Introduction
The African Continental free trade area is an agreement that was signed in 2018 by 54 member states. The agreement is the largest in terms of the number of countries that have signed since the establishment of the World Trade Organization. The agreement is expected to create a single African market that will reach 1.7 Billion people by 2030, increase GDP to US$1.7 trillion at purchase power parity and to attract US$4 trillion in terms of investment and consumer spending. A continuous nurturing of collaboration and trust among African countries by increasing intra-continental trade, will strengthen African country’s voices within International Organizations, thereby increasing their negotiating power.
The figure 1 below shows the journey that the African continent has been making towards co-operation. Each move had and still has its own demises which we expect to overcome through the AfCFTA agreement.
FIGURE 1- THE JOURNEY TOWARDS THE COOPERATION OF AFRICA.
Objectives
The key objectives of the agreement includes the following:
- To increase trade in goods by implementing the following:
- Removal of all non-tariff barriers.
- Progressive elimination of tariffs at least 90%.
- Improve efficiency of customs procedures and border administration.
2. To increase trade in services.
3. To facilitate movement of persons, this would entail the following:
- Free movement of workers.
- Mutual recognition of qualifications.
- Abolition of visas in all member states.
4. Creation of a single market.
Short term challenges.
1.Threat to Small and Medium Enterprises.
Liberating movement of goods will increase inflow and outflow of goods within the member states and this would pose a threat to the domestic medium and small enterprises. Imported goods provide stiff competition which some of the Small and Medium Enterprises will not be able to withstand since they will be competing with big companies. Most of the big companies due to economies of scales are able to manufacture goods of higher quality at reasonable prices, although this would be an advantage to the consumer as it expands choice base and bargaining power, it does hurt the Small and Medium Enterprises .This is because Small and Medium Enterprises have higher costs of operating mainly because of lack of economies of scale, and lack infrastructure to support efficiency production. Such a situation will unquestionably affect the growth of Small and Medium Enterprises in the short run. This was also the main reason that countries like Nigeria took time to sign the agreement as they feared the negative impact it could pose on the growth of Small and Medium Enterprises. However, in the long term it is expected that the Small and Medium Enterprises will develop enough resilience to not only fight competition but to also produce at international level.
2.Loss of Tax revenue
The agreement will result in most African countries cutting their custom tariffs up to 90%. Although this will be done in phases, that is removal of duty and customs fees for non-sensitive goods and later sensitive goods, its impact of loss of revenue will still be felt in the short time. For instance, according to the RBZ Supervision report of 2019, both custom and excised duty tax revenue contributed 28% of the total tax revenue. Hence, removal of it will lead to a hole that will need to be filled before its impact are felt. Most least developed countries would feel the impact of the 90% removal of duty due to lack of diversity in their economies. Most of these governments rely heavily on the income from customs duty. In order to minimize the impacts of this, the AfCFTA agreement has provided a different treatment for the least economic developed countries by granting them a 10 year delay in the removal of tariff barriers (Figure 2). This would give them enough time to mobilize resources and develop stamina to fight competition from bigger economies. African countries will need to rescript their budgets to accommodate the effects of loss of revenue and redistribute resources to support those sectors that were once supported by revenue from tariffs. Furthermore, governments would need to build and diversify their economies by creating other sources of revenue.
FIGURE 2-TARRIF REDUCTIONS SCHEDULE
Long term Benefits.
1.Single market
One of the most rewarding benefits of the free trade area is the creation of a single market that has more than 1.7 billion potential customers. For example, in the Republic of Benin, a country in West Africa which has a population of nearly 12 million and its neighbouring country, Nigeria, which has a population in excess of 200 million, free trade would entail that countries with small population like Benin would have 200 million people added to their market, facilitating increase in trade, productions, employment, and prosperity of the continent. The access to such markets has only been made possible by free trade area.
One of the main key problems regarding the single market issues is that most African economies are characterized by huge diversities and disparities. These disparities lead to the emergence of different interests and economic objectives among African countries. Due to this, it becomes imperative that we measure the impact of this agreement on bigger economies like Nigeria, Egypt and South Africa which account for over 50% of Africa’s cumulative GDP, while its six sovereign island nations represent 1% of the continental GDP.
How are the big economies going to benefit from the agreement? This is a major question that needs to be urgently addressed. If they fail to see the benefits, they may end up pulling away or going slow on the implementation of the AfCFTA provisions. We must make sure that the benefits are not one legged, a situation where only small economies are realising the benefits.
2.Removal of non-tariff barriers.
Most African borders are encompassed by many non-trade tariff barriers. These include a lot of bureaucracy, rules of origin, government procurement restrictions, quality, and quantity controls. Aliko Dangote in an interview at Mo Ibrahim Foundation once mentioned that it takes 2 weeks to have their cement cleared at Togo’s border. Such delays will always translate into loss of revenue, as it will result in raw materials not reaching suppliers in time, thereby affecting the time the final product reaches the consumer.
One of the key policies in attempting to eliminate non-tariff barriers is by adopting a uniformed approach when it comes to quality inspection procedures, that will apply to all the member countries. For instance, a trader moving from country A to country D, should pass at least 4 borders. At each border the goods are inspected for quality as each country has its own different quality requirements. This would increase delays as most time is lost during the inspection process. However in a situation where all the member states have matching quality procedures, traders no longer need to be cleared at each border. If border A clears the trade, that will be adequate, and at the next border the only thing that the trader needs to do is to present quality check documents from border A and the trade will be cleared. This would increase efficiency in production as raw materials will reach producers in time and products will reach consumers hastily. Furthermore, it reduces damage of goods that comes with the process of inspecting goods.
According to the African outlook 2018, having all countries in the world reduce just two key bottlenecks to supply chains (border administration and transport and communications infrastructure) halfway to those in Singapore would increase global GDP by US$2.7 trillion (4.7 percent) and global exports by $1.6 trillion (14.5 percent).Furthermore, removing non-tariff barriers will improve efficiency in the domestic industry as they now have much more competition. It will spearhead innovation and use of technology as firms will now need to compete at an international level.
3.Employment
Its effect on employment are varied because the liberation of trade will affect the low skilled workers, as the movement of people will improve the labour markets and availability of higher skilled labour. This then means that the government needs to invest in the improvement of the skill of its citizens in order to capitalize on the benefits that come with the Free Trade Area. However, the overall impact of the agreement is that it will diminish unemployment. The increase in employment will also vary per sector. Some jobs will be created and some will be displaced, the biggest winner being manufacturing. The manufacturing and retail trade sectors participation in total employment is expected to increase from 16.9 percent in 2020 to 20 percent by 2035 ( World Bank Group, AFCTA , 2020). According to the World Bank Report, 2020, the volume of workers in energy-intensive manufacturing (such as steel and aluminium) would increase to 2.4 million, public services (4.6 million), recreational and other services (0.28 million), trade services (0.13 million). A little growth is expected when it comes to some sectors such as agriculture. This is in line with AfCFTA objectives as it seeks to transform the continent through industrialization.
Critical Success Factors.
Leadership commitment and Implementation.
As noted above in figure 1, the AfCFTA is not the first stride that the African continent has made in an attempt to make the continent an economic powerhouse. Many other moves have been made. However, the lack of political willingness by the African leaders to implement and enforce the provisions of the agreements, have made all the efforts useless, thereby failing to materialize any advantage for the continent as a whole. AfCFTA is not an exception if leaders lack political willingness and commitment, the agreements will just go the same route as the previous agreements where its promises never came to fruition. It must be noted that the effectiveness of a policy or agreement can never go above the integrity and willingness of those who designed the policy. Hence the co-operation and commitment of the African leaders is of paramount importance in the materializing of this treaty. Some have even suggested that the AfCFTA agreements provisions must be legally binding, whereby if the members do not apply provisions of agreement in a specified amount of time, they will be probed.
Infrastructure Development.
The continent needs a serious infrastructure development in order to support the success of the free trade area. New estimates by the African Development Bank suggest that the continent’s infrastructure needs amount to US$130–170 billion a year, with a financing gap in the range US$68–$108 billion. The key infrastructure development needed to facilitate the agreements would be mainly in the following areas:
1. ICT- Based on estimation, the removal of both tariff and non-tariff barriers is going to increase the flow of goods in and outside countries. A manual process of border administrations will not fittingly handle the volume of trafficking of goods at respective borders. It will still result in more delays that we were experienced before the AfCFTA agreements. Hence government must invest in ICT and people that are skilled to automate the border administration. This would speed up the process, by removal of bureaucracy and all the inefficiencies that come with manual processes.
2. Transport – We need to assess if we have adequate transport infrastructure to facilitate the increased movement of people and goods. For instance, does the Zimbabwe-South Africa border route have enough capacity to sustain the inflow and outflow of goods at greater speed? Improved modern transport systems can support the easy movement of raw materials to producers and product to customers. Having enough infrastructure development will make Zimbabwe a favourite destination for imports and investors as they know that Zimbabwe has enough infrastructure to support the production, transportation and distribution. Lack of it will deter investors even in the presence of the AfCFTA.
3. Energy -As alluded before, the AfCFTA is expected to speed up the growth of the manufacturing industry sector compared to all other sectors. The most singular significant resource in manufacturing and industrialisation is the availability of electricity. Per the 2018 Africa Economic report, more than 640 million Africans have no access to energy, giving an electricity access rate for African countries at just over 40 percent— the world’s lowest.
To those who have access to electricity, it is never in constant supply, leading to some resorting to use of generators to support production. The use of generators is expensive and would end up increasing the cost of production. Furthermore, using sources of power like generators will also limit capacity of the manufacturing plants, in so doing, halting production levels.
Such a scenario deters investors and further force the ones in the industry to curtail their operations. This in turn would affect the number of manufactured goods that would be available for exports. Although AfCFTA has created a single largest market in the world, what good is the market if the countries are not producing enough to accommodate the market? Africa must prioritise, commit, and seek funding to increase the consistent supply of electricity to its business community.
Lastly, the government should invest in the training and development of the skills of its citizens. Failure to do that will result in most skills being obsolete as the agreement may result in structural transformation of the labour needs of organisations.
Bibliography.
ECDPM GREAT INSIGHTS, VOLUME 9, ISSUE, 2020,
African Economic Outlook 2018, African Development Bank 2018: https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/African_Economic_Outlook_2018_-_EN.pdf
International Trade Center, A business Guide to the African Free Trade Agreement, Geneva, September 2018 : http://www.intracen.org/uploadedFiles/intracenorg/Content/Publications/AfCFTA%20Business%20Guide_final_Low-res.pdf
World Bank Report on AfCFTA, 2020,
ADB (African Development Bank). 2019. African Economic Outlook 2019. Abidjan, Côte d’Ivoire: ADB.
Mo Ibrahim Foundation
