By Suwareh Darbo
The African Continental Free Trade Area (AfCFTA) is a free trade area founded in 2018, with trade commencing as of 1st January 2021. It was created by the African Continental Free Trade Agreement among 54 of the 55 African Union nations. The free-trade area is the largest in the world in terms of the number of participating countries since the formation of the World Trade Organization in 1995. Accra, Ghana serves as the Secretariat of AfCFTA and was commissioned and handed over to the AU by the President of Ghana Nana Akufo-Addo on August 17, 2020 in Accra. The agreement initially requires members to remove tariffs from 90% of goods, allowing free access to commodities, goods, and services across the continent.
The proposal was set to come into force 30 days after ratification by 22 of the signatory states. On April 2, 2019, The Gambia became the 22nd state to ratify the agreement. The agreement went into force on May 30 and entered its operational phase following a summit on July 7, 2019.
Potential benefits
The Agreement establishes an African market of more than one billion consumers and is touted to be a powerful engine for growth and employment. It can establish and strengthen product value chains and facilitate the transfer of technology and knowledge via spillover effects. It can also incentivize and spur infrastructure development and attract foreign direct investment. It is especially important for the continent’s many small, landlocked countries that face tremendous challenges trading internationally. (Kimenyi et al., 2012).
As a game changer in a continent with a market of 1.2 billion people and a combined nominal GDP of USD2.6 trillion, it is widely seen as a crucial driver for growth, industrialization, and sustainable development in Africa. Eliminating tariffs can help African countries boost growth, transform their economies, and achieve the SDGs. The ECA estimates that it has the potential to increase Intra-African trade by 52% by 2022 compared with trade levels in 2010 and double the share of intra-African trade currently at 13%.
Challenges
The low ratio of intra-African trade to total African trade has been traced to some tariff and non-tariff barriers to trade. Principal among the barriers are historical ties with former colonial powers, lack of diversification, conflict, poor transportation networks; cumbersome import and export procedures, border crossing problems; limited use of information and communication technology (ICT); limited involvement of the private sector in the design of programs intended to raise intra-regional trade; and financial encumbrances, among others. Sub-Saharan African countries impose more non-tariff barriers on trade between themselves than on trade with third countries. Efforts at harmonizing technical regulations and standards, Sanitary and Phytosanitary measures as well as rules of origin have also increased the cost of doing business.
Owing to these challenges, trade amongst African countries is almost stagnant. The top trading partner regions for Africa were the European Union (EU), Asia and the United States (US). Notwithstanding the efforts by African leaders to form regional groups with a view to boosting trade among themselves, intra-African trade remains low at 13%, compared with 70% for the EU, 52% for Asian countries, 50% for North American countries and 26% for South American countries.
In addition, fears of significant revenue losses and an uneven distribution of costs and benefits are among the main obstacles to the continent’s integration. Countries with large productive capacities in manufacturing may experience significant economic growth and welfare gains while small economies and LDCs may face substantial fiscal revenue losses and threats to local industries. An uneven distribution of costs and benefits among member states may pose a challenge to implementation. There is, therefore, need for flexibility to enable the redistribution of benefits and a fair sharing of costs by member states.
Policy options
The Gambia is a low-income country with a GDP per capita of about USD 700 with 48.6% of the population living below the UN poverty line of USD1.25 per day and an overall unemployment rate of 9.1%. Youth unemployment stands 12.6%, which is above the overall unemployment rate while inequality as measured by the Gini coefficient is 0.594, which are worse than the Sub-Saharan African averages. The corresponding figures for GDP per capita, poverty, unemployment, youth unemployment and inequality for Sub-Saharan Africa are USD1600, 33%, 6.17%, 11.6% and 0.439 respectively. In 1966, sectoral shares of agriculture, manufacturing and services in GDP were 30.2%, 2.97%, and 61.5% respectively. The corresponding figures for 2019 are 16.9%, 3.96% and 58.5% respectively. The figures underscore the fact that the agricultural sector’s contribution to GDP has declined significantly over the past five decades yet it constitutes at least about 30% of the total employment reflecting low productivity and a structural anomaly. The lethargic performance of the agricultural sector stems essentially from rural-urban migration and government policy towards the sector. The share of manufacturing has increased only marginally reflecting very little processing and value addition while the service sector is still the dominant one. The decline in the share of agriculture does not augur well for poverty reduction and employment creation since the bulk of the population are engaged in this sector. Manufacturing’s share in GDP is still abysmally low. This contrasts sharply with Singapore and Malaysia’s shares of 19.8% and 21.4% respectively. Development experience has shown that as a country develops, the share of agriculture in GDP declines while that of manufacturing increases. The overall picture depicted by the sectoral shares in GDP is that the structure of the Gambian economy has not changed much since independence; there has been very little, if any, processing of raw materials, value addition or industrialization defying any form of structural transformation. The Gambia has been exporting peanuts, fish, and animal hides without adding value which does not bode well for employment creation. Development experience has again shown that no country can develop by simply exporting raw materials. The ACFTA will be meaningless if the country fails to move up regional and global value chains. In order to take full advantage of the ACFTA, the country has to take the following measures:
I) Processing and value addition leading to industrialization: There is an overriding need to add value to raw materials. The nexus between global value chains and industrialization means a lot, especially for least developed countries (LDCs) in Africa, including the Gambia with an export-oriented economy. In fact, the Gambia has no choice but to develop an export-oriented strategy given that incomes are low and the domestic market is so small that domestic demand alone cannot sustain economic growth. Processing and value addition will help the country develop its local value chains to join both regional and global value chains at a competitive edge. The now developed countries advanced due to industrialization, and thus for Africa and indeed for the Gambia to develop, it has to develop its industrial base. To do this, the country has to radically transform its agricultural sector as no country has ever made the transition to industrialization successfully without first developing its agrarian sector. Transforming the agricultural sector will entail addressing supply side constraints such as access to fertilizers, seeds, finance, size of land holdings, and extension services, among others.
ii) A private sector-led development strategy: In a bid to foster structural transformation of the Gambian economy, the Government has to embark on private sector-led development strategy, with prior focus on attracting foreign direct investments (FDIs). According to the World Bank’s Ease of Doing Business Report, the Gambia ranks 155 out of 190 countries with a score of 50.3, which is very low. The Investment Policy Review conducted in the Gambia in 2017 highlighted a number of areas requiring attention, including streamlining the process to formally register a business, reforming tax laws, improving access to land, and addressing constraints that impede trade. It also highlighted issues relating to the labour market, competition policy and law, and access to justice — critical areas where reforms could improve the business environment. However, this does not mean granting of numerous tax exemptions and concessions to investors which often result in revenue losses. The Gambia can tease lessons from some of the East African countries. Five countries in East Africa have lost about USD 2.8 billion a year in tax incentives and exemption, a sum that is higher than the annual tax revenue of Uganda, which is about US$2 billion. It should also be remembered that in a number of countries, FDIs have failed to deliver on their promises, i.e. promoting technology and skills transfer, employment creation, and local sourcing among others. In that respect, the government should be very wary of Chinese investments which have very little, if any, impact on the host country’s balance of payments. Chinese industries in Africa source virtually everything from China, including materials for building the factories, raw materials, and personnel while paying local employees menial wages. Therefore, competition for FDI should not necessarily result in tax exemptions and concessions to investors.
Africa remains the least industrialized continent in the world. Indeed, the growth of manufacturing value added during the structural adjustment programs (SAPs) in the 1980s was disappointing, with several countries actually suffering de-industrialization. From 1980 to 2009, the share of manufacturing value added to GDP marginally fell from 16.6% to 12.7% in the rest of Africa, excluding North Africa. Thus, over half a century after independence, while other regions have increased their share of manufactured exports, the continent still depends on the export of raw materials to the industrialized world. These raw materials are processed and sold back to Africa at much higher prices, thus preventing Africa from moving up the higher end of the global value chain. A typical example is the production of peanuts. The Gambia exports peanuts to England which is transformed into peanut oil and butter and sold back to the Gambia at probably five times the price. Another example, is Ivory Coast which exports cocoa to France. This cocoa is transformed into chocolate and sold back to Ivory Coast at 8 times the price. Hence, the Gambia should ensure that FDIs are directed towards developing its domestic value chains so as to enable it to compete favourably in global value chains.
iii) Development of international standards: To achieve this, the need for the Gambia to develop products that meet international standards remains crucial if it seeks to move up the global value chains at a level that is of economic significance. The building of capacity to improve, certify and ensure the quality and standards of industrial products is important for taking advantage of access to the African market and kick start the process of industrialization.
iv) Development of trade Finance: The World Bank’s conservative estimate for the value of unmet demand for bank-intermediated trade finance in Africa ranges from $110 billion to $120 billion, significantly higher than estimated earlier figures of about $25 billion. These figures suggest that the market is significantly underserved. African banks face numerous constraints in meeting the demand for trade finance. The main constraints are limited dollar availability (by far the dominant currency in international trade, and by extension, trade finance) and insufficient limits with confirming banks for confirming letters of credit. Another constraint is weak balance sheets. The Gambia’s case is even more serious as almost all the banks are foreign-owned. The situation is further complicated by the country’s indebtedness which is undermining the stability of the domestic financial sector and crowding out private-sector lending, as local financial institutions invest heavily in treasury instruments instead of lending to the productive sectors. The results are a private sector unable to invest due to the lack of access to finance and a public sector that has a very limited fiscal space.
v) Diversification of the narrow export base: The Herfindahl (for the Gambia) Index which is a measure of diversification/concentration of an economy is 0.6 reflecting the fact that the Gambian economy is fairly concentrated in a few sectors. In other words, the export base is narrow. There is, therefore, a need to diversify the Gambian economy beyond agriculture. However, in order to break into manufacturing, it has to strengthen its competitiveness—by enacting policy reform to ensure more competitive markets for transport and trade facilitation, improving the efficiency of government agencies at the border, and addressing behind-the-border trade constraints to promote value addition, increase productivity, and undertake infrastructure investments that reduce the costs of inputs.
vi) Improve trade capacity in Government: The Gambia must be able to reinforce the capacity to negotiate and implement trade agreements in order to benefit from ACFTA. It should seek assistance from the Aid for Trade Initiative to build supply-side capacity and trade-related infrastructure while addressing trade-related constraints and challenges. It should also enhance the capacity of personnel in ministries and departments dealing with trade and trade-related issues, including the in particular, the Ministries of Finance and Trade, and the Gambia Revenue Authority, among others.
Disclaimer: The views expressed here are those of the writer and do not necessarily reflect the views of the African Development Bank.
Suwareh Darbo was born in Dumbutu, Kiang West in 1963. He began his professional career in the Ministry of Finance in 1988 where he served as an Economist until 1995 before joining the United Nations Development Program in The Gambia as National Economist until 2004. He is currently the Principal Country Economist for Lesotho at the African Development Bank’s Regional Resource Center based in Pretoria, South Africa.
