BY ERINAH CHIPUMHO
THE African Continental Free Trade Area (AfCFTA) is the largest free-trade agreement in the world since the signing of the World Trade Organisation in 1994.
The agreement for establishing the AfCFTA was adopted by the 10th extraordinary session of the assembly in Kigali, Rwanda, on March 21, 2018. After reaching the threshold of at least 22 member states to sign for the continental free trade area, the AfCFTA entered into force on May 30, 2019. So far, 54 out of 55 African Union member states have signed the AfCFTA with the exception of Eritrea and 36 countries including Zimbabwe have ratified the treaty.
Trading on the AfCFTA started on January 1, 2021. This implies that Zimbabwean companies can access markets from countries that signed the AfCFTA with about 1,3 billion people and a combined gross domestic product (GDP) of US$3,4 trillion.
The main goal of the AfCFTA is to create a single market for goods and services with movement of people with the intention of deepening the economic integration in Africa in line with the vision of “an integrated, prosperous and peaceful Africa” enshrined in Agenda 2063. The AfCFTA compels countries to remove tariffs on 90% of goods and non-tariff barriers. These measures also lay a foundation for the establishment of a common market in Africa, which would allow free movement of capital.
The AfCFTA is also meant to boost intra-African trade, which is currently low, at 2% between 2015-2017 compared to 47% for America, 61% for Asia and 67% for Europe, according to the United Nations Conference on Trade and Development 2019 report. Some of the reasons for the low intra-African trade are high cost of trade, non-tariff barriers and high tariffs. The intra-African exports were slightly higher at 16,5% for 2017 exports.
Given that the three biggest countries in Africa (Nigeria, Egypt and South Africa) account for over 50% of Africa’s GDP as of 2017, less developed countries (LDCs) have been granted a 10-year delay to remove tariff-barriers in strategic economic sectors. Zimbabwe is among the seven countries (together with Djibouti, Ethiopia, Madagascar, Malawi, Sudan and Zambia) that are expected to liberalise sensitive products over 13 years just like any other LDCs compared to 10 years for non-LDCs.
Moreover, the country is expected to liberalise 85% of non-sensitive products in 10 years with additional 5% fully liberalised over 15 years compared to 10 years for LDCs and five years for non-LDCs.
For excluded products, there is no set period to comply with liberalisation. Thus, Zimbabwe has a fairly longer period to comply with AfCFTA requirements on tariff reductions. This gives protection to companies to re-tool to enable them to compete with regional counterparts. However, consumers are disadvantaged from accessing a variety of cheaper and quality products from the African region.
Challenges to AfCFTA’s success
Zimbabwe’s export basket is dominated by exports of primary commodities with agricultural and mineral products contributing 18% and 74% to export earnings, respectively in 2020 according to the Zimbabwe National Statistics Agency.
Manufactured products contribute only 8% of total merchandise exports, of which countries that trade more manufactured goods are expected to benefit more from the AfCFTA. South Africa is Zimbabwe’s biggest trading partner with exports and imports averaging 60% between 2010 and 2020.
A fall in tariff revenue may affect government budget balances in the short term since most of Zimbabwe’s trade is currently with South Africa and other Southern African Development Community (Sadc) and Common Market for Eastern and Southern Africa (Comesa) countries which already have some preferential trade already in place.
Zimbabwe has infrastructure deficits estimated at US$$14,2 billion by the African Development Bank to finance the electricity sector (30,3%), road (25,4%), water resources management (15,5%), water sanitation (14,1%), and railway network (11,2%).
The country has high internet costs, which compromise the benefits from the AfCFTA. A tougher competitive environment may threaten small and medium enterprises (SMEs)’s survival as they fail to compete with larger firms. Companies are expected to recapitalise since most firms are using antiquated machinery which makes them difficult to compete with their regional counterparts. Moreover, borrowing money for recapitalisation from the local market is costly and short-term in nature.
Opportunities for Zim
As African countries grant each other preferential tariffs, member states may source more intermediate and final goods among themselves rather than import them outside Africa. Consequently, it will support the development of regional value chains and the building of manufacturing capacities in Africa. Hence, Zimbabwe should re-industrialise and boost exports of manufactured products into the African continent and beyond.
Implications for Zim
To consumers — Significant reduction in tariffs and the cost of trade would lower import prices and increase purchasing power of consumers.
To companies — The AfCFTA is an opportunity for Zimbabwean entrepreneurs to enter new markets and increase production. However, they should be prepared to face foreign competition from producers in other African countries. Without measures that come along with trade liberalisation to boost competitiveness of firms, such as rehabilitation and expansion of infrastructure and access to concessionary financing, economic benefits of the AfCFTA would be reduced for Zimbabwe.
To government — The reduction in tariffs will result in a small share of revenue loss to the government in the short-term since most trade is between Zimbabwe and South Africa, other Sadc and Comesa countries which already has some preferential treatment. Moreover, the exclusion list shields some tariff revenue from liberalisation.
Hence, Zimbabwe should enhance value addition and beneficiation of primary products to boost exports of manufactured products to fully benefit from the AfCFTA.
Chipumho writes the article in her personal capacity as the Senior Research Fellow of an economic policy think tank, the Zimbabwe Economic Policy Analysis and Research Unit (Zeparu). For comments on this article, she can be contacted at firstname.lastname@example.org