Doomed from the Start?

Despite the COVID-19 pandemic and other teething problems, African countries opened their markets in January 2021 under the African Continental Free Trade Area (AfCFTA). The new market, which allows for the duty-free trade of goods and services across borders, is expected to lift up to 30 million Africans out of extreme poverty. It is also expected to boost intra-African trade, promote industrialization, create jobs, and improve the competitiveness of African industries on the global stage. However, the new trade block is encountering problems from its birth. African countries, fearing trading through AfCFTA will immensely cost their economies, are retreating. In fact, more than 20 African nations, including Ethiopia, have not fulfilled necessary requirements to start trading under the agreement. EBR’s Ashenafi Endale explores.

In February 2021, Ghana pioneered to become the first African nation to start trading under Earth’s newest economic block, the African Continental Free Trade Area (AfCFTA), by exporting merchandise to South Africa and Guinea. Officially launched on January 1, 2021, in Accra, Ghana, where its secretariat is located, AfCFTA signaled the start of an important era in Africa’s history where the dreams of the founding fathers for a united and integrated Africa can be realized.

The highly anticipated trade block, part of the African Union’s (AU) Agenda 2063 initiative, is intended to drastically reduce tariff barriers for trade among African countries and enable the creation of a single market for goods and services. “Once restrictions imposed due to COVID-19 are lifted, other African countries are expected to follow,” Brian Mureverwi, Trade Advisor at the AU, tells EBR.

However, Ethiopia is unlikely to start trading under AfCFTA soon even though the country was among the first to sign and ratify the agreement governing AfCFTA in March 2019. This is because Ethiopia is yet to submit tariff concessions specifying which products can be traded duty free as well as its Rules of Origin governing the conditions under which products and services can be traded. Including Ethiopia, 14 African nations have not submitted tariff concessions for goods while 20 countries are yet to submit their tariff concessions for services.
A little more than 6,000 goods and services are expected to be traded under AfCFTA. It has been agreed that member countries must liberalize 90Pct of total items listed by excluding them from any custom tariff. Members are also expected to liberalize the remaining 440 items, deemed sensitive, gradually over the next 10 years.

“The Ministry of Trade and Industry (MoTI) has identified and submitted goods and services that should be liberalized to the Ministry of Finance (MoF),” explains Muse Mindaye, Director of Trade Relations and Negotiations at MoTI. “MoF is still assessing the list in terms of revenue loss and competitive edge. Different government institutions and the private sector will have to discus and approve the tariff-free concessions. This will take a while.”

On top of changing global trade dynamics and enhancing Africa’s miniscule 2.4Pct share in global trade, AfCFTA is forecasted to increase intra-Africa trade to 70Pct from the current 15Pct in addition to boosting annual GDP growth by 1.1Pct and employment by 1.7Pct.

Mesenbet Shenkute, President of the Addis Ababa Chamber of Commerce and Sectoral Associations (AACCSA), explains the downsides of failing to implement AfCFTA for the continent. “Africa’s population will double in the next 50 years. Unless African nations eliminate barriers and seize opportunities, the continent will be in crisis.”

Yet, Getachew Regassa, Secretary General of AACCSA, argues that the disinterest towards globalization and trade liberalization has cast a shadow on the success of AfCFTA. “Countries are retreating from globalization and trade liberalization. Brexit can be an example in this regard.”

More than a shift from globalization, the main reason for African countries’ hesitancy in fully engaging AfCFTA emanates from various threats and challenges which dwarf the opportunities presented by the trade block. In fact, in countries like Ethiopia, both the government and the private sector are uncertain about the gains AfCFTA is expected to bring along. Ethiopia and many African governments rely on customs revenue. If trade is to be executed among African countries duty-free, there is fear that the government’s revenue will drastically decrease.

Concerns against AfCFTA are not unsubstantiated. A study conducted by the United Nations Conference on Trade and Development (UNCTAD) indicates that tax revenue lost due to AfCFTA could be 4.4Pct of the continent’s GDP. Those who support AfCFTA stress that the reduction of tax and duty collections is insignificant compared to possible export revenues, job opportunities, and GDP growth.

Despite differing arguments, many agree that the winners will be African countries with a strong and competitive export sector. Trends indicate Ethiopia has a low track record regarding exports. The annual export earnings of the nation have stagnated around USD3 billion for the last decade. The export-to-GDP ratio also remains low, averaging around 9.65Pct. Ethiopia’s exports are also highly concentrated to few agricultural products. Coffee remains the dominant export commodity.

Alemayehu Geda (PhD), Professor of economics at Addis Ababa University says Ethiopia has a low competitive edge because its productivity is very poor. “In terms of productivity, Kenya is three times stronger than Ethiopia. China and Malaysia are seven times more productive than Ethiopia.”

“Production cost per unit is also extremely high in Ethiopia,” argues Alemayehu. “This is despite the fact that the cheapest labor force in the world can be found in the country.”
This does not mean the country has no competitive edge. Stakeholders stress that Ethiopia has a comparatively better advantage in the tobacco, textile, and footwear industries. “Ethiopia has a 100-year-old leather industry, the finest in Africa,” argues Daniel Getachew, Secretary General of the Ethiopian Leather Industries Association (ELIA). “Although Indian and Chinese industries are destroying the local leather industry, the country still has an undisputable advantage in the leather sector.”

Nevertheless, Ethiopia generates only USD150 million annually form the export of leather products. “The country could generate USD3 billion annually from footwear exports alone,” says Daniel. “But to reach the success nations like India and China have achieved, the industry needs incentives including tax reductions.”

It is not only tariff related barriers that are obstacles for improving intra-Africa trade. Rather, non-tariff barriers also threaten the success of AfCFTA. “On average, custom duties across Africa are low,” Mureverwi explains. “Non-tariff barriers are common and serious across African economies.”

The main non-tariff barrier for trade, in this regard, is the lofty logistics hurdle observed throughout Africa. “Although some sub-sectors in Ethiopia’s manufacturing industry have potential, the infrastructure required to facilitate cross border trade is not in place,” stresses Feleke Tadesse, General Manager of Elfora Agro-Industry.

Elizabeth Getahun, CEO of Panafric Global and President of the Ethiopian Freight Forwarding and Shipping Agents Association, agrees with Feleke in stating that the launching of AfCFTA without putting in place required logistics systems is like putting the cart before the horse. “The major challenge is not only underdeveloped logistics but also the disintegration of existing infrastructure.”

Lack of coordination in the logistics sector is an adjoining problem in Ethiopia. “There are over 24 institutions involved in Ethiopia’s logistics sector,” Elizabeth explains. “Therefore, introducing and expanding a single window system is critical for cross-border mobility.”

Of course, making AfCFTA successful requires the elimination of non-tariff barriers such as cumbersome and restrictive customs procedures that make trading difficult and expensive. In fact, stakeholders agree that it is non-tariff barriers that will make or break AfCFTA. The latest estimates by UNCTAD indicate that in Africa, non-tariff barriers are at least three times more restrictive than tariff barriers.

To address this problem, the AU in collaboration with UNCTAD developed an online reporting, monitoring, and eliminating mechanism. Using the online system, importers and exporters conducting trade under AfCFTA can report encountered non-tariff barriers. African governments, then, have the obligation to solve and eliminate the barriers.

Stakeholders also point to other non-tariff barriers such as certification, quality assurance, and currency interchangeability as challenges. Alemayehu indicates that some of the challenges can be solved easily. “For instance, the currency interoperability issue can be solved by allocating a defined fund for trading with a certain country. The majority of payments can cancel each other out through imports and exports.”

Currency swaps are another option on the table. In fact, Ethiopia already has a currency swap deal with Sudan, allowing the two countries to use their own currencies while trading with each other as of 2017.

Muse says the opportunities AfCFTA presents still outweigh the challenges, which can be solved. “AfCFTA creates a predetermined market. It can solve supply shortages in Ethiopia.”
Yet, Wubshet Hailu, Owner of Watt International PLC, argues that opening up the economy without addressing persisting macroeconomic imbalances will further deteriorate Ethiopia’s internal economic and political stability. “There is a chronic foreign exchange shortage in Ethiopia. As a result, industries cannot import raw materials. Therefore, Ethiopia needs a grace period until the country manages to settle macroeconomic distortions.”

Although Ethiopia registered impressive economic growth during the last decade by implementing expansionary monetary and fiscal policies, it came with adverse consequences. A high current account deficit, chronic foreign currency shortages, and a commodity price boom are some of the macroeconomic problems currently challenging the country.

Citing such macro challenges, Wubshet stresses Ethiopia needs to maintain protectionist policies until its industries are ready. “The Ethiopian government signed AfCFTA without consulting the private sector. In fact, the private sector does not have enough information about the aged Common Market for Eastern and Southern Africa (COMESA), let alone AfCFTA.”
To bridge the information gap and coordinate the implementation of AfCFTA, Elizabeth recommends the government establish a centralized administrative platform to easily provide information and effectively support the private sector.”

Yohannes Dinkayehu, State Minister for Trade and Industry, says the government is going in that direction. “A national coordinating committee has already been established to synchronize the activities of the public and private sector for the effective implementation of AfCFTA.” EBR

9th Year • Mar 16 – Apr 15 2021 • No. 96