By Alkali Amana
On March 21 2018, in Kigali, Rwanda, at a gathering of the African Union Summit, the African Union Treaty establishing the African Continental Free Trade Area (AfCFTA) agreement was signed by 44 African Union Leaders. Envisioned with the objective of creating a single market for goods and services and a customs union with free movement of capital and business travellers, the trade agreement/pact was originally planned for takeoff, with its second phase, on July 1, 2020, but for the unprecedented entry of the COVID-19 (Coronavirus) pandemic into the world scene which forestalled the realization of much-awaited anticipation, pushing it further to January 1, 2021, as announced by the African Union. According to infomineo.com, the AfCFTA will be the largest trade agreement in history since the creation of the World Trade Organization (WTO).
In estimation, the pact aims to boost intra-African trade by making Africa aa single market of 1.2 billion people and a cumulative GDP of over $3.4 trillion. The United Nations 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 export) by the start of the next decade. Under the agreement, members commit to removing tariffs on 90% of the goods produced within the continent. Recently, the government of Africa’s largest economy, Nigeria, announced that it has ratified the country’s membership to the Agreement to provide a boost as to the relevance of such agreement on the continent. Reporting with comprehensive data on the progress and current status of the AfCFTA pact, Tralac.org outlines that 29 countries out of 54 signatories have deposited their instruments of ratification with the depository chair of the African Union Commission. As part of recent developments also, the AfCFTA secretariat was commissioned in August in Accra, Ghana, in a bid to create a convenient environment which will enhance the operation of the pact in future with January 2021 at hand already.
Put in concise terms, the objectives of the Continental Free Trade Agreement incorporate the following:
- To 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.
- To expand intra-African trade through better harmonization and coordination of trade liberalization and facilitation across Regional Economic Communities (RECs) across Africa.
- To resolve the challenges of multiple and overlapping memberships and expedite the integration processes.
- To enhance competitiveness at the industry and enterprise-level by exploiting opportunities for scale production, continental market access and better reallocation of resources.
Originally, the agreement was designed with a two-phase implementation period in sight, the first of which went into effect at the end of May 2019 – providing a framework for the liberalization of trade in goods and services and a mechanism for dispute settlement. Phase II, initially scheduled for July 1 2020, is expected to cover negotiations on competition policy, investment and intellectual property rights. At the moment, the arrangement has been postponed to January 1 of the upcoming year.
With as much as it promises, AfCFTA portends a lot for the African continent and its people, more so economically, which will be explored forthwith with relevant considerations to its benefits.
WHAT THE CONTINENTAL FREE TRADE AGREEMENT (AfFCTA) PORTENDS ECONOMICALLY
- Repairing The Damage Caused by COVID-19: Interestingly, when this pact was signed, the world was not stricken with the coronavirus pandemic, yet, it can now prove to be timely intervention to the hardship caused by the pandemic. A recent report by the World Bank reveals that if fully implemented, the trade pact could boost regional income by 7% or $450 billion, speed up wage growth for women and lift 30 million people out of poverty by 2035. The report finds that the agreement represents a major opportunity for countries to boost growth, reduce poverty and broaden economic inclusion.
In analyzing the importance of these gains, the report suggests that the agreement will be effective in recouping upon the economic damage caused by the COVID-19 pandemic which is expected to cause up to $79 billion in output losses in Africa in 2020. According to the World Bank, the pandemic has caused major disruptions to trade across the continent, including in critical goods such as medical supplies and food, given the conditions and measures which were employed to combat its spread.
- Boosting Employment Opportunities: It is expected that the pact would greatly boost employment opportunities within the continent with sight on breaking down border restrictions and empowering Africans.
According to Albert Zeufack, the World Bank’s Chief Economist for Africa:
“The African Continental Free Trade Area has the potential to increase employment opportunities and incomes, helping to expand opportunities for all Africans… the AfCFTA is expected to lift around 68 million people out of moderate poverty and make African countries more competitive. But successful implementation will be key, including careful monitoring of the impact on all workers – women and men, skilled and unskilled – across all countries and sectors, ensuring the agreement’s full benefit”
Supporting the case for creating employment opportunities, the World Bank report reveals that the agreement would reshape markets and economies across the region, leading to the creation of new industries and the expansion of key sectors. A more mobile labour workforce is expected to evolve from the workings of this past with an adjustment in wages.
- Have an Impact on Tax: An IMF Staff Discussion Note analyzing the impact of the AfCFTA on fiscal revenue shows that the reduction in trade barriers stemming from the pact would affect tax revenues through four channels –
- A direct reduction in tax revenue is to be expected from the removal of tariffs on intra-continental imports.
- Trade diversion owing to lower tariffs would also reduce revenues.
- Higher GDP, owing to increased efficiency would lead to more revenue.
- Higher consumption, because of increased imports and income would also raise revenue.
In summation, the net impact of the agreement on tax revenues would depend on the combined effect of the four channels.
The discussion note also states that most studies estimate AfCFTA-induced tax revenue losses from tariff reduction using the CGE models. Estimates, according to the note, tend to focus on revenue losses from tax removal. These losses range from 0.03% to 0.22 % of the GDP (or about US$1 billion to US$7 billion) for the continent.
- Boost Economic Gains for Countries: Overall, economic gains are expected to vary, with the largest gains going to countries that currently have high trade costs, according to the World Bank. Cote d’Ivoire and Zimbabwe (noted as countries where trade costs are among the regions highest) are to see the biggest gains, with each increasing income by 14%, the world’s apex financial institution projects. Beyond this, the agreement is expected to boost African trade significantly, particularly interregional trade in manufacturing, and intra-continental exports are estimated to increase by 81% while the increase to non-African countries would be 19%.
- Increase the Income of Africans: Detailing the extent to which the AfCFTA would boost the income of Africans, the World Bank reports reveal that the implementation of the agreement would spur larger wage gains for women (an increase of 10.5% by 2035) than for men (9.9%). For skilled workers, the wage boost promises 9.8% while it plays to aid unskilled workers with a projection of 10.3%.
A determined effort at the implementation of the AfCFTA from African countries and relevant stakeholders is necessary and very important to be able to maximize the agreements potential gains while minimizing whatever risk it may present. To successfully achieve the implementation of the agreement, a concerted effort is needed. African countries need to enact legislation which will effectively support the AfCFTA in enabling goods, capital and information to flow freely and easily across the borders. Also, it is necessary that governments prepare their workforce(s) to embrace the agreement and take advantage of new opportunities with new policies designed to aid job-switching and career development. Other areas worth considering include reducing the infrastructure deficit within the continent (notably in roads and ports) and reducing customs (and administrative) requirements which directly affect the capacity of economies to move trade merchandise within and outside their borders.