doing its bit. Over the past two years, the government has reduced the number of agencies operating at the port, for example, and aims to have all these institutions interfacing with importers and exporters through a single portal.
Last year the Federal Government established the Presidential Task Team under the leadership of the Vice President to address the problem. It claimed in mid-2020 that it had succeeded in addressing the congestion and clearing the port of cartels that profiteered on the back of the dysfunction. But the real test will be when the country is at full economic strength in the post-lockdown era.
A more lasting solution is likely to be the plan to link the 156km Lagos-Ibadan rail line to the Apapa port complex to improve the speed and efficiency of goods in and out of the area. The rail tracks have been completed while the 10 stations along its route, including Apapa, are at different stages of completion.