Private sector is key to Africa’s free trade area success

Friday September 27 2019

acfta

AfCFTA is expected to fundamentally transform the current state of intra-regional trade in Africa. ILLUSTRATION | JOHN NYAGAH | NMG 

By The EastAfrican

Africa is expected to commence trading under the African Continental Free Trade Agreement (AfCFTA) in July 2020.

This gives the continent’s top diplomats, technocrats and negotiators less than a year to agree on the modalities that will govern the world’s largest free trade area since the establishment of the World Trade OrganiSation in 1995.

Having attended the Source21 Common Market for Eastern and Southern Africa (Comesa) High–Level Business Summit held in Nairobi this past July, it was clear that the key issues that African governments need to agree on before trading begins under AfCFTA are duties, levies and Rules of Origin, which will determine the eligibility of goods and services to be traded in the free trade area.

According to the Washington-based research group, Brookings Institution, intra-African exports accounted for 18 per cent of the continent’s total exports in 2016, compared with 59 per cent for intra-Asian exports and 69 per cent for intra-European exports.

AfCFTA is expected to fundamentally transform the current state of intra-regional trade in Africa by, first, phasing out tariffs on 90 per cent of goods traded on the continent by 2022 and, later, helping countries build larger and more sophisticated regional value chains.

To achieve these goals, a much broader and inclusive discussion that incorporates the interests and recommendations of key private sector players in Africa is needed. This is because businesses are able to channel investments into sectors where governments lacks the experience or technical expertise to succeed.

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This unique aspect of private investment is key to the success of the AfCFTA as it will help expand Africa’s export sectors beyond natural resources and raw agricultural produce—two areas where government involvement has historically been high.

Sectors such as manufacturing are ripe for expansion. However, private investors will be key in driving this expansion as governments lack comparable expertise and experience, especially after the structural adjustment programmes of the 1980s and early 90s led to the widespread privatisation of state-owned enterprises, including manufacturing concerns, across Africa.

Global management consulting firm, McKinsey, projects that Africa’s manufacturing output will grow to $930 billion by 2025, from $500 billion in 2015.

The good news is that three quarters of this growth will be driven by domestic demand, underlining the potential of the African market and the timeliness of the AfCFTA, which aims to unlock this potential.

To fully tap into the potential of manufacturing and other sectors, the private sector needs to be involved in the implementation of the AfCFTA.

Private businesses have a particularly important role to play in the process of identifying and eliminating non-tariff barriers (NTBs).

NTBs are arguably the biggest obstacle to intra-African trade. They include poor infrastructure, lack of access to forex for multinationals, poor integration of financial systems across the continent, corruption, unnecessary bureaucracy and a host of other factors that undermine business competitiveness and cross-border trade.

NTBs typically increase the cost of doing business without directly reflecting on the books, making it harder for businesses to plan financially and consequently commit long-term capital.

It is also important to note that while income levels in Africa are rising, a lot of this is still concentrated in urban areas like Cairo, Lagos, Nairobi and Johannesburg, on a continent where majority of the population lives in rural areas.

Moreover, even in these urban areas, consumer spending and the actual size of the consumer class are not at comparable levels to more mature markets in Europe, Asia or North America.

Profit margins are therefore lower in Africa due to lower price points and smaller markets, a situation that is worsened by NTBs that introduce hidden costs to businesses.

An example of how NTBs inflate costs is the issue of corruption at ports and border posts.

Businesses that choose to conduct their work ethically sometimes need to wait longer for their consignments to be cleared, slowing the pace of investment and undermining growth prospects.

Equally important to the success of AfCFTA is the need for strong political will. Institutions need to be strengthened to ensure continuity in implementing AfCFTA amidst dynamic electoral cycles across the continent.

Public investments in social areas such as health and education, which improve the quality of human capital, boost productivity and improve income levels, are also key to the long-term success of the trade agreement.

Businesses need to voice their concerns about these issues and, where possible, get involved through purposeful partnerships.

Governments, on the other hand, need to create a safe space for businesses to advocate without fear of retaliation or needless politicisation. Only by working together will AfCFTA be a success.

Wanja Mwangi is the corporate affairs director Developing Middle East and Africa at Mars Wrigley Email: Wanja.mwangi@effem.com

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