The Federal Government of Nigeria recently declared five of its international airports free trade zones in order to encourage increased flows of investment and international business activity.9 Although these are not the first zones of Nigerian free trade, this move is expected to further strengthen the government’s diversification campaign with important implications for industrialization.
Importance of airports as free zones
A free trade area is a specific area within a country that is approved for duty-free international trade activities. This implies that, as long as commercial activities remain within the limits of the free trade area, the import, processing, manufacture and export of goods or services are exempt from applicable tariffs such as customs fees. , import and export duties, etc. .10 According to the Nigerian Export Processing Zone Authority, there are 25 active free zones in Nigeria out of a total of 44 designated free zones.11 Free zones enhance the attractiveness of a country to investors given the tariff exemption conditions. attached.
Implications for businesses and investors
Investors and businesses generally benefit from free trade zones through reduced operating costs through tariff exemptions. However, the location of the free trade zone around an airport will give investors the added benefit of better access to the international market. The recent designation of the five international airports as free trade zones will reduce domestic logistics costs for businesses and encourage investment flows into the country. A lower operating cost will encourage economies of scale and promote increased economic activity in and around airports, which in turn will have a positive impact on businesses operating in free zones. In addition, airports, as free zones, will create a diversified transportation system for businesses, which could alleviate Nigeria’s port crisis. Nigeria is grappling with traffic jams at its two main ports, Apapa and Tin Can Island, resulting in several road hazards and traffic jams, especially in Lagos, its commercial capital.12
Expected impact on the economy
The Nigerian government is seeking to attract investors into the economy to support the development of its non-oil sector to reduce the country’s dependence on oil. Nigeria depends on the oil sector for around 50% of its tax revenues, and the sector accounts for around 90% of its total export revenues. The designation of airports as free trade zones is expected to attract foreign direct investment (FDI) to the country. FDI inflows to Nigeria fell 21.21% to $ 2.6 billion in 2020, from $ 3.3 billion in 2019.13 The expected rise in FDI will promote industrialization and facilitate growth in the non-oil sector , which is vital for economic diversification. It will also improve job creation, which will help tackle another big challenge for the Nigerian economy, unemployment. Nigeria’s unemployment rate rose to 33.3% in Q4’20 from 27.1% in Q2’20
In addition, the recent decision supports international business activities in Nigeria, especially exports. This will position Nigeria to benefit from the expected rebound in the global aviation industry after the severe impact of COVID-19. Air transport represented approx. 0.10% of Nigeria’s GDP in 2020 compared to 0.14% in 2019.15 Nigeria will also benefit from an improvement regional trade activities, in particular through the African Continental Free Trade Agreement. The increase in export earnings due to the expansion of export activities will contribute to exchange rate stability and facilitate economic recovery.
Harnessing the benefits of free zones depends heavily on a country’s ability to attract investors. While the tariff exemptions attached to free zones should improve a country’s attractiveness for investors, other operational challenges could weigh on investor confidence. Foremost among these problems is the poor development of infrastructure. The level of infrastructure development in a free trade area, such as good road networks and electricity supply, has an impact on the willingness of investors to enter a market. Another challenge is insecurity. The insecurity problem in Nigeria, involving frequent kidnappings and terrorist attacks, will continue to deter investors. The Nigerian government is expected to step up efforts to ensure good security and the necessary infrastructure is in place in the newly designated airport free trade zones.
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