[Column] Rahmon Ojukotola: The AfCFTA - how it affects the Nigerian economy
Nigerian president Muhammadu Buhari ratified the African Continental Free Trade Agreement AfCFTA on the 7th of July 2019 following a long consultation with stakeholders in Nigeria. The delay was due to lobbying from pressure groups highlighting the threats to their members and the national economy.
The AfCFTA basically requires members to remove tariffs from 90% of goods and services across the continent with a few exceptions. This will enable the expansion of intra-African trade that currently accounts for only 17% of Africa’s exports compared to 69% in Europe. The UN Economic Commission for Africa estimates the agreement will boost intra-African trade by 52% by 2022.
Nigeria’s main imports from African countries include fertilisers, polymers, frozen fish, prepared binders and petroleum oils. The Nigerian government currently has several supplemental duties on the US$1 billion of intra-African imports that significantly raise effective tariff rates. According to the World Bank, Nigeria imposed a trade weighted average tariff of 11.25% in 2016, with a maximum rate tariff of 35% on most of its imported goods.
Nigeria places high effective duty rates on imports into strategic sectors, such as agriculture, to boost the competitiveness of the local industries, while the proportion of duty free imports in Nigeria only amounts to 6.57% of imported goods in 2017 according the World Bank.
In 2017, Nigeria’s export to African countries totalling US$4.9 billion comprised mainly of crude oils (83%). This agreement should help the country to diversify its export as its other products become more price competitive. It also provides the opportunity to scale production in those industries.
According to the Nigerian National Bureaux of Statistics in Q1 2019, Nigeria exported goods valued at N300.6billion to ECOWAS member states and N325.5 billion to South Africa alone representing 70% of total exports to Africa. The continental market access provided by the agreement will help to diversify its export base beyond its immediate neighbouring countries.
Whilst the agreement will help to increase trade of African manufactured goods, it may lead to an increase in smuggling of non-African produced goods across African state borders in the short term. Analysis of the Nigerian rice farming sub-sector shows the October 2016 500% increase in tariffs on rice imports stimulated investments in farms and milling plants, but led to an increase in smuggling of Thailand produced rice from Benin Republic which shares a porous land border with Nigeria. The rice produced was still more expensive than Thai rice due to low yields on the farms in Nigeria, thereby incentivising smuggling. This is because Africa does not yet have a harmonized policy on tariffs from non-African countries as partially implemented by Europe. Fundamentally this is a short run issue, as in the long term with free trade agreements such as AfCFTA, market forces will allocate capital efficiently to produce goods and services demanded.
The AfCFTA will promote mutually profitable continental division of labour, leading to specialisation in the production of those goods and services in which each country has the greatest relative competitive advantage. This will increase Nigeria’s trade with other African countries beyond its 12% of total exports and 4% of total imports in 2017.
As with any change to trade policy there will inevitably be some parties that are worse-off in the new arrangement, but the special interests of unions and association should not succeed above those of the nation and continent.
Free trade between African countries is undoubtedly the best policy to improve the standard of living for Africans, because they can get a wider range of goods and services at lower prices. When tariffs are levied, prices increase and choice is reduced. As Milton Freidman aptly stated in 1980 “Protectionism and government intervention breeds conflict and free markets breeds cooperation”.
Rahmon Ojukotola is Founder of Nigeria based fintech startup, StartCredits.
This column a contribution to [Africa CEO Forum] What are the opportunities that AfCFTA brings for business?
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