THE AFRICA CONTINENTAL FREE TRADE AREA (AFCFTA) AND IMPLICATIONS FOR SMES
Mtem Dooyum Stephenie ACA
Finance and Tax Analyst
Abuja
The event from March 17th to 21st 2018 in Kigali, Rwanda, is a reminder and rejuvenation of the dream of the founding fathers of African continent in 1963 at Addis Ababa, Ethiopia when they converged to dreamed of one trade, one currency as well as deepening of political ideologies of the horn continent of the globe. African leaders from 44 African nations gathered at the African Union Summit and signed the Continental
Free Trade Area (AfCFTA) treaty to create the world’s largest single market which so far, has been ratified by 24African countries. Nigeria through the Federal Executive Council ratified Nigeria’s membership of the AfCFTA on the 11th of November, 2020.
The major aim of the AfCFTAas can be seen from the statue is to boost intra-African trade by making Africa a single market of 1.2 billion people and a cumulative GDP over $3.4 trillion. Similarly, the UN Economic Commission for Africa (UNECA) estimates that the implementation of the agreement could increase intra-African trade by 52% by 2022 (compared with trade levels in 2010) and double the share of intra-African trade (currently around 13% of Africa’s exports) by the start of the next decade. This indeed is full of prospects in the face of the COVID-19 pandemic that has affected critical sectors of the African economy like aviation, export and import, sport and entertainment etc.
Under the CFTA, governments across Africa are committed to removing tariffs on 90% of goods produced within the continent. The next step for the governments is to ratify the CFTA in their countries as soon as possible.
Major Objectives of the Continental Free Trade Area
According to a research paper published by the United Nations Conference on Trade and Development (UNCTAD) in February 2018, the CFTA offers many opportunities for sustainable development and economic growth in the African economies. However, not all countries will benefit to the same extent, and the gain of welfare benefits also implicates relevant costs and commitments. Clearly therefore, the major Objectives of the Continental Free Trade Area are but limited to thefollowing:
- Establish a single continental market for goods and services, with free movement of business
professionals and investments, accelerating the establishment of the Continental Customs Union and the African customs union.
- Expand intra-African trade through better harmonization and coordination of trade liberalization and facilitation across Regional Economic Communities (RECs) and across Africa.
- Resolve the challenges of multiple and overlapping memberships and expedite the integration processes.
- Enhance competitiveness at the industry and enterprise level by exploiting opportunities for scale production, continental market access and better reallocation of resources.
Potential Benefits and Implication on Trade
Despite the many benefits this agreement will render,
not all the countries are expected to benefit equally from the free trade agreement. As such, countries with large manufacturing bases and enabling physical and industrial infrastructure, such as South Africa, Kenya, Egypt, Morocco, and Ethiopia are in a better position to gain the expected benefits of the CFTA
According to world Economic Forum, a full Free Trade Agreement (FTA) eliminating all tariffs in the CFTA could generate welfare gains of US$ 16.1 billion, at the cost of US$ 4.1 billion in trade revenue losses (representing 9.1% of current tariff revenues). GDP and employment are expected to grow by 0.97% and 1.17% respectively. Intra-African trade growth is estimated at 33% and the continent’s trade deficit is expected to drop by 50.9%.
Similarly, Special Product Categorization (SPC) permanently exempts sensitive products from liberalization. In a scenario in which the sector with the highest current tariff revenue would be exempted from
liberalization, UNCTAD simulations estimate a welfare gain of US$ 10.7 billion in the long term. Tariff revenue losses are expected at US$ 3.2 billion (representing 7.2% of current tariff revenues). GDP and employment growth are expected to grow by 0.66% and 0.82% respectively. Intra-African trade is expected to grow by 24%, while, Africa’s trade deficit only shrinks by 3.8%.
Risk Implications for SMEs
Even though most of the benefits of ACFTA is to further trade integration , welfare benefits from lower import prices, production efficiency and increase in outputs, higher value-added jobs and exports, technological specialization, etc.) will materialize in the long term, while most of the associated costs of adjustment and integration there will be drastic effects and risks for local SMEs such ; as loss in trade tariff revenue, local SME’s vanishing in front of stronger competition, adjusting unemployment, required investment in infrastructure, political and regulatory reforms, etc.) will be incurred in the short term.
Secondly, the agriculture sector with many of the local SMEs which is extremely relevant for the African economies since it employed about 53% of the continent’s workforce may also be threatened. Governments are worried about possible adverse impacts of the CFTA on the agriculture sector’s economic growth, which would massively affect employment across the continent. Even though the largest employment growth rates are found in manufacturing and services sectors, agriculture sub-sectors are also expected to grow. Therefore, enhanced trade in agricultural products will promote agro-processing and further sectoral linkages with manufacturing as way out.
Conclusion
Even though the CFTA is a great step forward towards economic integration, there is still a long road ahead. African governments must commit to keep working so that the gains from the CFTA are distributed as fairly as possible, making sure no one is left behind, and ensuring that the CFTA becomes a catalyst for sustainable economic development for the continent as a whole. It is vital that African countries commit to continue improving their institutional capacities to efficiently tax and redistribute the gains from the CFTA. This includes integrating and harmonizing regulatory measures, eliminating non-tariff barriers to trade and investment, and facilitating the entry into the formal economy.
