Friday, July 19, 2024
InterviewExamining the progress of the much cherished free trade deal

Examining the progress of the much cherished free trade deal

Steven Karingi is the UN Economic Commission for Africa’s director of regional integration and commerce. He previously worked as a Senior Analyst and Head of Macroeconomics Division at the Kenya Institute for Public Policy Research and Analysis (KIPPRA), as well as a Lecturer of Economics at Egerton University, the oldest institution of higher learning in Kenya. Over the sidelines of the Conference of African Ministers of Finance, Planning, and Economic Development in Addis Ababa, The Reporter’s Ashenafi Endale sat down with him to discuss the implementation of the African Continental Free Trade Area (AfCFTA).

The Reporter: Only 96 items are being traded under the African Continental Free Trade Area (AfCFTA), though it has been operationalized since January 2021. How do you evaluate the progress of the AfCFTA?

Steven Karingi: The AfCFTA is an agreement between states that has to be domesticated before it can be implemented. Domestication is the instrument that allows you to trade under the AfCFTA. One of them is that a country needs to have a tariff book. A tariff book shows the rates applied to more than 6,000 products and services traded in Africa.

The other instrument is that for every product traded, there must be documented rules of origin showing the specific product is produced in a specific African country. Anything that comes from Ethiopia to Ghana needs to follow the rule of origin. Then it is given the same treatment in Ghana as it is in Ethiopia. It is what we call the citizenship of the product, or national treatment.

Under the guidance of the AfCFTA secretariat and the ministers of member countries, sectors are identified. Some countries can trade their coffee, tea, manufactured batteries, and others. This has been piloted and tested in eight African countries. They demonstrated under the tariff book and rules of origin. So, those 96 items mentioned were selected for demonstration out of a total of close to 6,000 goods and services.

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Countries like Ethiopia did not domesticate the agreement and did not make the tariff offers. What kind of pressure is being applied on countries to operationalize the AfCFTA sooner?

Since the AfCFTA came into force, countries have been making tariff offers. You have mentioned Ethiopia as an example. I know Ethiopia is ready with its tariff offer.

So far, 46 countries have already made their tariff offers, and I think 29 have already been verified. The majority have been verified and recognized by the AfCFTA secretariat to go into the tariff book.

The offers include those items under the 90 percent tariff-free category, the seven percent sensitivity, and the three percent exclusion. We should see this as progress. Once the countries launch at full scale, we will see an accelerated implementation.

Some countries, like Ghana and others in West Africa, started trading under the AfCFTA but were then discouraged. There is an infrastructure gap across Africa. The customs and payment systems are also not integrated. How do you see these challenges?

There was a shipment coming from Kenya to go to West Africa under the trade agreement. That shipment had to find its way through a port in Asia to go to West Africa.

Connectivity across Africa is crucial for the trade to be cost-effective. The AfCFTA does not commit countries to build roads. But countries have commitments and programs among each other to develop infrastructure in Africa, like road networks. Under the Single African Air Transport Market (SAATM), they also agreed to give each other landing rights for aircraft. They are also investing in expanding their port capacity.

But transshipment is crucial for Africa. Otherwise, goods from Ethiopia will have to go through Asia to reach Nigeria. So, the challenge of connectivity has already been experienced, but that does not mean African countries do not know what to do. That is why they are integrating their cross-border infrastructure network and pooling resources to deepen interconnectivity.

The Ethiopian government is worried about the loss of customs revenue, which has even been discussed in Parliament recently. We have also heard that the Afrexim Bank has allotted a fund to compensate for potential revenue losses for countries once tariffs are zeroed under the agreement. Is this Afrexim incentivizing countries to operationalize the AfCFTA without the worry of fiscal deficits?

At the ECA, we use data to analyze what the AfCFTA’s implications mean. I can tell you that countries will not make all of the nearly 6,000 goods and services subject to zero tariffs at once. First, the 90 percent will have zero tariffs, then the seven percent, and then the remaining three percent.

So, governments are not going to get shock therapy in terms of the current tax collection since they are implementing their AfCFTA commitment over time.

The level of intra-African trade that is taking place today is very small, and the share is insignificant. They would not face revenue losses by applying zero tariffs to this very small intra-Africa trade volume. If they apply zero tariffs to the items they import from outside the continent, which is huge, then they could have lost significant customs revenue. So, the customs revenue loss due to the AfCFTA is very insignificant because the intra-Africa trade volume is very small.

The argument that African countries like Ethiopia are going to lose revenue by opening up their market to other African countries, with whom they are not actually trading, is a weak argument. A tariff on zero is zero. Intra-Africa trade is very low. So revenue cannot be lost because they are already not raising customs revenue from intra-Africa trade. So, it is not a big issue. That is a fact. We know how much trade African countries have with each other.

We have estimated the total amount of revenue potential that would be lost. We conducted simulations for the years 2022–2045, assuming that Africa’s economy will reach a steady state by 2045. The revenue expected to be lost by 2045 would only be eight percent lower than if it were not implemented. The amount of tax revenue Africa mobilizes is somewhere between USD 500 billion and USD 700 billion. In 2045, of all the revenues Africa expects to collect, you will only reduce USD 15 billion.

In an economy with a total of USD 3.5 trillion, USD 15 billion is a very insignificant amount.

We now also have the AfCFTA adjustment program, under the Afrexim Bank and AfCFTA secretariat, which has three windows. A government can go and say, “I am going to lose this amount of revenue by opening for the AfCFTA, and there is a window to support that.

If there is a specific sector to be affected because it is opened up and needs a structural adjustment, you can access financing as a government to strengthen that sector. The private sector, especially the MSMEs, can maximize their AfCFTA opportunity through the windows.

Ethiopia’s macroeconomic team is still expected to deliberate on the tariff line offers. But Ethiopia was among the first to ratify the agreement. How do you see Ethiopia’s commitment in terms of operationalizing it?

I know Ethiopia has been engaging with the AfCFTA secretariat. I think Ethiopia has landed where it wants to with the AfCFTA and its tariff offer. If they have not made the tariff offer so far, they are in the process of submitting it.

The Ethiopian Ministry of Trade has done a lot of work, and they are waiting for the macro team to look at the final documents. My sense is that I would expect them to do it soon, if they have not already done it. I saw that the Parliament asked the Ethiopian Minister of Trade how much trade Ethiopia had with the rest of Africa. Most parliaments have researchers, and I thought the Ethiopian Parliament was also wondering how much revenue it might lose by operationalizing the AfCFTA.

Ethiopia has a hundred-billion-dollar economy. It should not be worried about revenue loss by operationalizing the AfCFTA.

African countries have different currencies. How are they going to trade under a single market? Are you planning on establishing some kind of African central bank or single monetary system, or just using currency swapping?

This is a very important issue. Under the Abuja Treaty, there is an expectation to have monetary institutions that Africa aspires to have, such as the African Monetary Fund, the African Finance Institution, and the African Central Bank. African countries have already agreed to establish the three institutions. The question is when. You cannot have enhanced policies unless such institutions are in place.

Yes, we have multiple currencies, but I do not think the discussion of a single African currency is a discussion that we should be having today. What we should be discussing is currency convertibility, which is the pan-African payment settlement system.

African currencies are convertible. So you do not need to have the foreign currencies to buy dollars, euros, or yen to trade. What we need is a system that integrates the conversion with real-time transactions.

Is that aimed at excluding the dollar and other non-African currencies?

No. The USD question is more about international trade. Africa is a believer in intra-Africa trade. For international trade beyond Africa, we still need foreign exchange, but for trade within the continent, it makes sense that we minimize the cost of trading. We do not have to pay commission for hard currency conversions. Africa does not need to use hard currencies as we know them today for intra-Africa trade.

Africa can save at least USD five billion every year by trading within itself and just relying on its own currency convertibility payment system.

When will the three monetary institutions be established?

I do not know. We have a champion for that, the President of Ghana.

Ghana’s minister of finance is expected to be in Addis Ababa for the 55th Conference of Ministers (CoM) meeting. So you must ask him this question.

Given that most African countries export similar raw materials, some wonder what Africa is going to trade with each other. The industrialized world also wants Africa to be a raw material supplier for their industries. Do you think the rest of the world, especially developed economies, is welcoming to the AfCFTA, domestic value creation, and industrialization of Africa as a continent? We still need industrial products from the developed world, high-tech products, and the latest technologies.

I disagree with the assumption that we produce the same goods. I come from Kenya. I live in Addis Ababa. There is nothing like an Ethiopian macchiato. I love variety. Even when I am in Kenya, I love Ethiopian coffee. African consumers also deserve variety, and we cannot say all African countries have the same products and services.

To create value addition across African countries, we also need different inputs and raw materials for their manufacturing industries. So all African economies need variety in their supply chains. That is key for regional value chain and manufacturing industry growth in Africa.

On the second question, many still want Africa to remain their source of raw materials, be it electric batteries, chips, agricultural commodities, or other things. And they want it to remain that way. They do not want Africa to add value to its own resources.

From a political point of view, it makes sense for those developed countries to come and invest in Africa and add value to its resources. That way, they can also secure the supply chain. There are some initiatives in the international framework, with some commitments from the international community, including developed countries. They want to see job creation, industrialization, climate change mitigation, and others. These commitments indicate that the developed world also wants to see more value added on the African continent.

Are opening up the telecom and financial sectors mandatory to operationalize the AfCFTA?

That has already been agreed upon. The first five service sectors that would be opened up are transport, tourism, finance, communication, and business services. That alone means there is an expectation that countries will open up telecom and finance, among others. That is already taking place on the continent and is part of the AfCFTA services protocol.

How do the AfCFTA secretariat, AU, and ECA evaluate the progress of the implementation? I did not see the AfCFTA convene since it became operational.

There is an agreement that requires the review of the AfCFTA’s progress every five years. Considering it came into action after the threshold was met in 2019, which makes 2024 the review year. So it will be the first five-year review.

There is also the African peer review and trade policy review. These mechanisms are coupled together to determine the exact progress. The secretariat sends teams to the countries to report back to the different organs of the AfCFTA. Then recommendations are made on how to accelerate and advance. Institutions like ours can also design instruments. Country-level review mechanisms are also necessary.

Which countries do you think have better comparative advantages? Can you also reflect on the potential and deficits of Ethiopia and Kenya?

Under the Regional Economic Communities (RECs), there are countries that are making good progress. Under the AfCFTA, there is something for everyone. Some have an advantage in manufacturing products, while they are not effective in service sectors like finance, transportation, business services, or tourism. So every country has its own competitive advantage.

But investing in their people is crucial for all African countries. Then they can have innovative and competitive manpower that can create new competitive advantages to succeed in the AfCFTA, where all countries can monetize their innovative manpower.

I know there are some who believe we do not have to open up our economies because we are at different levels of development. But the agreement offers opportunities for everyone. The size of these two economies is essentially the same.

Kenya is one shock away from losing some indicators that make it a least-developed country (LDC). I do not see any difference between LDC and non-LDC. All of them require much larger investments.

For instance, the Democratic Republic of Congo (DRC) has the raw materials required to make batteries for electric vehicles (EVs). Unless the DRC begins manufacturing EVs now, it will remain exporting the raw material for EV batteries to developed countries, even 10 years from now. But you can produce the precursors—the battery and then the EV—in the DRC. After some time, EVs will have big demand in Africa, and the DRC can be a huge beneficiary from that.

Are there investors interested in the DRC’s EV and EV battery industry?

There is a lot of interest. The issue of EV batteries is not just about private investment. The big developed countries also want to be part of it because whoever is able to tap into that will also tap into the global value chain.

When will the deadlines be for the 90 percent, the seven percent, and the three percent tariff categories?

It depends on whether you have a developed country or one that is developing. For LDCs, I think it is 13 years. For developed African countries, I think it is 10 years.

Which countries are better trading under the AfCFTA?

These are countries that have already domesticated the AfCFTA. Kenya, Rwanda, Mauritius, Ghana, Tanzania, and I think also Tunisia are trading under the AfCFTA. I think there are eight of them.

Let us say Ethiopia wants to operationalize the AfCFTA next month. What are the steps? Do they have to come and get a license in Ethiopia? How do they pass border customs? Can African businesses directly start selling their items here, and vice versa?

It is very easy. First, the Minister of Finance has to announce the final approval. Then customs offices are set up at Bole, Kality, or Modjo.

Let us say a Kenyan is bringing items to the Ethiopian market under the AfCFTA trade regime and shows his certificate. The customs official here in Ethiopia recognizes the certificate from Kenya, and vice versa. This means African businesses can do business in any African country with similar treatment as local businesses, without additional license or document requirements. But the Ethiopian customs officials will not recognize the item the Kenyan brought unless Ahmed Shide, Minister of Finance, announces the items Ethiopia has offered under the AfCFTA trade regime.

Ethiopia being an LDC and Kenya being a non-LDC, the rate of tariff reduction for those goods that Kenya wants to trade in Ethiopia is not supposed to fall at the same rate as what Kenya is doing for the other members. Applicable tariffs vary based on the status of the country. Basically, I always wonder why a lot of products do not come from Kenya or Ethiopia. Of course, the exchange of services is better, like through Ethiopian Airlines, Kenyan Airlines, and now the telecom sector.

But in terms of goods, very little is flowing between the two economies.

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