Investment flows in Africa peaks over treaty on free trade area
Photo Credit- Freight and Trade Weekly
…will translate to signiﬁcant gains for manufacturers, food exporters
44 African economies signed in March an ambitious treaty in order to form the African Continental Free Trade Area (AfCFTA). The goal is to eliminate tariﬀs on 90 percent of goods. The rationale behind more regional integration is to trade between equals and limit the share of vertical trade (exports of commodities and imports of capital).
It should help ascend the value chain and increase the share of manufactured goods in African exports, since manufactured goods represent 43 percent of intra-African exports and less than 20 percent of African exports to other regions (75 percent is driven by commodities).
The current pre- dominance of commodity exports makes growth procyclical to commodity prices. Sizeable output volatility deters economic development. More trade openness should imply some economies of scale, through the relocation of production activities in regional hubs, although with some limitations explained by remaining capital controls. One may easily infer some welfare gains for the consumer. However, such economies of scale will also imply some losers. The recent period of low commodity prices was abruptly felt by countries with ﬁxed exchange rates, as they lost competitiveness after other currencies depreciated (like the Nigerian Naira or the Ghanaian Cedi). In economies with low labor productivity, the likely impact of lower import tariﬀs is worrying trade unions.
It explains why Nigeria and South Africa did not sign the free trade agreement yet, since these organizations are directly involved in political parties in these countries. A free trade area will increase intra-African exports.
We expect African exports to increase by a wide margin, based on two deterrent scenarios. The ﬁrst one is without AfCFTA, and is driven by current development trends and foreign investor appetite for Africa. After China, Turkey developed a strategic partnership with African economies, and India is about to do so. In this ﬁrst scenario, African exports would grow but trade would remain quite vertical, as commodity exports would keep the lion share of total exports. Based on our country scenario (on nominal GDP growth, exports and exchange rates), we estimate that African exports of goods and services would increase by +7 percent per year and reach $1275 billion by 2030. But, intra-African exports would stick with their 19 percent share of the total.
The second scenario adds an AfCFTA impact on exports. Continental exports would grow by about +8 percent per year and reach $1415 billion by 2030. This scenario yields also to very diﬀerent structures of trade. Intra-African exports would reach 27 percent of the total, about the current ASEAN intra-regional trade share. Under this second scenario, intra-African exports would grow by about +11 percent per year (+7 percent with the ﬁrst scenario). Manufactured goods would also represent a higher share of total ex- ports in this second scenario, jumping to 28 percent ($ 398 billion) from 24 percent ($ 308 billion) in the ﬁrst scenario.
It also means that the trade impact of an AfCFTA would be asymmetric. Manufactured goods and service exporters will make the bulk of additional export gains (South Africa, East Africa), while many oil exporters would not see key divergences, as e.g. Nigeria, Algeria or Gabon. Additionally, food exporters will also be big winners (Ghana, Zambia, and Côte d’Ivoire), since current barriers to food exports are among the biggest barriers to trade in Africa.
Issues for implementation Infrastructure development is among preconditions to a stronger intra-African trade. Export logistics are frequently organized in order to trade with other regions.
Physical integration is increasing in East Africa, but is still in its infancy. Up- grading it would mean key infrastructure investment. E.g. Kenya would need $117 billion investment in roads and railways (76.5 percent of its actual GDP) to close by 2030 its transportation infrastructure gap with Thailand. Moreover, this development would imply other basic needs (investment in the digital economy, water, sanitation, power).
Power generation would make the bulk of it: $84bn (55 percent of actual Kenya GDP). Attracting the right kind of ﬁnancing would be another issue. Increasing foreign direct investment from the current $ 50 billion would require many reforms since the current business climate is still detrimental, despite some progresses made. Fiscal revenues will also have to be increased in order to channel more funds to infrastructure ﬁnancing. It means that new taxes will have to be raised (VAT, income tax) to replace old ones, as import tariﬀs currently represents 9 percent of ﬁscal revenues in Africa according to the UNCTAD. Sources: Euler Hermes, Allianz Research.
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