It has been three years since 54 of the 55 African Union member states, except Eritrea, have signed the African Continental Free Trade Area (AfCFTA) agreement. Headquartered in Accra, Ghana, the AfCFTA Secretariat officially operationalized the agreement on January 1, 2021.
Only few West African states have started transacting under the continental trade umbrella so far. COVID-19, nationalism and protectionism, the lack of cross-boundary infrastructure and other factors delayed the operationalization of the agreement. But new findings show how African governments are suppressing the agreement, as they could not reduce their involvement in their economies, with the private sectors weak capacity to go beyond the domestic market.
The commitment of governments was questioned in a panel discussion held under the theme, “AfCFTA and the Private Sector,” organized by the UNECA, AU and Konrad Adenauer Stiftung (KAS) on June 16, 2022 at Hilton Addis. Particularly, the narrative that private sectors are weak under state-led economies has won over minds.
The economic models of most African states remain hostile to the private sector. This emanates from the political ideologies and governance system the states adopt, usually sticking to a dictatorship or authoritarianism, and becoming scarcely liberal.
For Ethiopia, which transitioned into a developmental state model from a communist ideology three decades ago, the share of the private sector to the GDP could not exceed 25 percent. Even though Prime Minister Abiy Ahmed’s (PhD) administration embarked to liberalize and privatize state owned enterprises since 2018, the government’s role in the economy was further cemented through the newly formed Ethiopian Investment Holdings (EIH).
“If you ask about the Ethiopian private sector and the AfCFTA, they say it is a country, a new commodity or something else. They do not even have the capacity to know about the Agreement,” said Kebour Ghena, president of Pan-African Chamber of Commerce Industry (PACCI).
“The private sector also does not have the productive capacity to compete in the domestic economy, let alone continentally. The agreement was initiated with a hyper continental aspiration, and African governments must work to realize that aspiration,” added Kebour.
The Ethiopian government did not offer the list of goods and services so far, a crucial step to start trading under the trade agreement. Last week, Fitsum Asefa (PhD), Minister of Planning and Development, said Ethiopia has lost its bargaining leverage, because the government is late to offer the tariff free goods.
Countries have to make 90 percent of the 6,100 goods and services free of any tariff to kickoff trading.
“It has been over a year since we finalized the technical work of picking 90 percent of the items. Negotiations are expected to take place only for the remaining 10 percent of items. This includes banking services. Ethiopia could not offer even the 90 percent tariff free lines, because the macro-economic committee could not approve it,” said Muse Mindaye, Trade Relations and Negotiations director at the Ministry of Trade and Regional Integration (MoTRI) of Ethiopia.
The government is also worried of the revenue loss from customs duties, according to Muse.
Ethiopia, still guarding key economic sectors monopolized by state owned enterprises, was among the first to ratify the agreement but is the last to offer the tariff free items. This might not take place before 2022.
The AfCFTA is predicted to meteorically increase intra-Africa trading to 53 percent from the current 15 percent. This means, import from other continents to Africa will drop by 38 percent, maximizing self-sufficiency of import dependent countries like Ethiopia.
Since the Russia-Ukraine war substantially increased commodity prices in the international market, self-sufficiency is ideal for Africa that faces forex crunches. The AfCFTA, designed in light of other continental single markets like the EU, can also adopt an African currency similar to the Euro, as a medium.
However, the ultimate target of the trade agreement is to make Africa a competitive economic block.
In a study conducted by the Economic Commission for Africa, it indicated that operationalizing the AfCFTA could increase intra-Africa freight demand by around 28 percent compared with the non-AfCFTA scenario.
Africa would require close to two million trucks, over 100,000 rail wagons, 250 aircrafts, and more than 100 vessels by 2030. All in all, the study showed that the cost of not integrating African economies is much higher than integrating the economies.
Competition wise, Morocco, Nigeria, Egypt, Kenya and South Africa are positioned to maintain a better competitive advantage, as they have a comparatively stronger private sector that can export more products and attract more investments.
Nonetheless, Christoph Kannengiesser, director general of German-African business association, said a single or few strong African economies cannot be winners in the AfCFTA.
“Cross-border value chain is crucial for Africa’s industrialization. Volkswagen is not produced only in Germany. Various components are produced across European countries. The same should be true for Africa. A single African economy cannot produce everything. So African countries must specialize on what they are good at. Then the final product will be in one country,” said Kannengiesser.
“Additionally, individual African markets are very small for big global investors. For instance if Volkswagen wants car 500,000 sales annually, that might work only for Egypt, Nigeria or even may be Ethiopia. But for a continental market, such investors would come to Africa,” added Kannengiesser.
The major bottleneck towards realizing the AfCFTA, according to him, is high bureaucracy, and growing nationalism.
“De-globalization and protectionism are not a good direction for Africa. African governments must also lower taxes and bureaucracy for cross border value chains. The AfCFTA is a project European investors’ need. We also need the regional economic blocks as well,” said Kannengiesser.
No doubt Africa’s private sector, is struggling to flourish under the shadow of state interest in economies, protective policies and monopolized businesses by state run enterprises.
However, some experts question why the private sector has to wait for government supports. They recommend the private sector needs to be innovative and competitive by itself, instead of always budding on preferential treatments from their respective governments, limiting their scope in their domestic markets. These experts are cautious on the impact of a sudden liberalization on the private sector.
However, Endalew Mekonen, State Minister of Trade Ministry, believes both the private sector and government can grow together to realize the AfCFTA.
“The AfCFTA is necessary not only for the economic integration, but for the realization of Pan-African movement and a united Africa. The Ethiopian government is highly investing in cross border infrastructure, to create a favorable launching pad for the private sector to activate the agreement,” Endalew said adding, “Ethiopia has an unwavering commitment for the cause, and its constructive engagements. AfCFTA not only realize Africa’s industrialization and structural transformation, but also cut out unfair dumping practices, maximize FDI, export and transform livelihoods. African problems need African solutions.”