Category Archives: Trade

Time for Hailemariam to lead

By Rafiq Raji, PhD

With an economy set to grow by more than 7 percent over the next few years – after about 10 percent on average over the past five, Ethiopia is a bright spot on a continent beset by stagnation as commodity prices remain tepid. Its growing success in replicating China’s manufacture-for-export model is a source of hope for peers and partners who desire an Africa that adds more value to its resources. Cheap labour, ample power generation capacity in view, and generous investment incentives are major attractions. Still, much of what Ethiopia has been able to achieve can be traced to its stable polity, held so by an autocratic leadership that has little tolerance for the slightest dissent. Erstwhile forceful leader, Meles Zenawi, was able to hold things together, because of his credentials. He led the rebellion that freed his countrymen from the much loathed Derg military regime. Under a more genteel leader, Hailemariam Desalegn, that model has become increasingly tested. Most recently, albeit intermittently hitherto, an uprising by the Oromo and Amhara tribes – about two-thirds of the population – over land and basic human rights threatens to unravel the country’s economic miracle. It need not be so. The most recent casaulties of the face-off with authorities are more than 50, adding to about 400 believed to have been killed since 2015 under similar circumstances. About 40,000 jobs are now at risk, after protesters attacked foreign-owned establishments. For Ethiopia’s economic success to continue, the politics can no longer be ignored. Room has to be made for the quite diverse polity. Mr Hailemariam has a chance to do this. But to succeed, he would need to be his own man.

Address the concerns
The Oromo and Amhara peoples feel marginalised by the ruling minority Tigray tribe, about 7 percent of the population, which dominates the government and military. The authorities have met their agitations with brute force. This approach worked in the past, on the surface at least. Not this time: this recent unrest was triggered precisely because of the authorities’ heavyhandedness to what are widely believed to be legitimate concerns. The troubles this time could be potentially more damaging than past ones: foreign investors are being targeted. Lingering terrorist threats from neighbours are daunting enough; add unrest by a majority of the population, and you have a combustible mix. And the protests are growing nationwide; these are not isolated and distant pockets of dissatisfaction. It is widespread. And they could spread even more. Solution then? Address the concerns. The Oromo want more self-determination. The Amhara likewise. Authorities might be quick to point out that the country operates a republic of semi-independent states, with enormous leeway guaranteed them in the Constitution, including the right to secede. That is not the case in reality. There needs to be more inclusion. A devolution of actual powers to the regions might be a good start.

Allow more room for dissent and political expression
It was always going to be a huge task for Mr Hailemariam to fill the shoes of his larger than life predecessor – Mr Zenawi had a force of personality that is palpably missing in his successor. Already perceived to be weak, he likely fears those views could become entrenched if the current unrest is treated with kid gloves. Still, Mr Hailemariam has an opportunity here. It is in time of crisis that leaders often emerge; tested at least, in a manner that cements their authority to the point where they are able to make bolder moves. The longer the Oromo and Amhara protests and deaths continue at the hands of the security forces, the more hardened the protesters would get. And now they may have caught on to the one thing that would get the attention of the ruling elite: targeting foreign investors. If there is anything that has made the autocratic leadership tolerable, it is the veneer of stability it has engendered, the type investors crave. They have shown that confidence with their pockets, pouring money into manufacturing and agriculture. Ethiopia has the only other light railway mass transit system in sub-Saharan Africa outside of South Africa. And only just recently, it opened a Chinese-built railway to Djibouti, whose seaport it relies on. Its development-before-democracy paradigm faces its toughest test yet. Just as foreign investment gains have come about by the authorities’ strong grip, their reluctance to adopt a more democratic approach may be what unravels them. And frankly, a desire for equity by a genuinely aggrieved people is not farfetched. Land sold to foreign investors should be well compensated for. Locals should be given greater consideration in employment. And there should be a preference for dialogue over coercion. The Oromo and Amhara are too numerous and determined to be put to rest by force. The authorities must engage them and find a solution that is acceptable within the bounds of reason.

Tough love by powers could help
Democratic reforms would be easier under Mr Hailemariam. But to fend off likely resistance from the Tigray elite that dominates the ruling Ethiopian People’s Revolutionary Democratic Front (EPRDF), his hand would need to be strengthened. He is not Tigray. Neither is he an Ethiopian orthodox christian. World powers have leverage: about $3 billion in aid. The United States has already raised significant concerns. Together with others – German chancellor Angela Merkel visits this week, they should engage the leadership, making the point that the protests provide a unique opportunity to finally embark on much needed democratic reforms. The Oromo and Amhara are likely to be less agitated if they believe they are able to participate in the democratic process. Not the charade midwifed by the authorities hitherto: how is it that not a single seat in parliament is occupied by an opposition party? Ms Merkel has refused an invitation to address the ‘lawmakers.’ She plans to speak to opposition parties though. Fact is, it is when people feel stifled and find no means to exert their opinions that they resort to insurrection. True, the minority Tigray worry if they did that, they could be overwhelmed. That is often not the case. And even so, they might have little choice now that more than half of the population has had enough. And in this age of instant news and social media, it would be foolhardy for the authorities to think that they could quell yet again another uprising with force. A state of emergency has been declared. Sadly, the authorities may yet learn a lesson.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz. http://www.businessdayonline.com/time-for-hailemariam-to-lead/

What is Japan’s African game?

By Rafiq Raji, PhD

The 6th Tokyo International Conference on African Development Summit (TICADVI), held on 27-28 August in Nairobi, Kenya, has come and gone. But what did it achieve? Some US$30 billion in aid and investments over the next three years were promised, half of what China pledged late last year at its similarly themed get-together, the Forum on China-Africa Cooperation (FOCAC); also its sixth meeting then. Some 73 memoranda of understanding were also signed, a lot of which were related to infrastructure, power generation especially. Others were in the health, education and expectedly, oil and gas sectors. A friend who attended the summit was particularly excited about some of the products on display at the exhibition along the sidelines of the event, like pay-as-you-go solar power, supplements for maize porridge, and so on.

Like China, Japan is involved in quite a few infrastructure projects in various African countries, albeit to a lesser degree. And Japanese companies already do quite a great deal of business in most of these. Chinese companies increasingly so as well. In sum though, China’s engagement with the continent is more intense and widespread. The Japanese make up for this in other ways. Japanese brands evoke feelings of quality, brilliance and efficiency. From electronics to cars, they are quite ubiquitous across the continent. Despite China’s growing closeness, similar sentiments are barely associated with its brands, if at all. Chinese goods are still considered inferior. Surprisingly, their cheapness barely appeals commensurately. Even so, China’s experience and relatively ample resources may be more germane to African needs. No matter. Both are willing. Sand in the wheels? Both are staunch rivals, albeit they feign some level of maturity in front of their African ‘friends’ – an official Chinese delegation attended TICADVI.

They all want the same thing
When there are numerous suitors for a potential bride, it is often ironic that blessings do not always follow. The one being sought after might overestimate her value, dither, or hope for better opportunities that may never come. Africa is one of many frontiers of interest to these world powers. So for Japan and China, longstanding rivals, whose volatile relationship is writ large by a territorial dispute over eight islands in the East China Sea, Africa provides a vast field for them to spar. Even so, they both really want the same thing: influence. Like China, Japan is also interested in the continent’s mineral resources. Resource-poor Japan seeks fuel for its energy needs, as its nuclear-dominated system have been mostly shut down since the 2011 Fukushima mishap. Both are also counting on African countries to pursue varied agendas at the United Nations and other multilateral institutions. Like the Europeans and Americans before them, Japan and China are also building military bases on the continent. Simply put, they are pursuing their own interests. Knowing this could be a blessing for African countries, whose negotiating positions are enhanced as a result. The temptation to pitch one against the other should be resisted, however. Instead, African countries should articulate what their development needs are and then go with the partner that best ensures their fulfilment. Japan is not offering as much money as China is. But it has one advantage over the latter. It is more technologically advanced. Its projects are executed with the highest standards and are delivered on time. And they last. China, on the other hand, knows only too well how steep the road to development can be. It is likely a better teacher on how to traverse that road than Japan could ever be at the moment. There need not be a dilemma in any case. Both can help.

Accept only the help that liberates you
As the Japanese prime minister, Shinzo Abe, was engaged in his charm offensive – the TICAD conference was being held on African soil for the first time – Chinese officials were quick to deride his efforts. It was almost the same way the Americans were all too quick to point out how the Chinese then newfound interest in Africa was going to be similarly or more exploitative. Truth is, these supposed development partners go into these relationships often because they already see more advantages for themselves. Or at least, they see the costs and benefits as evenly balanced – not in the African case: whether the partner is China, Japan, America or Europe, the advantages are tilted towards the other side. And the toast is always the same: we want to help. That is all very well. What African countries need the most, in addition to infrastructure, is technology and skills transfer. In doing this though, the situation can no longer be as it is currently, whereby these so-called partners set up businesses on the continent, bring their own staff, integrate little and barely mask their disdain. The scorecards cannot continue to be about how many billions of dollars our partners’ supposed benevolence allowed for each time. Thankfully, more energy at these summits is now being devoted towards changing this lopsided paradigm.

Also published in my BusinessDay Nigeria newspaper back-page column (Tuesdays). See link viz. http://www.businessdayonline.com/en/what-is-japans-african-game/ 

Volatile environments test the resilience of firms: The experience of businesses in #Nigeria during the 2015-16 FX scarcity

By Rafiq Raji, PhD

Kindly click on the link below for the article.

https://ntusbfcas.com/african-business-insights/content/volatile-environments-test-the-resilience-of-firms-the-experience-of-businesses-in-nigeria-during-the-2015-16-fx-scarcity  

Nigeria-China relations may work this time

By Rafiq Raji, PhD

This past week, Nigeria’s president Muhammadu Buhari was in China. He was given full honours by the Chinese government. Nigerian authorities are hailing the trip as a huge success. They point to the more than US$6 billion worth of investments agreed between Nigerian and Chinese businesses – earlier statements credited to Nigeria’s foreign minister, Mr Geoffrey Onyeama, by Reuters suggested a US$6 billion infrastructure loan was agreed, later debunked by President Buhari’s spokesman. In fairness to Mr Onyeama, he did not say a new agreement was signed. Quoting him in the 12 April 2016 Reuters article: “It won’t need an agreement to be signed; it is just to identify the projects and we access it.” With more clarity on what actually took place, it is now known that what President Buhari did was to re-negotiate loans already agreed with the Chinese by previous Nigerian administrations, especially that of President Goodluck Jonathan. Since that is the case, it seems the loans might actually be more than US$6 billion. As I recall in November 2014 amid much fanfare, China Railway Construction Corporation Limited signed a US$12 billion contract for the 1,402-kilometre Lagos-Calabar coastal railway – the line would be a significant boost for the Niger-Delta and Southeastern regions of Nigeria and is currently a source of divisions in the Nigerian legislature: southern lawmakers accuse their northern colleagues of deliberately removing the project from the 2016 budget, putting President Buhari in a bind somewhat as he reportedly threatened to withhold his assent of the budget until the railway project is put back into the bill – China’s largest single overseas contract at the time, probably still is. If you assume the typical 85 percent Chinese funding format for Sino-Nigerian infrastructure projects, we could say the loans President Buhari successfully re-negotiated might actually be at least US$10 billion for the Lagos-Calabar railway modernization project alone. And there are others. There is the US$8.3 billion Lagos-Kano railway modernization project (contract was initially signed in 2006); Chinese funding commitment using the same ratio would be about US$7 billion. Although some of the funding for these projects were provided by the Chinese government to earlier Nigerian administrations – and diverted to other means by Nigerian authorities to the dismay of their Chinese counterparts – there could be about US$13 billion (taking a median figure) in re-negotiated debt obligations for the Nigerian side. It is probably why Nigerian authorities might not want too much focus on the loans because they are likely more than has been reported. While I worry about Nigeria’s rising debt burden, what worries me more is that most of the borrowings usually end up being spent wastefully on recurrent expenditure. Only recently, Nigeria’s top scribe revealed US$3 billion (600 billion naira) is borrowed monthly by the government to pay wages, based on media reports. Still, if indeed the funds – Chinese or otherwise – are actually used for the designated infrastructure projects and are completed, it would not be overly concerning. Although Nigerian authorities have not revealed whether the local content of the infrastructure projects was re-negotiated as well, it is likely Chinese companies would still supply the labour, equipment and materials for them. Notwithstanding, if Nigeria gets the infrastructure in the end, it would be just as well.

A currency swap agreement with the Industrial and Commercial Bank of China (ICBC) – that country’s largest bank – was also signed by Nigeria’s central bank during the trip; and has since been a source of controversy of some sorts. Most initially wondered why the agreement was not with the Chinese central bank, the People’s Bank of China (PBOC). News making the rounds is that both central banks actually agreed in principle on a currency swap – potential size of US$4-5 billion – with modalities still being negotiated. It is being reported in the media that the Central Bank of Nigeria (CBN) actually proposed a US$10 billion currency swap. A demurral by the Chinese is why about half of that is being considered as more likely. Still, it would be a relatively good outcome. As there are potential downsides, its significance should not be exaggerated however. A currency swap is a two-way instrument. Just like Nigerians would be able to buy Chinese goods using the naira – as opposed to first purchasing the US dollar and then converting to Chinese Yuan – the Chinese would also be able to buy Nigerian goods in naira. And what do the Chinese buy from Nigeria? Crude oil mostly. And since the naira is overvalued, Nigeria would lose significant value for that commodity in that case. That is in addition to the valuable US dollars the country would lose if crude oil sales come under the arrangement. Also bear in mind; the Chinese would be in possession of the US dollar equivalent of the Chinese Yuan Nigeria keeps with the PBOC as foreign exchange reserves. There are other concerns. With the swap, Nigeria’s net position would likely more often be negative. How so? China sells at least four times as much goods to Nigeria, mostly manufactures. And if Nigeria is looking to diversify its economy, it is not in its best interest to make it easier to import Chinese goods. Probably to put some modicum of dignity on the fact that Nigeria was actually in China with a begging bowl, the Nigerian president kept harping on the trade imbalance in favour of China – China accounts for more than 80 percent of its total trade with Nigeria. But is that the fault of the Chinese? You correct a trade imbalance by first building your own industries or say only importing as much as you export. Whereas China’s exports to Nigeria are largely manufactures – machinery, equipment, processed goods, etc. – and very diversified, more than 80 percent of China’s imports from Nigeria are crude oil and gas. In 2013 – most recent annual data available from the National Bureau of Statistics of China – China’s exports to Nigeria was US$12 billion (88 percent of total trade) and its imports were US$ 1.6 billion (12 percent of total trade), putting its total trade with Nigeria in that year at US$13.6 billion. Nigerian authorities put total 2015 trade with China at US$14.9 billion. In two columns in February 2016 – “Africa should renegotiate EPAs for manufactures’ trade parity” – I make a case for manufactures’ trade parity as a model for correcting the significant trade imbalances that exists between African countries and their western and eastern trade partners. So is there any advantage to the swap agreement? Oh yes. Nigerian banks are saved some hassle. And Lagos would effectively be the West African hub for Renminbi transactions. But in light of the aforementioned concerns, the CBN has to ensure that Nigerians are protected as it negotiates the terms.

So what does China get in return? China seeks influence primarily. In any case, it is not really giving much away. On 8 April 2016, acting on instructions from Chinese authorities, Kenya forcefully repatriated eight Taiwanese – charged and acquitted by a Kenyan court in a cyber crime case – to China, not Taiwan. It probably had no choice in the matter. Apart from the many Kenyan infrastructure projects being funded by China, Kenya is also currently negotiating a US$600 million Chinese loan. Nonetheless, the relationship with China is an excellent opportunity. China does not see the relationship as competitive. What Nigeria – and indeed Africa at large – could gain from China is what China is giving up. There is an opportunity in labour-intensive manufacturing as China ascends to advanced stuff. Still, power and infrastructure deficits are constraints. Even so, Nigeria could use special economic zones with designated infrastructure assets to get around them. Progress on this front has been slow, however. More importantly, the real potential gain from the China-Nigeria relationship is if it engenders the transfer of skills and technology from China. This is possible. China is helping Ethiopia in diverse ways in this regard – see my column on 22 December 2015: “East African countries seem to have cracked the Chinese code.” This should also be Nigeria’s emphasis. Fundamentally, China would be happy to help if it finds a Nigerian side that espouses some of the values it holds dear. Integrity and honesty are few examples. At this point, it is important to point out that there are aspects of Chinese culture that are not entirely pleasant. Racism is entrenched in Chinese culture and is at the root of its unpleasant labour practices in Nigeria and other African countries. Still, if the Chinese find honest Nigerian partners who fulfill their promises, there is no limit to the potential gains for the Nigerian side. In this Nigerian president at least, they may have found one such partner. That is also the impression one senses from the Chinese side.

Also published in my BusinessDay Nigeria newspaper back-page column. See link viz. http://businessdayonline.com/2016/04/nigeria-china-relations-may-work-this-time/

#Zuhari and the Nigeria-South Africa relationship

By Rafiq Raji, PhD

President Jacob Zuma is visiting Nigeria this week. The trip would probably be welcome relief for the South African leader. Not that his troubles back home would not follow his trail. The visit is probably just as well for his Nigerian counterpart, who has been itinerant of late. See, they are coming; one could almost hear him say chidingly. There are also indications a long overdue economic summit is planned for this week by Nigerian authorities. President Buhari is facing increasing criticisms for his not so deft handling of the economy thus far. Apart from this commonality with the South African leader, the pair – ‘Zuhari’ – could not be any more different. Still, they would probably get along. Both men are old-fashioned. They probably also have mutual respect for one another. Corporate SA dearly hopes so, MTN above all. The South African telecommunications company is trying to reduce a fine imposed on it by Nigerian authorities for refusing to disconnect unregistered customers on its network. Based on its agreement with the Nigerian government, MTN is liable. However, it probably did not count on an administration so bold. The company’s attitude has not been helpful either. Most of the steps the South African company has taken hitherto suggest a belief it could get away with its infraction. Were Mr. Buhari not president, it probably could. Unfortunately, these are hard times for the Nigerian government. I have been asked – and have read commentary – about whether the MTN issue would not discourage potential investors. It never occurred to me that investors would be discouraged from investing in a country because its authorities might just enforce signed agreements. Oh, wait a minute. Most investors do not think those agreements matter. Well, I guess they know better now. By its actions, MTN trifled with Nigeria’s national security. And the company’s attitude since the fine by the Nigerian telecommunications regulator seems unremorseful to me. To think now MTN recognizes it should list on the Nigerian Stock Exchange. If it had done so much earlier, Nigerian authorities – and indeed Nigerians – would probably have been much more sympathetic.

As it would set a bad precedent, I would be surprised if President Buhari interferes in the MTN matter. Otherwise, the same arguments could be raised for similar flexibility on behalf of oil companies and former Nigerian officials being investigated for corruptly enriching themselves. President Zuma would be wise not to let the MTN issue dominate his discussions with the Nigerian president. They should instead focus on the broader Nigeria-South Africa relationship. ‘Zuhari’ should seek ways to ease the recurrent but unnecessary tensions and rivalry between the two African heavyweights. Sometimes onerous visa conditions for Nigerians travelling to South Africa and xenophobic attacks on Nigerian residents are examples. There have been worries that perhaps Nigerian authorities are targeting South African companies. I do not think so. The MTN issue is an unusual case. Some investors have also been wondering why a number of South African companies have decided to divest from their Nigerian operations. My view is that these companies did not seek or get the best advice before embarking on their Nigerian ventures. Also, I think these South African companies underestimated the taste and intelligence of the average Nigerian consumer. Woolworth and Truworth did not succeed in Nigeria because Nigerians simply did not like their clothes, in my view. The price tags for their clothes were not commensurate with their quality. Brand recognition was probably also a factor. The average Nigerian – even those with pennies – likes to show off. Even the bus conductor would not be caught dead wearing clothing labels that would not be appreciated by his peers. Nigerians buy clothes not just for the quality. They want respect. The South African clothing retailers would probably have succeeded if their goods were cheaper. The Nigerian consumer probably thought a much valuable brand could be had at the same prices on offer at either of Woolworth or Truworth. At least, I thought so. For instance, British clothier, TM Lewin has been doing quite well; albeit some Nigerians still prefer to go to their London stores just so they could say how much in British pounds they spent shopping.

Not all South African companies in Nigeria have had bad experiences, however. Food retailer, Shoprite, is doing well, albeit 2015 could have been a better year. And the company has made public its intention to brave the current challenging business environment. Like other businesses in the country, it has been hit hard by scarcity of foreign exchange. However, it is probably succeeding because it has adapted faster. It sells more Nigerian food brands, meaning it buys locally; and its prices are competitive. The South African food retailer began to gain increased custom when Nigerians began to realize its published prices were sometimes lower than what obtained in the open market. So Nigerians thought why go brave the scorching heat in sometimes stuffy markets when you could go to an air-conditioned store and still save money. What Shoprite did was to put a premium on the not so common goods to make up for the meager margins on the fast-moving items. In the case of South African milk producer, Clover, it probably did not know not many Nigerians drink fresh milk; not even those that can afford it. Apart from quick spoilage due to power cuts, most Nigerians have grown accustomed to certain evaporated or powdered milk brands. It probably befuddles foreigners (and some Nigerians) that northern Nigerians – even the humble ones – for instance would only take evaporated liquid (not powdered) milk with their tea. So a Clover needed to target that section of the country to succeed. But then it would still have faced stiff competition from more established milk brands with history and products that actually taste better. Proper research would probably have revealed the size of the Nigerian fresh milk market might not even be big enough to warrant their move in the first place. So, it is probably just as well that the foreign currency crisis has provided Clover with a good excuse to exit the country. In a nutshell, South African companies need to adapt to the tastes of the Nigerian consumer to succeed. If what you are selling are fast-moving consumer goods, price is everything. If your pitch is quality, you have your work cut out for you because Nigerians set a very high bar for that. Not knowing this is probably what caused the failure of the South African consumer goods companies that have left. Nonetheless, there has been some positive collaboration between businesses from both countries. Despite its recent troubles, MTN has done exceedingly well in Nigeria; when it took care to adapt to the environment, that is. Standard Bank has also had a good experience in Nigeria, never mind the recent accounting issue. The South African bank has probably succeeded because of its choice of Nigerian partners, who are well grounded and connected. Other South African companies should probably take lessons from them.

Also published in my back-page column at BusinessDay Nigeria newspaper. See link viz. http://businessdayonline.com/2016/03/zuhari-and-the-nigeria-south-africa-relationship/

Africa should renegotiate EPAs for manufactures’ trade parity (1)

By Rafiq Raji, PhD

Published by BusinessDay Nigeria Newspaper on 09 Feb 2016. See link viz. http://businessdayonline.com/2016/02/africa-should-renegotiate-epas-for-manufactures-trade-parity-1/

African countries should only allow duty-free manufactured goods’ imports for the same amount of manufactured goods that they export. Customs duties should apply to trade in excess of this threshold. Reciprocity by Africa’s trading partners would be just as well. Ultimately, this would incentivize local production as Africa’s more industrialized trading partners realize the exports market for their manufactured goods would be dependent on the destined African country’s industrial progress. In tandem, African authorities would also need to ensure that local alternatives are cheaper and readily available. In my view, this is the simple but necessary change that African, Caribbean and Pacific (ACP) countries must insist be made to the Economic Partnership Agreements (EPAs) between them and the European Union (EU). My focus would be on the EPA between the EU and the West African regional bloc. Nigeria is yet to sign the most recently revised EPA. So, it still has a chance to secure concessions from the EU. In his speech to the EU parliament on 3 February 2016, Nigeria’s President Muhammadu Buhari highlighted concerns of local manufacturers about the agreement. These concerns were initially raised during the administration of President Goodluck Jonathan. On 23 June 2014, I attended an event in London hosted by the Financial Times and the Nigerian Customs Service themed “Business in Nigeria: Trade facilitation for Africa’s business hub.” When asked about the status of the EPA negotiations at the event, the then Nigerian trade and industry minister, Mr Olusegun Aganga, said Nigeria would not sign an EPA that potentially harms its industrial development. More than two weeks after, Heads of State of member countries of the Economic Community of West African States (ECOWAS) endorsed the revised EPA that – in the words of the communiqué issued – “has taken due account of the technical concerns raised.” Although the language of the communiqué was somewhat vague, I assumed that perhaps ECOWAS had succeeded in securing concessions on the concerns of its member countries. Not until the Nigerian legislature brought the matter to fore in January 2016 did I realize Nigeria’s concerns had not been addressed. At this time, a committee of Nigeria’s lower house of parliament is reviewing the EPA and should present its findings before the end of February. There is tremendous pressure on Nigerian authorities to sign the EPA. They should not. Not yet.

The Cotonou Agreement reached in February 2000 is actually a marked improvement from the earlier Lome and Yaounde Conventions. The EPA in question is the third revision of the Cotonou Agreement. Earlier revisions were in 2005 and 2010. There is a consensus about the failure of these agreements to achieve their development objectives. The European Commission admitted as much, saying EPAs “failed to boost local economies and stimulate growth in African, Caribbean and Pacific (ACP) countries.” During the period of the four Lome Conventions – which subsisted between 1975 and 2000, exports to the EU from ACP countries actually declined. Between 1978-2002, ACP exports to the EU declined from 7 percent to 3 percent. There has not been much improvement since the Cotonou Agreement either, as trade in manufactures remains significantly tilted in favour of the EU. Not that this is entirely surprising. Fifteen years after the Cotonou Agreement, only 15.5 percent of total ACP exports to the EU were manufactured goods. In the same year, 69 percent of total EU exports to ACP countries were manufactures. The manufactures’ trade deficit is much more staggering for the ECOWAS region. In 2014, manufactures accounted for 3.3 percent of total exports to the EU by the ECOWAS region. Goods manufactured in the EU were almost 50% of its total exports to West Africa in the same year. The revised EPAs – that would subsist for at least another 5 years (2015-19) before they can be revised again – are supposedly aimed at reversing this trend. Still, reservations that these new EPAs would achieve their stated goals of trade development, sustainable growth and poverty reduction remain. This is because the revised EPAs still have provisions that are potentially harmful to local industries in ACP countries. A major issue is the very short transitional period – five years in the West African case – before European goods would enjoy free movement in subject countries. It does not require a stroke of genius to know that these arrangements would be detrimental to Africa’s industrialization.

Why did Nigerian authorities wait till after the negotiations to raise their concerns about the revised EPA? Negotiations between the EU and the West African regional bloc were closed on 6 February 2014 and ECOWAS Heads of State endorsed it on 10 July 2014. I have always wondered about the recurring incidence of sub-optimal negotiation outcomes by African countries. At the Financial Times Africa Summit in October 2014, I put these concerns to Dr. Donald Kabureka – who was then the President of the African Development Bank (AfDB) and keynote speaker at the event – wondering if he thought for instance that Ghana’s petroleum fiscal regime was optimal. My question was more pointed. Did it make sense that Ghana was borrowing money abroad at about the same time that it was already producing crude oil? Ghana’s Jubilee oil field started production in late 2010. Unlike most crude oil producers who have Production Sharing Agreements (PSAs) with their partners, Ghana opted for the less lucrative Royalty Tax System (RTS) for its Jubilee oil field. Much more worrying is the fact that the Ghana National Petroleum Corporation has only 13.64 percent equity in the Jubilee oil field – the Nigerian National Petroleum Corporation has a 60 percent ownership in five of its six joint ventures with foreign oil companies. After much criticism, however, Ghanaian authorities sought better terms in subsequent contracts. A paper published in the Ghana Policy Journal in December 2010 – “An evaluation of Ghana’s petroleum fiscal regime” – authored by Joe Amoako-Tuffour and Joyce Owusu-Ayim, shows only 38-50 percent of crude oil revenue accrued to the Ghanaian government, calculated based on $65 per barrel of oil – the average brent crude oil price in 2011-14 was $108. When compared with Nigeria’s 64-70 percent, Angola’s 64 percent and Cameroon’s 74-78 percent, it is sub-optimal. Not surprisingly, Dr. Kabureka tactfully avoided taking on Ghana specifically but highlighted how through the African Legal Support Facility (ALSF), the AfDB assists African governments to secure optimal outcomes from negotiations with partners. I do not know if the ALSF was involved in the Ghanaian oil negotiations. However, trade negotiations do not seem to be a priority area for the ALSF, based on its literature. As most trade-related technical assistance (TRTA) is sponsored by developed countries whose interests it serve that such capacity remain limited in the subject countries, the ALSF should probably prioritize trade-related capacity building (TRCB) and TRTA as well. The concerns raised by the Nigerian government on the EPA – and some ACP countries hitherto – is evidence of limited negotiating capacity. Still, even when a government fails to negotiate properly, it should not sign a document if it later realizes its error. It would be most unfortunate if the Nigerian government signs the EPA in its current form.

Also published on my company’s website on 10 Feb 2016. See link viz. http://macroafricaintelligence.com/2016/02/10/thematic-africa-should-renegotiate-epas-for-manufactures-trade-parity-1/ 

Africa’s trade with the developed world: Reflecting on trade preference schemes (Part II)

By Rafiq Raji

ssa us exportsssa eu exports

Sub-Saharan Africa (SSA) exports to the United States (US) has been declining since 2011. At USD40bn in 2013, it was a 50% drop from three years earlier. It is set to decline further in 2014. This is because natural resources (especially crude oil) dominated SSA exports hitherto. As increasing shale gas production brings the US closer to becoming a net exporter of crude oil, this is set to change. Consequently, SSA crude oil producers have sought new customers in Asia. In July 2014, Nigeria did not ship a single barrel of crude oil to the US. This is the beginning of a trend that is likely to be pervasive amongst SSA crude oil producers. This new crude oil market dynamics make it more likely the declining trend in SSA-US exports would worsen in 2014-15. The resource-rich SSA countries of Angola, Nigeria and South Africa have consistently accounted for at least three-quarters of SSA exports to the US since 2005. The same resource-rich SSA countries account for a significant portion (64%) of the sub-continent’s exports to the European Union (EU). However, the structure is relatively more diversified.

In light of the aforementioned, it seems paradoxical that one would adjudge AGOA a relative success. That potential confusion is defused when you “clean up” (discount crude oil and other natural resources) SSA exports to the US. Otherwise, the trade structure is not dissimilar from that of the sub-continent with other regions. According to US International Trade Administration (ITA) data, non-fuel AGOA US imports was USD4.9bn (18% of total AGOA imports of USD26.8bn) in 2013. The positive trend in textile and apparel exports to the US is why AGOA is praised. In 2013 for instance, SSA textiles and apparel exports to the US increased by 11%. These are the types of exports that generate jobs and contribute to growth. It is trends like this that the performance of trade preference schemes should be judged by. So although US-SSA trade has been declining, the positive trend in light manufacturing exports (textiles and apparels) point to the effectiveness of AGOA. In contrast, that type progress is not discernible from EU-SSA trade. For instance, manufactures constituted just 3.7% of 2013 EU imports from West Africa. More progress is seen in Eastern & Southern Africa (ESA), with manufactures constituting 28% of 2013 EU imports. In SADC, it was 32%. So it varies.

Views are mine and not that of any institution(s) I may be affiliated with.

Africa’s trade with the developed world: Reflecting on trade preference schemes (Part I)

By Rafiq Raji

SSA Exports to EU and US

Views on the developed world’s trade preference schemes with African countries are mixed. The European Union (EU) Economic Partnership Agreements (EPAs) have “failed to boost local economies and stimulate growth in African, Caribbean and Pacific (ACP) countries.”[1] Between 1978-2002, ACP exports to the EU actually declined from 7% to 3%.[2] Re-negotiated EPAs, which technically come into effect on October 1, 2014, are supposedly aimed at changing this. Reservations that they would achieve their stated goals of trade development, sustainable growth and poverty reduction remain. Also, the United States’ trade preference scheme with African countries, the African Growth and Opportunity Act (AGOA IV), which expires in September 2015 (if it is not renewed by the US Congress), enters its final year on October 1, 2014 as well. The consensus view is that AGOA has been relatively successful. This is principally because of its more flexible Rules of Origin (ROO).

Duty-free access for Africa’s exports supposedly should make its goods cost competitive relative to say, Asian ones. Tariffs and duties that would have been paid by African exporters had there been no trade preferences also add to capital for incremental investment. With predictable demand for its exports consequently, these schemes are expected to help generate employment and contribute to growth. That has largely not been the case because some of the quality specifications in these agreements are beyond the technological reach of most African countries. Flexible ROO mitigate this by allowing subject countries to import intermediate inputs and yet still enjoy preferential market access. The re-negotiated EPAs address this hitherto rigid ROO requirement that has been argued to be responsible for the failure of the Yaounde and Lome Conventions (1975-2000) to engender increased ACP exports to the EU. For instance, the EU-West Africa EPA will allow subject countries “produce goods for exports to Europe using materials sourced from other countries without losing the benefit of the free access to the EU market.”[3] The devil would be in the fine details of these agreements.

My continuing skepticism about these agreements being in the long-term industrial development interests of African countries pushed me to ask for the views of Dr. Adam Elhiraika of the United Nations Economic Commission for Africa (UNECA) at the launch of UNECA’s 2014 Economic Report on Africa (“Dynamic Industrial Policy in Africa”) on 24 September 2014 at Chatham House in London. It was important to me to hear the views of a respected economist who was also African. He believes the EPAs should be re-negotiated for the same reason. A survey of the literature also points to strong views about the cost-benefit trade-offs of these agreements for Africa’s industrial development. Whether these new ones would finally help the continent grow its industrial base remains to be seen.

Trade preferences spur growth under the following conditions: (1) Easy import of complementary inputs (2) Availability of skills and infrastructure that meet global standards.[4] Africa falls short on both conditions for internal and external reasons. Logistical bottlenecks at its ports and foreign exchange policy constraints constitute major hindrances. Corruption and cronyism are also problems. Imports of complementary inputs need to be tariff- exempt for the final goods to remain cost-competitive. Tariff concessions have instead been used as tools of political patronage by most African countries. So, there is a governance problem that is wholly and entirely African. In regard of a skilled workforce, the continent remains bereft. The continent also continues to run a very large infrastructure deficit. There are other supply-side constraints as well. Some of them are: still relatively lower labour productivity, little or no scale economies, and shallow capital markets. The expected relocation of the more value-adding, employment-generating and growth-driving labour-intensive manufacturing from Asia to Africa has not been forthcoming precisely because of these constraints. This is in spite of a widening wage gap between the two continents. The economic argument is that gains that would be given up when an Asian manufacturer relocates to Africa still remain relatively higher. The reverse has to be the case to induce relocation.

[1] http://www.ec.europa.eu/trade/policy/countries-and-regions/development/economic-partnerships/

[2] http://www.ec.europa.eu/trade/policy/countries-and-regions/development/economic-partnerships/

[3] http://trade.ec.europa.eu/doclib/docs/2014/july/tradoc_152694.pdf

[4] Venables, T. Collier, P. 2007. “Rethinking Trade Preferences: How African can diversify its Exports” The World Economy 30 (2007): 1326-45

What is the status of the EU-Africa EPA?

By Rafiq Raji

eu africa

On 23 June 2014, I attended an event in London hosted by the Financial Times and the Nigerian Customs Service themed “Business in Nigeria: Trade facilitation for Africa’s business hub”. In preparing for my attendance, I looked up Nigeria’s recent trade statistics and doing business indicators. It could be better. Nigeria ranked nine places lower to 147th in the World Bank’s 2014 Doing Business ranking, below the Sub-Saharan Africa (SSA) average ranking of 142nd. The top three SSA countries were South Africa (41st), Botswana (56th), and Ghana (67th). In terms of ease of getting electricity, ease of registering property, ease of paying taxes, and ease of trading across borders, Nigeria ranks lowest in Africa and in some cases was amongst the bottom five. On the positive side, Nigeria ranked highest in SSA at 13th place on ease of getting credit, higher than South Africa. When the audience was finally allowed to ask questions, I put these facts before the Nigerian officials and wondered if they could explain what happened. As far as they were concerned, the World Bank got it wrong. At least that is what I interpreted their responses to be. Doing business in Nigeria remains profitable in spite of these inefficiencies, however. Investors look at Nigerian success stories in the cement and noodles manufacturing industries and think to themselves: where the heck were our heads all this time? But of course, fans of Nigeria wish it would fix the myriad of problems it has. Trading through the country’s ports can be unnerving and an energy shortfall increase production costs for businesses by as much as 40-50% according to some estimates. The Nigerian authorities’ are certainly committed towards increasing the country’s electricity production capacity. Progress remains slow, however.

However, the question I was really looking to ask at the earlier mentioned event is the title of this article. When asked by another participant, the Nigerian trade and industry minister gave an answer that was truly music to my ears. According to him, Nigeria will not sign an Economic Partnership Agreement (EPA) that potentially harms its industrial development. That was in June 2014. A month later, heads of state of member countries of the Economic Community of West African States (ECOWAS) endorsed a negotiated EPA that is the words of the communiqué issued, “has taken due account of the technical concerns raised”. The Cotonou Agreement – the EPA in question – is actually a marked improvement from the Lome and Yaounde Conventions. Exports to the EU from African, Carribean and Pacific Countries (ACP) actually declined during the period of the four Lome Conventions which subsisted between 1975 and 2000. However, the Cotonou Agreement had some provisions that were potentially harmful to local industries on the continent. A major issue was import liberalization, as early as 2015, for some African countries. For obvious reasons, some countries raised objections. The argument for some level of protectionism in the early stages of a country’s industrial development is a strong one. The US and EU continue to protect select markets. As ECOWAS has endorsed the Cotonou Agreement and plans to sign it, I wonder if the West African regional bloc was able to secure concessions from the EU in regard of the technical concerns it earlier raised.

Photo credit: Deutsche Welle

The bottlenecks at Nigeria’s ports are the major constraints on its international trade performance @ftlive #Africa #Nigeria #Trade

By Rafiq Raji

nigeria ports

The Financial Times and the Nigerian Customs Service would today host investors to discuss “Business in Nigeria: Trade facilitation for Africa’s business hub”. In preparing for my attendance, I’ve had cause to take a second look at Nigeria’s recent trade statistics and doing business indicators. They are not encouraging. According to the World Bank’s Doing Business 2014 Report (a survey that compares business regulations for domestic firms in 189 economies), Nigeria ranked nine places lower in 2014 to 147th; worse than the Sub-Saharan Africa (SSA) average ranking of 142. The top three SSA countries are South Africa (41st), Botswana (56th), and Ghana (67th).  In terms of ease of getting electricity, ease of registering property, ease of paying taxes, and ease of trading across borders, Nigeria ranks lowest in Africa and in some cases was amongst the bottom five. On the positive side, Nigeria ranked highest in SSA at 13th place on how easy it is to get credit; higher than South Africa.

In 2013, FDI inflows to Nigeria decreased 20% to USD5.5bn largely because of asset sales by foreign oil companies. That said, Nigeria continues to be an attractive destination for foreign direct investment. On June 9, 2014, the Wall Street Journal (WSJ) quoted the asset manager, Advance Emerging Capital, as saying Nigeria and Kenya would be the two most attractive frontier markets over the next five years. The list of Nigeria’s backers is increasing; in spite of the recently bad press it has been getting. The WSJ also attributes Bank of America Merrill Lynch with favourable investment dispositions to the two countries. Incidentally, the two African stars have recently had to grapple with an increasing spate of terrorism. One may not want to entertain conspiracy theories, but the coincidence is uncanny. The most compelling investment case for Nigeria, however, remains its demographics. After an 8.5% decline in 2011, Nigeria’s exports volume increased by 1.1% in 2012 and likely improved further in 2013 by an estimated 1.7% according to the IMF. This could be better; especially as imports increased by an estimated 8.1% in 2013 after a 10.1% decline in the previous year.

Doing business in Nigeria remains profitable in spite of these inefficiencies, however. Investors look at Nigerian success stories in the cement and noodles manufacturing industries and think to themselves: where the heck were our heads all this time? But of course, fans of Nigeria wish it would fix the myriad of problems it has. Trading through the country’s ports can be unnerving and electricity generation increase production costs by as much as 40-50% according to some estimates. Recent developments in Nigeria point to the authorities’ increasing commitment towards increasing electricity production capacity. Progress remains slow, however. Increased efficiency at the ports is certainly an area that the authorities can record a quick-win if it is indeed committed to facilitating Nigerian trade and making the country Africa’s business hub. There are too many government agencies at Nigerian ports. All the relevant agencies should be integrated into one check-point at the ports. This is easier said than done, however. Most of the agencies at the ports belong to different ministries. It is not likely they would want to give up a lucrative revenue-earning function for efficiency’s sake. What is needed is a Presidential task-force to bring all the various parties together, manage the potential turf issues and persuade the political actors that having an efficient ports system is in the national interest. Otherwise, Nigeria would continue to lose ports business to its neighbouring countries. One certainly hopes the various government functionaries at today’s event in London would tell those who wish Nigeria well – many of whom will be in the audience – how and if they intend to make trading across Nigeria’s borders a little easier.