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African Continental Free Trade Area (AfCFTA) Agreement and Nigerian start-up bill

By Omoruyi Edoigiawerie, Esq
The African Continental Free Trade Area (AfCFTA) is one of the Flagship Projects of Agenda 2063 of Africa’s development framework. It was approved by the 18th ordinary Session of Assembly of Heads of State and Government in Addis Ababa, Ethiopia in January 2012.

The AfCFTA was established to create a single market for goods and services, facilitated by the movement of people, to promote industrial development and sustainable and inclusive socio-economic growth, and to deepen Africa’s economic integration.

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On March 21, 2018, the African Union (AU) validated the AfCFTA agreement for signatures. Apart from Eritrea which has a closed economy, all African member states have signed and ratified the agreement, making it the world’s largest free trade zone.

According to the Trade Law Centre, as of May 2022, 43 of the 54 signatories have presented their instruments of ratification to the chair of the African Union Commission.

Why does Africa need AfCFTA?

The answer is simple, commercial integration across the continent has been negatively impacted by outdated border and transport infrastructure, coupled with biased and often hasty internal regulations which are affected by the political and institutional instability that pervades the region.

Governments have often instituted trade barriers to defend their local markets from the regional competition, making it more expensive for countries to trade with their close neighbours. In Africa today, it is cheaper, easier, and less rigorous to trade with the European or Asian markets than with other African markets. AfCFTA will not just deepen trade and boost African economies, it will create jobs and achieve meaningful market integration. By creating a single African market of 1.3 billion consumers with a total GDP of over $3 trillion, Africa will indeed become the largest free trade area in the world.

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The AfCFTA’s objectives include:
1. The creation of a single market for goods and services, facilitated by the movement of persons to deepen the economic integration of the African continent

2. The creation of a liberalised market for goods and services through successive rounds of negotiations.

3. The contribution to the movement of capital and natural resources and to facilitate investments, by building on the initiatives and developments being undertaken by the different State Parties and Regional Economic Communities (RECs).

4. The laying of the foundation for the establishment of a Continental Customs Union at a later stage.

5. The promotion and attainment of sustainable and inclusive socio-economic development, gender equality, and structural transformation of the State Parties.

6. Enhancement of the competitiveness of the economies of State Parties within the continent and the global market.

7. Promotion of industrial development through diversification and regional value chain development, agricultural development, and food security.

8. Resolution of the challenges of multiple and overlapping memberships and expedite the regional and continental integration processes.

Implementation
Although it was originally envisaged that trade under the Agreement would commence in 2020, the Covid-19 pandemic stalled that plan and it only commenced in January 2021.

Presently, there are still important negotiations on pivotal issues that will help the agreement function meaningfully. These negotiations have been categorized into three phases.

The first Phase seeks to address issues around the trade in goods and services, the ratification of relevant protocols on trade goods and services, and the settlement of disputes amongst member states. The second phase of the negotiation targets the issues of intellectual property rights, investment, competition policy, and optimisation of trade investment services.

The third phase of the negotiations will be centered on e-commerce and is expected to commence as soon as negotiations in the second phase are concluded.

Discussions are underway to eliminate tariffs on 90 per cent of goods over five years or 10 years for Least Developed Countries (LDCs).

At the 8th meeting of the AfCFTA Council of Ministers, in January 2022, 850 products were given the green light to be traded under the rule of origin protocol, some significant products in this list include cheese, and edible oil, fish, and some machinery.

This is a huge boost to the agricultural sector as it will benefit the most. The reason for this is not farfetched, African countries spend over $80bn on food imports and AfCFTA is expected to expand access to markets at a regional and international level, thereby generating higher state revenue and increasing agricultural income.

In its report in June 2022, the World Bank firmly restated that AfCFTA promises broader and deeper economic integration and would attract investment, boost trade, provide better jobs, reduce poverty, and increase shared prosperity in Africa.

According to the report, Africa could see Foreign Direct Investment (FDI) increase by between 111 percent and 159 percent under the AfCFTA and the Inflows of FDI attracted by the AfCFTA would bring jobs and expertise, build local capacity, and forge connections that can help African companies join regional and global value chains.

One interesting aspect of the report is the estimation that AfCFTA can bring higher-paid, better-quality jobs, with women seeing the biggest wage gains. Wages would rise by 11.2 percent for women and 9.8 percent for men by 2035. This is indeed commendable.

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The report further states that If AfCFTA’s goals are fully realized, 50 million people could escape extreme poverty by 2035, and real income could rise by 9 percent. It also opines that under deep integration, Africa’s exports to the rest of the world would go up by 32 percent by 2035, and intra-African exports would grow by 109 percent, led by manufactured goods.

AfCFTA, Nigeria, and the Nigerian startup ecosystem

On November 11th, 2020, the Federal Executive Council ratified Nigeria’s membership in the African Continental Free Trade Area (AfCFTA). Nigeria occupies Africa’s greatest economy and population, with a GDP of over $445bn and a population of over 200 million people making it Africa’s largest market.

It is expected that Nigeria’s membership will provide enhanced economic opportunities for collaborative action between Nigerian Businesses and their counterparts across Africa, thereby allowing Nigerian entrepreneurs and Startup companies to do business across the region.

Due to the size of the African market, Nigerian startups are given a platform to expand their production and penetrate other African markets. This will in the long run boost productivity, and job creation, and reduce poverty.

Another very interesting aspect of the AfCFTA is the introduction of the joint production enterprise. The agreement promotes specialization and industrialization by making it easier to import raw materials from one African country with limited production capacity to another country equipped with an enhanced production capacity. Wherever the pendulum swings, Nigerian businesses would benefit from the joint production enterprise initiative.

With AfCFTA in place, Nigerian businesses will also have access to a broader market, which will help them expand internationally and scale up their businesses.

An important benefit of the AfCFTA to Nigerian startups is its ability to help attract international investments and venture capital from developed economies. The math is simple, access to a larger market makes the Startup more viable and increases its growth projection and profitability significantly and this is what drives Foreign Direct investment.

The development of a centralized payment and settlement infrastructure to support trade is another positive product of the AfCFTA that Nigerian Startups can plug into. Led by the Africa Export-Import Bank (Afreximbank) in partnership with the AfCFTA Secretariat, the Pan-African Payment and Settlement System (PAPSS) is set to facilitate the smooth operation of a continent-wide marketplace by helping businesses across Africa enjoy the benefit of receiving and making payments instantly.

PAPSS will increase trust and trade volumes, and free up time previously lost while waiting to confirm payments. With PAPSS, payment facilitators will be able to make secure and instant payments on behalf of their customers and this also provides a profitable avenue for fintech startups in Nigeria to help Nigerian businesses benefit optimally by leveraging on the opportunities created by the payment system.

To ensure smooth operations, the AfCFTA also has a Dispute Settlement Mechanism in place which provide for mediated consultations between disputing parties, this will significantly reduce the cost of setting legal machinery in motion to resolve trade disputes.

AfCFTA, the Nigerian startup bill, and the startup ecosystem
As earlier reiterated, AfCFTA will allow Nigerian companies to enter new markets. This will expand their customer base and lead to the creation of innovative new products and services, making an investment in innovation viable. This is why the Nigerian Startup Bill (NSB) recently passed by the National Assembly and awaiting Presidential Assent couldn’t have come at a better time.

The NSB provides a unique and bespoke legal and institutional framework for the development of startups in Nigeria. It is geared toward providing an enabling environment for the development of Startups in Nigeria, fostering the growth of technology-related talents, and positioning the Nigeria startup ecosystem as the leading digital technology hub in Africa.

The reason for the above conclusion is not farfetched because the NSB as the law would decisively resolve the regulatory, financial, and structural constraints that have plagued the Nigerian Startup ecosystem over the years by creating an enabling environment and putting in place mechanisms that allow them to thrive.

With support from the NSB which is Nigeria’s first all-inclusive Startup legislation, Startups in Nigeria will not just receive the relevant regulatory buffer they need, but will also be adequately equipped to compete meaningfully in the single African market and lead the pace in innovation and digitalization of products and services.

In essence the AfCFTA Agreement and the Startup Bill both provide a dynamic combination for growth and expansion of the Nigerian Startup ecosystem as they both seek to enable increased productive capacity geared toward enabling innovation, technology, and entrepreneurial development.

Conclusion

Although the implementation of the AFCFTA still suffers several teething challenges spanning from difficulty in harmonizing Africa’s diverse economies due to their differences in size, levels of economic growth, political issues, and diversification, the benefits of the AfCFTA far outweigh the challenges of its implementation.

Let me end this piece with a strong statement from H.E. Wamkele Mene Secretary General of the AfCFTA Secretariat “The AfCFTA sends a strong signal to the international investor community that Africa is open for business, based on a single rule-book for trade and investment.”

AfCFTA will be immensely beneficial to the Nigerian startup ecosystem, but to see the benefits crystalize, a pragmatic collaboration between all players in the ecosystem is essential.

OMORUYI EDOIGIAWERIE is the Founder and Lead Partner at Edoigiawerie & Company LP, a full-service law firm offering bespoke legal services with a focus on startups, and established businesses and upscale private clients in Nigeria. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Our firm can be reached by email at [email protected]

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