Join the AfCFTA with grounded expectations!

As the FGN deliberates on the merits of signing up for the African Continental Free Trade Area (AfCFTA), it will be considering organizational and institutional issues in additional to the economic impact. To paraphrase Bill Clinton’s advisor, “it’s the politics, stupid”. We can draw some tentative lessons from the evolution of the EU over more than 60 years.

There are first mover advantages. That way, a government can help to shape the organization from the outset and embed its nationals in its important institutions. At the same time, it should take a view on how far the organization might evolve. For example, the European Coal and Steel Community of six states, established in 1951, is today the 28-member EU (including 19 in the Eurozone). If the FGN is wary of ever increasing integration, it should acknowledge the risk of marginalization as the organization races ahead of it. Not all African governments share the same thinking on the management of an economy, one separate strand being the developmental state favoured by Ethiopia and Rwanda.
For the AfCFTA to flourish, it requires strong institutions to enforce regulations and prevent the creation of new non-tariff barriers. They are likely to be overstaffed, and develop into a bureaucracy. Without such, however, the area would go the way of many underperforming regional organizations in Africa. We understand that these regional bodies will continue to exist as building blocks for the overarching area, and have concerns about duplication.
In a sense, we are more comfortable in making these “political” points than assessing the impact of membership on the economy. If all states signed up for the area, there would be a single market for goods and services of 1.2 billion inhabitants and combined GDP cited as between US$2.3trn and US$3.4trn. This would be easily the largest trade agreement since the WTO in 1994. There are official forecasts in circulation for aggregate area GDP and intra-African exports in 2022 and 2030. We prefer to focus on concrete results. For example, the area, with or without its largest economy, will be a stronger position to negotiate trade agreements than individual countries and regional bodies currently are.
Turning to the advantages for Nigeria, its manufacturing sector is relatively developed in an African context, and certainly the most advanced in the West African sub-region. A breakdown of intra-African trade shows that 43 per cent consists of manufactures, compared with a share of less than 20 per cent for African trade with the rest of the world. Nigerian traders are to be found in many African countries, and would be able to make Nigeria their market of choice for imports of finished goods within the area.
The area is to bring free movement of labour and investment, which would create new opportunities for Nigeria’s services sector. An example frequently made is that of Nigerian lawyers who would be able theoretically to practice across the continent. On the same basis, Nigerian firms in accountancy, advertising, banking and the creative media would be well placed to take advantage of the new openings in the area. The services sector accounted for 53 per cent of a US$370bn economy in 2017.
The FGN was set to sign up in Kigali in March 2017 but changed course and did not sign any of the three legal instruments underpinning the creation of the area. We understand that 49 of the 55 members of the AU have now signed and that the area comes into being with just 22 signatures. Nigeria was not the only large economy not to sign in March. The FGN stepped back, it is said, following pressure from organized labour and the Manufacturers Association of Nigeria (MAN).
Labour had ideological objections to “radioactive neo-liberal policies” we read, while MAN felt that the FGN had not completed its homework. The FGN has carried out a lengthy process of nationwide sensitization and polled 512 firms across the six geopolitical zones, of which 78 per cent supported membership of the area. The MAN has some legitimate concerns but the FGN has to consider all segments of the economy, of which manufacturing represented 9 per cent last year.
Doubtless the decision will be taken on the grounds of national interest. We can see why the FGN would not sign an economic partnership agreement with the EU but think that it should join the area. We have conservative expectations of multilateral bodies such as the AfCFTA. Their development is never seamless. The first mover advantage is significant however, and the elimination of 90 per cent of tariff lines over five years is reasonable.
Nigeria would join from a position of strength: the many small economies had no choice but to sign. By virtue of the size of its domestic market and the development of its many industries, Nigeria should be able to benefit from membership. Our understanding is that members will be free to exit the area after a trial period of five years. We doubt that the FGN would choose to go down this route but governments in these circumstances should think carefully before holding a referendum.

Gregory Kronsten
Head of Macroeconomic and Fixed Income Research
FBNQuest Capital