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July 24, 2020

Africa

SUB-SAHARAN AFRICA: An AfCFTA antidote to economic woes?

BY Malte Liewerscheidt, Anne Frühauf

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  • The Covid-19 pandemic has strengthened policymakers’ resolve around the African Continental Free Trade Agreement (AfCFTA), which is increasingly considered one of the few options available to boost the region’s deeply troubled growth and revenue outlook over the long term.
  • However, the impact of the pandemic may equally fuel second thoughts regarding tariff liberalization and schedules as it forces policymakers to re-evaluate short-term revenue losses vs long-term gains.
  • Nevertheless, the completion of the remaining bargaining around trade in goods and services would send a strong signal and could begin to lay foundations for the growth in intra-African trade over the long term.

Challenges to operationalizing the AfCFTA

Billed as an economic game changer for the continent, the AfCFTA is expected to create a market of 1.2bn people with a combined GDP of USD 2.5tn. Full implementation of the AfCFTA promises significant economic potential for the continent, albeit in the long run: USD 16.1bn in welfare gains (already factoring in a loss of USD 4.1bn in tariff revenue), additional GDP growth averaging 1-3%, employment growth of 1.2%, intra-African trade growth by 33% and reduction of Africa’s trade deficit by 50% are expected, once 97% tariff-free trade is achieved over a 15-year period.

However, while the AfCFTA – signed by 54 countries and ratified by 30 countries as of June 2020 – entered into force on 30 May 2019, the commencement of trade in goods and services under AfCFTA preferential terms hinges on several key issues that still need to be resolved:

  • State parties have yet to agree on tariff schedules, i.e. work out which products will be classified as non-sensitive (90% of all products), sensitive (7%) or excluded (3%) from tariff liberalization, which will take place over a 15-year timeframe (see table below) and include a slower phaseout for least developed economies.
  • Equally, the protocol on rules of origin (RoO), which determine the level of local content required in order for products to benefit from tariff concessions under the AfCFTA, still needs to be agreed upon for goods including clothing & textiles, automotive, sugar and edible oils.
  • Trade in services negotiations are still in their infancy, as negotiators have to work out rules for the five priority sectors identified as most critical to increase trade in goods (business services, communication, and financial, tourism and transport services). The end goal is to achieve a “GATS+” framework, but it remains to be seen how ambitious member states will prove to be, particularly on thorny topics such as the movement of people.

SUB-SAHARAN AFRICA: An AfCFTA antidote to economic woes? 1

Looking ahead

Even in pre-Covid times, negotiating these aspects had been a hugely complex and time-consuming task. But while negotiators failed to meet a December 2019 deadline on tariffs and RoO, the pandemic has derailed the most recent July 2020 deadline as well. A new January 2021 deadline is being contemplated but looks increasingly ambitious as the pandemic’s impact stretches out. For one, the AfCFTA secretariat, which commenced its operations in Ghana on 1 April, has been unable to recruit a full team owing to the Covid-19 crisis. Beyond the obvious distractions for governments created by the colliding health and economic crises, it remains doubtful whether the sensitive bargaining around goods and services involving all member governments can be thrashed out via virtual conferences. Furthermore, administrative challenges like translation into the AU’s four languages would be difficult to conclude within six months’ time. For the negotiations in services, the pre-Covid roadmap only envisaged the adoption of the respective protocol by January 2022. Negotiations on protocols regarding investment, competition policy and intellectual property rights are left to a future stage.

Even once the crucial annexes governing trade in goods are in place, the practical use of the AfCFTA will depend on their full implementation and domestication at national levels, ranging from regulatory adjustments to administrative changes and personnel capacitation at borders. This is a daunting task, considering that two years after the official signing ceremony, 24 countries still have to ratify the AfCFTA agreement. Besides, to reap the benefits of trade liberalization, the agreement must be accompanied by efficient trade governance structures and large-scale investment in infrastructure (which will not be helped by mounting debt). Coupled with the 15-year implementation timeframe for tariff liberalization for trade in goods, it is obvious that the AfCFTA will not be a remedy for the immediate damage caused by the pandemic.

Nevertheless, at least in principle, the pandemic and the heavy economic toll it has taken on oil producers, mineral producers and tourism-dependent economies alike has brought into sharp relief the challenges of Africa’s global trade position. This includes the continent’s over-dependence on primary commodity exports to Asia, Europe and North America, while the pandemic has also highlighted the problems of a heavy reliance on imports of crucial goods including medical equipment and medicines. Amid a lack of other upsides to the outlook (including the looming debt crisis), the pandemic has thus provided fresh impetus to promote regional integration and intra-regional trade. Although the percentage of intra-African trade remains small at 15% of Africa’s world exports, the appeal of fostering intra-regional trade is that, according to the IMF, “unlike exports to the rest of the world, intraregional trade flows are relatively diversified, contain higher value-added goods than exports to the rest of the world, and include a sizable share of manufactured products (for example, motor vehicles and clothing).” This may gain added importance at a time when, thanks to the pandemic, “localization” is emerging as a policy priority even in relatively liberalized markets such as South Africa and reinforcing existing trends in countries that have for years been opposed to market liberalization, such as Nigeria.

The positions of key countries

The extent to which intra-regional trade goals remain aspirational will depend in large part on the impetus provided by leading members of the bloc. Larger economies and trade hubs such as South Africa, Nigeria, Kenya and others will need to lead on the domestic implementation of the AfCFTA, generating critical mass to encourage implementation by smaller countries. As the leading intra-Africa exporter, South Africa has much to gain from the AfCFTA. President Cyril Ramaphosa and policy documents of the ANC regularly reference the AfCFTA, which seems to be one of the few uncontested policy issues. As the AU’s current chair, Ramaphosa has the opportunity to generate momentum around the AfCFTA process, to the extent that rising Covid-19 cases and economic lockdowns permit.

The same would apply to Kenya as the East African Community (EAC)’s trade hub. However, the Kenyatta administration has simultaneously pursued negotiations with the US over a bilateral FTA, which kicked off this month but will take at least 12 months to complete. This is driven by the looming expiry of the African Growth and Opportunity Act (AGOA) in 2025, which is forcing Kenya to seek new foundations for trade with its third-largest export market and seventh overall trading partner. While the US administration has billed the bilateral effort as “complementary” to the AfCFTA and a potential model for future FTAs across the region, the AU and the EAC favor collective, rather than bilateral negotiations. Kenya’s focus on the US FTA thus presents possible legal and certainly diplomatic challenges for regional trade integration under EAC and AfCFTA protocols. AU officials have strongly discouraged member states from bilateral FTA negotiations with third parties and any concessions Kenya makes to the US, for instance around most-favored nation status or RoO criteria might have to be extended to all AfCFTA signatories.

Nigeria, for its part, signed the AfCFTA belatedly and has yet to ratify the agreement. Given its near-exclusive reliance on oil and gas exports that typically do not face any duties or quota restrictions from recipient countries, Nigeria’s interest in dismantling barriers to trade has traditionally been limited. Instead, due to pressure from manufacturer associations and big conglomerates with vested interests, high tariffs and import bans have been long-standing features of Nigerian trade policy. This trend has only accelerated since President Muhammadu Buhari took office in 2015, and the government seems determined to double down on its so-called self-sufficiency agenda in response to Covid-19. Nevertheless, there is growing pressure from certain domestic companies which have grown beyond the Nigerian market to engage with and reap the benefits of the AfCFTA.

As much as the pandemic has reinforced the long-term strategic rationale for the AfCFTA and its potential to boost value-adding intra-regional trade, it may equally fuel second thoughts regarding tariff liberalization and schedules as the pandemic forces policymakers to re-evaluate short-term revenue losses vs long-term gains. This is another reason why the 1 January 2021 deadline – and a smooth and speedy implementation process – looks uncertain.

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