Parminder Vir OBE identifies benefits for the micro, small and micro enterprises (MSMEs) accruing from the AfCFTA…
What is the AfCFTA?
The African Continental Free Trade Area (AfCFTA) is a flagship project of the African Union (AU), established in 2018 to create a single market for goods and services, facilitated by movement of persons, to promote industrial development and sustainable and inclusive socio-economic growth to deepen the economic integration of Africa.
As at 5 February 2021, 54 Member States of the AU have signed the agreement, and 36 countries have deposited their instruments of ratification. Start of trading under the AfCFTA Agreement began on 1 January 2021.
The agreement connects 1.3 billion people across the continent with a combined GDP estimated at US$3.4 trillion.
Why the AfCFTA Matters?
Intra-US trade is 50% of trade. In Asia, it is 60%, and in Europe, 70%. However, intra-Africa trade currently accounts for only 12% of trade – significantly lower than in many other regions. This limits foreign investments within the continent, while increasing trade dependence on foreign markets.
The AfCFTA is the most exciting moment for the continent in this regard, and for Africa’s post COVID-19 recovery. The agreement offers opportunities for collaborative action, allowing Africans to do business with each other and strengthening Africa’s resilience.
What is the AfCFTA Promise?
The AfCFTA is set to:
- Create a liberalised market for goods and services;
- Contribute to the movement of capital;
- facilitate investments through the creation of a large market;
- catalyse the introduction of new technology to boost productivity;
- enhance competitiveness of members’ economies;
- promote industrial development through diversification;
- develop value addition systems for products;
- eliminate tariffs on intra-Africa trade making it easier for businesses to trade within Africa and benefit from their own growing market;
- introduce regulatory measures such as sanitary standards and eliminating non-tariff barriers to trade;
- establish, in the future, a Common Conti- nental Market.
- What would be the economic impact of the AfCFTA?
- According to a report from the World Bank: The African Continental Free Trade Area: Economic and Distributional Effects, implementing the AfCFTA would:
- lift 30 million Africans out of extreme poverty and boost the incomes of nearly 68 million others who live on less than $5.50 a day;
- boost Africa’s income by $450 billion by 2035 (a gain of 7%) while adding $76 billion to the income of the rest of the world;
- increase Africa’s exports by $560 billion, mostly in manufacturing;
- spur larger wage gains for women (10.5%) than for men (9.9%);
- boost wages for both skilled and unskilled workers — 10.3% for unskilled workers, and 9.8% for skilled workers.
What are the challenges to implementing the AfCFTA?
Implementing the AFCFTA could involve a number of challenges.
The agreement will mean harmonising Africa’s heterogenous economies, despite their considerable variation in size, levels of economic development and diversification and it is hard to ensure broad-based gains for all members states.
The AfCFTA has the greatest levels of income disparity of any continental free trade agreement. Many countries, especially the 32 least developed countries, face challenges to create jobs, develop their industrial sectors and diversify their production capacity.
In some countries, weak infrastructures, low technological uptake and conflicts will threaten the implementation of the agreement. A general fear of losing control and sense loss of identity across segments of the population has also been expressed.
What are the Benefits of AfCFTA for African SMEs?
African MSMEs can benefit from greater access to new markets and the possible economic transformation that competition in these markets could promote, and are regarded as key target for the AfCFTA.
The agreement offers a number of benefits to African SMEs, vital due to their importance to the continent’s economy, accounting for up to 80% of businesses and contributing up to 40% of national income.
- fostering specialisation and boosting industrialisation;
- increasing employment and investment opportunities, as well as technological development;
- allowing African-owned enterprises to enter new markets, expand their customer base and create new products and services, making investing in innovation viable;
- Reducing the manufacturing gap, creating more avenues for SMEs to create more well-paid jobs, especially for young people;
- Increasing investments that drive capital to domestic businesses;
- Easing the process of importing raw materials from other African countries and enabling SMEs to set up assembly firms in other African countries, creating cheaper means of production.
- The Nigerian Association of Chambers of Commerce, Industry, Mines, and Agriculture (NACCIMA) surveyed 1,804
MSMEs across agriculture, manufacturing, services and wholesale/retail across Nigeria for a report on the impact of the AfCFTA, and found the following:
- Low level of awareness regarding the existence of the Agreement, 67% of respondents (although survey was undertaken prior to September 2020 and awareness in Nigeria may have increased due to communication campaigns);
- Majority are optimistic of positive effects of the AfCFTA on market size, cost of materials/inputs, cost of machineries and production capacity.
- Possible challenges of the AfCFTA to African SMEs
- Despite its many benefits, the agreement still may face certain challenges within Africa. These include:
- Capacity: there is a deficiency in human and technological capacity of MSMEs, putting them at a disadvantage to larger corporations.
- Access to Finance, i.e., limited access to SME finance and trade finance that may hinder participation in intra-Africa trade.
- Access to Power: erratic and poor electricity supply limits operations and raises expenses for many SMEs, preventing their ability to scale to other African markets.
- Network Infrastructure: travel and transport between African countries and regions via roads, rail and air need a boost to be more efficient. Digital infrastructure and stronger internet penetration will also be needed for SMEs to take full advantage of the agreement.
- Foreign competition: Local producers may lose sales to foreign suppliers, because the latter can lower the cost of their products by leveraging the reduced tariffs imposed on imported goods, and can dump sub-standard products into the market.
- Loss of intellectual property: to larger corporations due to poorly enforced patent laws.
What is the AU Trade & Industry Commissioner is doing to support SMEs?
According to the AU Trade & Industry Commissioner, a study is underway to see how small-scale cross-border traders can be mainstreamed into the AfCFTA. This is vital because it will facilitate their growth, train them to market their products, make returns, manage their accounts, legally register their businesses and pay taxes, all of which allow them to access capital from financial institutions.
The agreement is also building a mechanism to report non-tariff barriers, which disproportionately impact MSMEs due to their limited resources and access to information.
MSMEs can also tap into the regional export destinations and leverage on the AfCFTA to eventually expand into overseas markets.
Call to Action for African SMEs
My call to action to African SMEs on the AfCFTA is to organise and educate themselves about the AfCFTA, and to be participants and not bystanders in this new African initiative.
African entrepreneurs must raise awareness and initiate campaigns on how they can benefit from the agreement, and what measures and policies are needed to ensure they have a place within the agreement.
SMEs must also provide their own leadership, as they cannot afford to wait for others to lead them. With their chosen leaders and with a common voice, they can then begin to engage with the AU, African governments and trade bodies, holding them accountable for the implementation and regulation of the AfCFTA to ensure that it works as intended for all Africans.
About Parminder Vir OBE
Parminder Vir OBE has dedicated herself to positively impacting and transforming lives through a professional career spanning 40 years in philanthropy, entrepreneurship, film and television production, arts and culture, and investment funding. She is the co-founder of the Support4AfricaSMEs campaign and The African Farmers Stories, launched in 2020. She served as the CEO of the Tony Elumelu Foundation, based in Lagos, Nigeria from April 2014 to April 2019. Prior to joining the Foundation, Parminder has enjoyed a distinguished career as an awarding winning film and television producer and private equity investor in film and media.