Nigeria: AfCFTA – Nigerian Industries Need Investment Friendly Environment to Thrive

This post was originally published on this site

Operators and other stakeholders in the Nigerian manufacturing sector argued that the country required investment friendly policies and addressing structural challenges that held the sector down for it to thrive under the competitive AfCFTA, writes Dike Onwuamaeze

The President of the African Export and Import Bank (Afreximbank), Professor Benedict Okey Aramah, is an incurable optimist that the African Continental Free Trade Agreement (AfCFTA) has the possibility to spur industrialisation in Africa and Nigeria in particular.

As the salesman in chief of the AfCFTA, Oramah, ever optimistic, did not miss the chance in one of his recent meetings with the members of the Nigerian Manufacturers Association (MAN) to impress it on his audience that the AfCFTA, which took off in January, would brighten the prospects of the country’s beleaguered manufacturing sector.

He said: “Despite the challenges of the past, the future of manufacturing in Nigeria looks bright. The coming into force of the AfCFTA opens the wider African market for Nigerian manufacturer. The preferences that AfCFTA offers can make Nigerian manufactured goods more competitive in many African markets and can also make it possible for integration into regional and global supply chains.

“The rising middle class in Nigeria and Africa and the rapid urbanisation will expand demand for manufactured goods. It is the manufacturing industry that will supply these items.

“Related to the foregoing is the gradual exit of China from labour intensive light manufacturing. As China shifts to more capital-intensive manufacturing due to rising labour costs, those goods have to be supplied by somebody. Nigeria, and indeed the entire African continent will have themselves to blame if this projected supply gap is filled from outside the continent.”

The President of MAN, Mr. Mansur Ahmed, in a recent interview with the ARISE NEWS TV, a sister organization of THISDAY, agreed with Oramah that AfCFTA offered Nigeria’s manufacturing sector a chance to thrive.

Ahmed hinged this hope on backward integration and value chain addition that would link the SMEs to the big manufacturing concerns in the continent and enable Nigerian manufacturers to use local inputs to improve our cost structure and competitiveness. This will benefit both the SMEs and the larger manufacturers.

He said: “The AfCFTA will build our capacity to manufacture and change the narrative of African economy and give Africa a stronger voice and positioning in the global economy as we go on.

“I am confident that there will be a tremendous opportunities for growth and development for each and every one if the countries that signed this agreement are willing to come together to make it a success. But this cannot come without challenges.”

Industrial Sector Success

He, however, noted that success of the industrial sector would depend much on the federal government coming up with right policies that would attract investments into the country’s manufacturing sector as well as the willingness of the African governments to enforce the free trade area’s agreement favourablly to checkmate dumping.

“Are we ready to do the things we have to do to address the possibilities of dumping? “The dumping issue frankly is a matter of political will. Do our governments and political leaders have the political will to agree on those things that we have to do to ensure that we do not allow dumping to take place?” he asked.

Ahmed also said during his recent tour of media houses in Lagos this month that the manufacturing sector is currently employing seven million Nigerians with prospects to grow the number if government could support the right kind of industries with right policies that could attract investments and enhance strong linkages between the various sectors.

Ahmed said: “We need to encourage investments consistently across the value chain.

We need to work with the government to make sure that its policies are right.”

Similarly, a recent report of the Nigerian Economic Summit Group (NESG), titled the “Economic Implications of the African Continental Free Trade Agreement (AfCFTA) on the Nigerian Industrial Sectors,” said that the ability of the Nigerian industrial sector to benefit from the AfCFTA would depend on a number of ifs.

It said: “If the government can tackle the myriad of structural challenges and make the economy conducive for private investment to thrive, the industrial sectors will benefit a great deal from the AfCFTA.”

This is also followed by another if: “If Nigeria can effectively position the priority of its industrial sector for integration into African markets, this could potentially provide a larger market to support the expansion of production and investment across the industrial sectors. That said, it means that government has to be prepared to address the myriad of long-standing structural problems inhibiting real sectors of the economy.”

The report stated clearly that Nigerian industries would lose out in the trade integration agreement if the government failed to “implement pro-business and growth-enhancing policies that could attract foreign investments and technical labour supply.

“By implication, for the Nigerian industrial sectors to benefit from AfCFTA, it would require more than tariff reduction and/or elimination. It requires providing effective supportive economic structure to fairly partake in the gains.”

The NESG observed that currently, Nigerian industrial sector has not been operating at the capacity where it could leverage on the potential benefit of the AfCFTA to create more wealth for the economy.

Meeting these challenges would require that the implementation of the AfCFTA would be supported “by a cohesive industrial development framework including, rules of origin compatible with Nigerian productive capacity and the improvement of trade facilitation measures.”

The NESG’s report used a Nigeria-based Computable General Equilibrium (CGE) model (NESG GEMOD), to provide an analysis of the potential impact of AfCFTA on the Nigerian industrial sectors.

The report also contained some macro-economic impact of AfCFTA on the manufacturing industry like effects on investments, output, import and export.

Investment Effect

The NESG argued that if efforts were not made to mobilise private capital inflows that would boost domestic private sector investments in the Nigerian economy, seventy per cent of the industrial subsectors would experience a decline in investment.

“An implied explanation for the expected decline in investment is that the choice of investment destinations will become more competitive with the AfCFTA implementation. This is because Nigerian companies will be able to produce in any African economy they perceive as having the best investment climate and trade their products freely in other African economies with the desired market,” the report said.

Output Effects

The report stated that, “with complete elimination of tariffs, only electricity, textile and extractive industries would be positively impacted. But the implementation of AfCFTA will result to a decline in sectoral output of chemical products, electrical, motor vehicles, oil refining, water and waste management, wood products, cement and construction and food, beverage and tobacco sectors. The import effect is substantially different compared to other indicators.

“With the elimination of tariff, AfCFTA has a negligible impact on industrial import, with 0.1% on the average over the 10 years while increase in industrial export will be insufficient to compensate for the loss in import.”

The NESG’s report concluded by stating that removal of tariffs would have insignificant effect on Nigeria’s industrial sector because Africa accounted for a relatively small fraction of Nigeria’s overall external trade.

It however, noted: “the industrial sectors in Nigeria will lose out in all segments when the government eliminate tariff completely and at the same time attempt to cushion the economy by increasing expenditure by 10 per cent.”

It also posited that employment rate in the industrial sector would suffer the most with a decline of 2.6 per cent in the period of five to 10 years and an average decline of 1.7 per cent over the 10-year period.

“The result is not surprising within the context, as government investment spending has been proven to be underperforming historically and not having a significant impact on economic growth.

“Eliminating tariff alone, have some negligible positive effects on the Nigerian industrial sector. However, combining such a measure with an increase in government investment will not result in any effect for the industrial sectors. This is because the revenue losses resulting from the reduction in tariff are not being compensated for by the expected level of expansion in local industrial activities.”

The NESG’s report also flawed the general assumption that the AfCFTA would automatically spur expansion in economic activities in Nigeria by pointing out that the country has “long-standing non-tariff barriers” that represented a critical obstacle to the competitiveness of the Nigerian industries.

These non-tariff barriers included large infrastructure gaps, significant trade-related transaction costs and difficult business environment are some of the biggest problems to tackle head-on if Nigeria’s industrial sectors were to benefit from AfCFTA implementation.

This is particularly reflected by its assumption that where the tariff is phased out over a 10-year period, and “assuming that AfCFTA would bring about 10 per cent increase foreign investment and 10 per cent increase in technical labour supply in the economy. Under this scenario, all indicators (except employment) show an appreciable positive effect of AfCFTA.

“It is important to note that the increase in importation from African countries as a result of the implementation AfCFTA would not offset Nigeria’s industrial goods export to African countries.

“Even the projected 10 per cent increase in foreign investment could only impact the export of industrial goods by an average of 0.7 per cent over the period of 10 years.

“This result pointed to the fact that the AfCFTA would be trade-diverting as Nigeria’s imports from non-African countries would be substituted by imports from African countries. Hence, Nigeria will have to take anti-dumping measures more seriously during AfCTA ratifications and negotiations.”

Pharmaceutical Sector

The Chairman of Pharmaceutical Manufacturers Group of the MAN and Founder/Chief Executive Officer of Fidson Healthcare Plc, Mr. Fidelis Ayebae, stated flatly that the Nigerian pharmaceutical industrial sector is not yet ready for the competition that would arise from the AfCFTA.

Ayebae said: “From my perspective as a pharmaceutical manufacturer, note that I am not speaking for other industries, I am speaking for pharmaceuticals. If it is cheaper to import into Nigeria, why would it be cheaper to export what is expensive to manufacture in Nigeria? The arithmetic does not add up. The AfCTA has the potential that if not properly managed would rubbish industry that has not gained traction in Nigeria. Using a technical term, it’s not competitive. From a pharmaceutical perspective, we are not ready.

“I don’t know why African countries have chosen to embrace all of these things that are not helpful to us, simply because we want to belong and we want to run the race that the rest of the world is running.

“We do not manufacture anything here from the scratch that will stand us in good stead to compete. So, if we must compete, whether it is AfCTA or whatever, we must go back and rebuild this country from the scratch.”

However, the Minister of Industry, Trade and Investments, Mr. Niyi Adebayo has assured that Nigeria would be the game changer in the implementation of the AfCFTA by emerging as the manufacturing hub of the continent that have goods to trade all over Africa.

“We have come up with the idea of independent power plants that are gas powered to provide electricity to manufacturers within the economic zones we have created. The federal government is looking at solar power for Nigerian households so that a lot of what we have on the national grid will be diverted to manufacturers,” he said.