AfCFTA: Challenges to SME Scalability in Intra-Regional Trade in Nigeria
February 15, 2021
Small and medium scale enterprises (SMEs) are largely viewed as the engine wire of any nation’s economic growth and are regarded as justifiable means that propel development globally. SMEs are the key drivers to economic growth and poverty reduction which strengthen and enhances the development of Nigeria, as in several other economies.
Although SMEs have been regarded as the gold for employment and technological development in Nigeria, challenges encountered on an intra-regional trading scale hinders the sector with unsavory impacts on the economy. They include constrained access to financing, poor infrastructural facilities, multiplicity of regulatory agencies and overbearing operating environment, integrity and transparency problems, restricted market access, lack of skills in international trade, and bureaucracy.
With the implementation of the African Continental Free Trade Agreement (AfCFTA), the challenges posed by the Nigerian economy becomes conspicuous as SMEs will be unable to partake in benefits that this agreement bears if they are not resolved timely.
On January 1, 2021, the biggest trade area with a market of 1.2 billion people and a projected cumulative GDP of US$3.4 trillion since the creation of the World Trade Organisation (WTO) in 1995 after years of ambitious planning commenced with 54 countries aimed at providing great opportunities to enhance industrialization in Africa by removing tariffs on and other barriers to trade on goods and services as well as increasing intra-African investment.
While the establishment of the African Continental Free Trade Agreement is not the utmost goal but rather a means to an end towards actualizing Africa’s Agenda 2063 – The Africa We Want, it aims to; create a single and liberalized market for goods and services; contribute to the movement of capital and natural persons; promote sustainable and inclusive socio-economic development; expand intra-African trade and enhance competitiveness within the continent and the global market.
However, the current Nigerian market poses greater challenges in ensuring a successful intra-regional trade for businesses in her sphere. The key question that comes to mind is – “How Nigeria can resolve these challenges to ensure SMEs’ growth in the regional economies of Africa?”.
Current Limitations of AfCFTA to SMEs Growth in Nigeria
One of the objectives of AfCFTA is to increase intra-African investments; the global competitiveness of firms and products will depend on having access to the most cost-effective services and products. This will create a need for significant volumes of investment in Nigeria as the intra-African investment will not be enough.
A massive and strategic investment in infrastructure is essential together with the harmonisation of regulations related to different sectors needed to foster trade. The latter can be achieved through mobilization of the country’s financial resources without increasing the risk of debt distress as well as designing relevant sectoral economic development strategies and industrial policies through learning from other successful regional economic systems.
Poor trade logistics
Reliable transport infrastructure is vital for businesses to be able to scale up production for regional export or to develop manufacturing bases. Poor logistics has been a major constraint in production which has led to local supply chain disruptions and overreliance on imports.
Investments in utility infrastructure will be an incentive for foreign companies to set up production facilities as investors need countries with a business enabling environment to easily transport goods to other African markets.
Volatile financial markets
Nigeria’s economy is plagued by volatile macroeconomic conditions as a result of poor infrastructure, access to capital, and increased contraction in GDP growth post-COVID era resulting in competitive devaluation and tariff barriers posing great danger to AfCFTA. As Africa emerges as a viable investment opportunity, there is a demand for timely, reliable, and competitively priced sourcing of currency. Unfortunately, for those investing in Nigeria, this demand has not yet driven supply as the currency is illiquid creating exchange rate volatility thereby increasing risks and reducing opportunities for investments in SMEs.
Cross-border payment settlements
Payment providers currently have difficulty providing services cross-border for several reasons. They include trade barriers manifested in form of discriminatory regulations, treatment of foreign providers, requirements for local incorporation, licensing, prohibitions on cross-border services or limitations on the movement of capital, as well as infrastructure barriers – difficulty in transmitting money from one country to another due to cross-border connection or the payments system in either country.
A more developed regional financial infrastructure can help facilitate further intraregional trade. This could include harmonizing regional payment systems to further facilitate cross-border payments; creating swap arrangements across central banks and a multicurrency clearing center to reduce risks from trading in different national currencies.
Onerous regulatory agreements
Nigeria, though haven come a long way still lacks effective regulations, as well as regulation stability, which could work against the benefits of AfCFTA. For the agreement to work, there should be flexible regulations that would aid trade such as reducing bottlenecks to ease of doing business. There should be an increased focus on the digitization of the Nigeria economy to enable the development and harmonization of a regulatory framework needed for integration. A legal and regulatory framework that enables quick digital transactions is vital for full participation in global digital trade.
Government needs to overhaul regulation relating to tariffs, bilateral trade, cross-border initiatives as well as capital flows, at least, across the region, to allow for the efficient implementation of AfCFTA.
Freedom of movement of people
One of the numerous benefits of AfCFTA includes the essential protocol on the Free Movement of people as this is important for trade in services. Despite the effort of East Africa and West Africa sub-regions that introduced regional passports to aid the movement of people across each region, traveling between African countries can be very challenging for Africans.
Security threat poses one of the greatest obstacles to free movement as a result of limited or non-existent capabilities of the Countries to effectively differentiate ‘good’ from ‘bad’ mobility. A free movement regime requires better-resourced airports, border posts, significant work, and investment in border
Complex dispute settlement within Africa
While AfCTFA is a rule-based system, Nigeria has weak laws with the inability to protect small businesses against property rights, intellectual property theft, strong monopolies, and labour rights. The agreement is yet to determine how to settle disputes between private parties, the jurisdiction of legal proceedings, and the implementation of judgments. With diversity between the various regional economies communities (REC); the interplay between regional integration and national industrial policies is not always harmonious. Most African countries are part of more than one REC with them bound to their WTO commitments and treaties with external regions or countries (EU, USA, China, Canada) – this has probable potential of impeding the development of the AfCFTA (when national policy objectives conflict with regional integration goals, national objectives will be prioritized).
Inadequate arbitration measures and corruption tackling mechanisms will therefore deter the envisioned integration.
There have been recent interventions to reduce the impact of these challenges on the implementation of AfCFTA to SMEs. They include:
1. Afro-Champions initiative of a trillion-dollar investment framework towards AfCFTA, enabling projects between 2020 and 2030;
2. facilitation of a trade portal with Zenith Bank;
3. partnership with Standard Bank to provide US$1 billion Trade Finance Facility, aimed primarily at SMEs;
4. creation of an online trade barrier platform to enable African businesses play an active role in removing obstacles to continental trade, and;
5. development of a Pan-African payment and settlement platform by Africa Export-Import Bank to eliminate the need for transactions in a third currency.
The impact of the AfCFTA cannot be determined by government policies alone but also by how much the private sector leverages the abundant opportunities available in the free trade area in Africa. Policies implemented must minimize short-term adjustment costs in order to break entry barriers of small markets and establish a truly integrated continental market that maximizes gains from economies of scale. There is a therefore a need for the private sector to ensure the policy is not inimical to participating small businesses.