By Victor Bhoroma
THE Africa Continental Free Trade Area (AfCFTA) was launched on March 21, 2018 in Kigali, the capital of Rwanda. The trade agreement was signed by 44 heads of state and government, with nine more signing over time to make it 53 countries.
The only country still not to sign the agreement is Eritrea, which has a largely closed economy in terms of trade.
As of February 10, 2022, 41 of the 53 signatories had ratified their AfCFTA instruments with the African Union (AU) Commission, making them state parties to the agreement.
Free trading under the AfCFTA accord came into effect on January 1, 2021, even though there are several country exemptions and negotiations under way for the agreement to be fully applied.
The agreement gave birth to the world’s largest free-trade area in terms of the number of country participants, with a market size of more than 1,3 billion consumers on the African continent. If implemented well, this agreement can be a game-changer for African trade.
AfCFTA objectives
As with other trade agreements, such as the European Union (EU), Common Market for Eastern and Southern Afrrica (Comesa) or Southern African Development Community (Sadc), the agreement aims to create a single market for goods, services, labour and capital movementto deepen the economic integration between African countries.
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The trade area could have a combined gross domestic product of around US$3,4 trillion, but achieving its full potential requires significant policy reforms and trade facilitation measures across all African signatory nations.
The agreement’s goals include boosting intra-African trade, which stood at a meagre US$63 billion in 2017, contributing to sustainable economic development and facilitating industrialisation through the development of value chains.
Currently, Africa accounts for just 2% of global trade and only 17% of African exports are intra-continental, compared with 59% for Asia and 68% for Europe.
The potential for transformation across Africa is therefore significant. The agreement also aims to reduce trade costs and enable Africa to integrate further into global supply chains.
It will eliminate 90% of customs tariffs and manage outstanding non-tariff barriers through cutting red tape and simplifying customs procedures which will bring significant income gains.
AfCFTA progress
The operational phase of the AfCFTA was launched on July 7, 2019. Start of trading under the AfCFTA Agreement began on January 1, 2021. However, no trade has yet taken place under the AfCFTA regime. Negotiations are under way on three aspects, which are e-commerce, intellectual property rights, investment and competition policy and legal instruments for dispute settling among other things.
AfCFTA challenges
The biggest challenge facing the trade agreement is that the 54 countries on the African continent are at different levels of economic development and there are disparities in levels of industrial capacity.
Some countries such as South Africa, Nigeria, Egypt, Kenya and Ghana are ready from an industrial capacity point of view to export immediately under AfCFTA rules,whileother countries such as Zimbabwe, Malawi, Zambia, the Democratic Republic of Congo (DRC)and others will need more time, thus they are submitting 5-10 year exemptions on certain commodities and tariff lines.
Also, there is a segment on trade facilitation, transit,and harmonisation of customs procedures rules.
Countries are at different levels of readiness in terms of enforcement capacity of the harmonised rules. Another herculean task comes from the need to foster cooperation among national and regional countries or organisations with diverse trade interests with influential trade partners such as the United States, European Union, China, and Japan.
These outsiders have their own trade agreements that favour certain African countries on exports to those markets.
The existence of numerous bilateral trade agreements negotiated with sensitive clauses, overlapping memberships, different levels of economic development and varying degrees of openness pose challenges to the implementation of the agreement.
The downside with AfCFTA is that trade agreements naturally crowd out emerging domestic industries, increase outsourcingwhich create jobs in countries that possess competitive advantage in thosesectors.
The agreement also opens chances ofintellectual property theft and reduces tax revenues for smaller governmentsbecause of relaxed tariff structures.
Zim’s prospects in AfCFTA
About 55% of Zimbabwe’s world exports in 2020 were to African countries. Zimbabwe’s main Africandestination markets are Comesa and Sadc countries. The value of 2020 intra-Africa exports was US$2,4 billion.
The exports are mainly biased towards minerals such as platinum, gold, diamonds, and nickel. Other popular commodities in the African market include tobacco, cotton, sugar, cement, and wood.
About 60% of Zimbabwe’s world imports were intra-Africa imports. These importsare mainly from Comesa and Sadc countries as well with South Africa dominating on both ends. Between 2019 and 2020, intra-Africa imports increased by 32%.
Maize, fertilisers, soya bean oils, petroleum oils and electricity are the main import commoditiesfor Zimbabwe.
However, Zimbabwe’s import bill is filled with raw materials and commodities that used to be produced locally especially agricultural products, industrial chemicals, and consumer goods. Even if industry capacity utilization has gone up to 54% as of June 2021, over 80% of the raw materials used to manufacture consumer goods are imported mainly from South Africa.
To benefit from AfCFTA, there is need for clear policy implementation towards the following key pain points:
Managing high production costs
The high cost of producing locally is one of the primary reasons why Zimbabwean products struggle to break into the export market.
The high cost of doing business considers the cost of fuel, which is more expensive by more than US0,30if compared to the Sadc regional average. Similarly, the cost of transportation locally,taxation and compliance, water, labour and property rentals is comparatively higher. To move cargo in Zimbabwe, it costs US$0,12 per tonne/kilometre using road and US$0.06 per tonne/kilometer using rail. The Sadc average is US$0,07 by road and US$0,03 by rail.
Consequently, local products cannot compete on the African export market.
Currently severallarge-scale manufacturers outsource all their production from South Africa and simply do break of bulk and packaging locally.
To address this structural constraint, the government needs to urgently reform its tax regime especially on import and export fees, streamline permits paid to government agenciesand scrap import duties paid on raw materials used by local manufacturers.
To address labour cost, the Labour Act needs to be amended to give flexibility to employers to hire contract workers easily and to terminate contracts on short notice without the burden of blanket fixed minimum retrenchment packages or imposition of permanent employee status on contract workers. The flexibility removes hesitation from various producers to hire contract workers as and when need arises, which in effect benefits both the employee and the employer.
Simplification of tax, trade
Taxation plays a fundamental role in managing the cost of doing business in an economy and giving incentives to potential investors in the industry.
Tax compliance is less than 40% in Zimbabwe, partly because of the steep indirect taxes levied on the industry. High levels of taxation encourage tax evasion and business informalization where over 75% of businesses are now in the informal sector.
A reduction in indirect taxes on fuel, VAT and customs duties levied on raw material importsand other levies or licenseswill have positive ripple effects on pricing. The government should offer3–5-yearindirect tax holidays(scheduled, targeted and stepped) to local suppliers of major imports such as steel products, fertilizers and Agro chemicals, industrial chemicals and packaging materials.
This will simply help in managingthe trade deficit and boosting domestic industrial capacity in preparation for AfCFTA.
Never mind the resultant direct and indirect employment created for downstream producers. Import procedures also need to be reviewed to discourage importation of goods that are manufactured locally.
Critically, customs duty for finished goods (say Refrigerators) cannot be the same as customs duty for importing components used in manufacturing refrigerators locally. Finished products should not be ordinarily imported duty free as it hurts local producers (unless under national emergency).
Value addition of raw exports
Our exports are predominantly raw, as such they fetch low prices on the regional market. A value addition policy has been tabled for long with meaningful progress in Platinum mining only.
This policy should be taken across to other minerals (such as Lithium, Gold, Chrome, Nickel and Diamond) and agriculture commodities that are being processed in neighboring countries.
A clear example of the benefit of value addition is on PGM metals where export value has tripled in the past 3 years due to beneficiation. The same can be achieved in Lithium, Gold and Diamond.
Raw tobacco exporters and cigarette manufacturers need to be offered production incentives to produce cigarettes for the export market as a matter of urgency. It may come with foregoing possible tax revenues in the short term but bring immeasurable economic growth in the medium to long term.
Infrastructure development
Inevitably, Zimbabwe rail and road network into the Sadc region should be rehabilitated to reduce the cost of transporting commodities. Otherwise access to the African market will be costly and difficult for local producers.
Public Private Partnerships (PPPs) are the best model for this initiative in terms of cost, quality, and turnaround time. This requires an efficient foreign exchange market, a PPP Act and stable government policy to private financiers in infrastructure.
Strategic policies to reindustrialize the economy represent a sustainable formula to improve Zimbabwe’s prospects for AfCFTA, which are currently bleak.
The gains realised in subsidising agriculture and ramping up mining production can only make economic sense if commodities from those two key economic sectors are processed by the local industry than be exported in raw form, then ultimately be imported as finished products by consumers.
AfCFTA is here and Zimbabwe must start implementing policies that fast track re-industrialisation, not to draft more economic blueprints to address known production challenges for the past three decades.
- Bhoroma is an economic analyst. He holds an MBA from the University of Zimbabwe (UZ). Feedback: Email [email protected] or Twitter @VictorBhoroma1.
