News Archive October 2014

Africa still attractive despite challenges

The confidence index for Africa among business leaders has remained unchanged over the third quarter of 2014, according to YPO Global Pulse.

The Young Presidents’ Organisation (YPO) Global Pulse Confidence Index for Africa released on Tuesday puts Africa at 61.9 points despite the Ebola outbreak that is rampaging West African states.

According to Paul Kavuma, CEO at Catalyst Principal Partners, business leaders in Africa maintained a cautious optimism.

“Any sort of confidence rating over 60 per cent still shows strong confidence and optimism in the economy. So generally Africa although it remains stagnant from one perspective, it is actually stagnant but at a high level and while it may have been stagnant because there are some economics that have been under more pressure while others have been really racing well  and doing extremely well,” Kavuma said in a statement.

Slight alterations were seen in Africa’s one year outlooks for sales and capital spending. Employment confidence rose marginally by one-tenth of a point to 57.4.

“While there were increased geopolitical risks in the third quarter coming from both inside and outside the continent, they are not yet expected to be long-lived enough to counteract the economic tailwinds of infrastructure investment and strengthening services sector,” Paul Berman chair at YPO’s Africa region said in a statement.

The quarterly electronic survey conducted in the first two weeks of October with 2,431 CEO’s across the globe, including 152 in Africa saw variations in confidence at the country level. South Africa, the highest weighting in the index shaved off 1.3 points to read at 63.3 points while Africa biggest economy, Nigeria, rose marginally by 0.4 points to 56.7. Meanwhile, Kenya, East Africa’s largest economy climbed 3.7 poijnts to 68.7 over the third quarter.

“If you look at the macro environments, it is improving. We [East Africa] have got better governance, better accountability, more investment in infrastructure, better provision of services and the business community therefore is responding whereas if you look at our economy in East Africa 20 years we probably had very export orientated economy,” Kavuma explained.

Meanwhile globally, the YPO confidence index dropped by 0.8 points. Confidence in Asia declined by 1.8 points, Australia dipped 1.5 points, Canada shaved off 0.7 points despite it being the world most upbeat region, European Union was down 2.5 points and the United States also down by 0.6 points.

Nonetheless, the Middle East and North Africa were up with a reading of 65.8 points.

Swaziland in SACU funds shocker

The ministry of finance says member states revenue shares for 2015/16 will be concluded in December after South Africa, being the manager of the pool has provided the forecast of the size of the pool for the next (2015/16) financial year and has provided the audited size of the pool for the previous year (2013/14)

Revenue receipts from the Southern African Customs Union (SACU) for the next financial year (2015/16) might drop.

They are expected to fall below the E7.4 billion that the government received during the current financial year, the ministry of finance has reported.

This could spell disaster for the country as it is likely to relive challenges the country faced in 2011 when it had to freeze salary increases for it to cope with the cash-flow problems the country faced.

The possible SACU money drop is according to the second quarter performance report for the ministry tabled by Minister Martin Dlamini in Parliament on Monday.

The second quarter of the government financial year covers three months, from July to September.

The major cause for concern is the performance of the economy of South Africa, being the major contributor into the Southern African Customs Union revenue pool. The ministry of finance says member states revenue shares for 2015/16 will be concluded in December after South Africa, being the manager of the pool has provided  the forecast of the size of the pool for the next (2015/16) financial year and has provided  the audited size of the  pool for the previous year (2013/14).

The ministry further stated that the modest growth of the South African economy of 1.9 percent in 2013 from 2.5 perecnt in 2012, the protracted mining sector strikes and a decline in that country’s manufacturing sector output remained a cause for concern as they may translate to a decline in extra-SACU imports. Such could lead to a reduction in the size of the revenue pool.

The ministry further noted that recent estimates put the 2014 South African Growth Domestic Product (GDP) growth at 1.4 percent and if the audited size of the revenue pool is below the forecast which was provided in 2012, then, the country would be required to pay more money back into the pool.

It says such a situation could further diminish revenue for the next financial year (2015/16).

“Considering all the above factors, particularly the level of intra-SACU imports for Swaziland and the economic performance of the South African economy, SACU receipts for the country for 2015/16 might fall below the 2014/15 level of E7.4billion,” the ministry reported.

In September, finance ministers from the union’s member states participated in the SACU Task Team on Trade Data reconciliation.

The purpose of the meeting was to finalise the process of reconciling intra-SACU trade data for 2012/13 which would be used to determine their revenue shares for the next financial year (2015/16).

In the meeting, member states further presented and confirmed their GDP and population data for 2012, in line with the SACU Agreement which requires member states to submit their data GDP, population and intra SACU imports and exports for the most recent financial year for purposes of sharing.

This finalised intra-SACU trade data for 2012/13, GDP and population levels would be used to determine revenue shares for 2015/16. 

Revenue receipts from SACU finance about 60 percent of the national budget.

Last week, South Africa’s Finance Minister Nhlanhla Nene announced that his country’s economic growth was much slower than anticipated. 

According to a report from SAPA, the minister said the GDP growth was expected to be half of what was forecast in February, at 1.4 percent. Nene warned that South Africa has reached an economic turning point. 

He announced firm measures to check South Africa’s worsening debt outlook, warning that the country had reached an economic turning point. Nene said GDP growth was now anticipated to be 1.4 percent this year (2014/15), almost half of the 2.7 percent forecast in February. He said growth was expected to reach three percent in 2017.

Expenditures growing twice more than revenue

Government expenditures are growing more than twice as fast as revenues.

This has been the trend from the last financial year, 2013/14 and the situation is still the same even in this financial year. 

During the 2013/14 financial year, revenue grew around E700 million while expenditures increased by E2.3billion. This financial year, expenditure is projected to increase by E2.2 billion while revenues are projected to grow by only El billion. The finance ministry said this is despite an outstanding revenue collection performance on the part of the Swaziland Revenue Authority (SRA). It said the recent expenditure-revenue divergence will affect available financing over the medium term. The finance ministry further stated that line ministries are failing to mitigate high expenditures in the medium to long term. However, the ministry is positive that in the next two quarters, budget execution would materialise as planned.

It says over-expenditures related to the wage bill and other unbudgeted decisions may or may not be contained under the existing 2014/15 budget.

The intra-SACU trade data for the countries was presented as follows:

Intra-SACU trade Swazi Observer 30-10-14

Member states’ presentations of GDP and Population levels:

SACU GDP Swazi Observer 30-10-14

What it would mean if SACU money drops

It would be not the first time Swaziland is faced with such woes with the SACU money drop.

Swaziland’s SACU receipts dropped to E1.9billion in 2011. This followed a global economic meltdown which hit the world hard around 2010. Swaziland encountered serious financial challenges then.

Recap of 2011 challenges

  • Government could not cope with some of its responsibilities. It struggled to pay civil servants’ salaries which accounted for over 40% of its expenditure. 

  • In light of the low SACU revenue, the International Monetary Fund (IMF) proposed various fiscal adjustment strategies for the government.

One of the key recommendations for Swaziland was to reduce the huge public sector wage bill.

  • Government announced that 7 000 public service jobs would be cut in 2011 a move that was expected to save money but also came with fears that such could compromise public service delivery and further contribute to an unemployment rate that already stood at 40 percent at the time.

  • Government suspended new recruitments into the civil service, froze salary increases and short-term borrowing.

  • The IMF predicted that if government did nothing to confront its economic problems, public debt would hike from 19 percent of GDP in 2010 to 31 percent in 2011, eventually constituting 75 percent of GDP by 2015. However, the public debt stock currently stands at E6.9billion, which amounts to 16.7 percent of GDP.

SD granted E8m from COMESA

Swaziland has been granted E8million for funding of national programmes related to regional integration. 

However, the ministry of finance is required to submit projects that are regional integration related to be considered for the funding.

While the country gets the funding offer, it has still not been able to adopt any COMESA harmosined standards. 

The ministry of finance says this is due to inconsistency in the procedures for harmonisation between COMESA and the Southern African Development Community (SADC) as Swaziland is affiliated to both regional organisations. 

It says the situation has historically put the country in a position where it can only focus on standards harmo0nisation under SADC given her deeper integration within SADC and her stronger industrial and economic ties to South Africa. 

Minister pours cold water on World Bank Ease of Doing Business report

The government has dismissed a new report by the World Bank showing that Kenya has made a slight improvement in its business regulatory environment.

The 2015 Ease of Doing Business index report fails to capture recent developments, according to Industrialisation and Enterprise Development Cabinet Secretary Adan Mohamed.

The study was released by the global lender on Tuesday and shows that the country edged to position 136 this year from last year’s position 137 in the global competitiveness ranking.

Mr Mohamed said on Wednesday that the survey did not include reforms undertaken by the government in the last one year and, therefore, did not reflect the current situation in the country.

“These latest results do not capture the reforms undertaken by the government in the last 12 months. We see an improving business climate as a result of the reforms that various government agencies have undertaken, but more needs to be done,” Mr Mohamed said.

The Kenya Private Sector Alliance (Kepsa) backed the government’s position.

The minister cited the reduction of the period taken to register a company from 32 days a year ago to a day, the introduction of an electronic tax payment system (iTax) by the Kenya Revenue Authority and decentralisation of Huduma Centres as some of the initiatives by the government to improve the business environment but which were omitted in the survey.

NOT REPRESENTATIVE

At the meeting, Kepsa said the survey included responses from as low as two participants in some categories, a situation they said was not representative of the entire country.

“Kenya has recently become the leading destination for global-scale investments with major companies choosing to locate their African operations through their headquarters in the country, an achievement we are proud of,” Kepsa chief executive Carole Kariuki said.

The government now plans to carry out periodic surveys to audit progress of reforms in business regulation.

Mr Mohamed said a team of 40 individuals drawn from government agencies, the private sector and leading business schools in the country had been identified to carry out the exercise.

“We are optimistic that going forward and given the Business Environment Delivery Unit launched recently, we will see our country ranked even higher in coming years,” he said.

The World Bank report shows that sub-Saharan Africa had the highest number of reforms last year with 74 per cent of the region’s economies improving their business regulatory environment for local entrepreneurs.

In the East Africa, Rwanda and Burundi were cited as having made significant multiple improvements in the past five years, alongside Cape Verde and Ivory Coast.

The Continental Free Trade Area: What’s going on?

Regional integration has been a core element of African countries’ development strategies since independence.

The Africa-wide development agenda, as championed by the African Union (AU), is based on regional integration and the formation of an African Economic Community (AEC). This was laid out in the 1980 Lagos Plan of Action for the Economic Development of Africa and the Abuja Treaty of 1991.

The Africa regional integration roadmap considers the Regional Economic Communities (RECs) as the building blocks of the AEC. The AEC is to be formed in six phases over 34 years, as outlined below:

At its 18th Ordinary Session in January 2012 in Addis Ababa, on the theme “Boosting Intra-African Trade,” the Assembly of Heads of State and Government of the AU adopted a decision and a declaration that reflected the strong political commitment of African leaders to accelerate and deepen the continent’s market integration. The Heads of State and Government agreed on a roadmap for establishing a Continental Free Trade Area (CFTA) by the indicative date of 2017.

As highlighted in the roadmap, the CFTA is set to build on the Tripartite FTA negotiations, which would create a free trade area among the 26 countries of the East African Community (EAC), the Common Market for Eastern and Southern Africa (COMESA) and the Southern African Development Community (SADC). Since the formal launch of the negotiations in 2011, significant progress has been made, and leaders have expressed confidence that the negotiations will be successfully concluded by the end of 2014, with the agreement to be fully implemented by 2016. The 26 Tripartite countries represent close to 60 percent of the AU’s GDP and population, and an FTA among them would constitute a fundamental building block for the CFTA.

The 18th AU Summit in early 2012 opened the discussions on a second bloc of combined RECs (ECOWAS, ECCAS, CEN-SAD, and AMU) to emulate the TFTA. Initial consultations took place in April 2013, and the first negotiation meeting on the second bloc occurred in December 2013. A formal Memorandum of Understanding outlining how decisions will be made and establishing coordination mechanisms still needs to be signed, along with the launching of work on technical studies and key institutional preparatory work on the formation of this second bloc.

Rationale for a CFTA

During its 19th Ordinary Session in July 2012, the AU adopted a decision that highlighted the gains from the CFTA for intra-African trade, through the High-Level African Trade Committee and the consultations of the Committee of Seven Heads of State and Government, which addresses the challenges of intra-African trade, infrastructure and productive capacities.

The creation of a single continental market for goods and services, with free movement of business people and investments, would help bring closer the Continental Customs Union and the African Common Market envisaged in phases 4 and 5 and turn the 54 single African economies into a more coherent, larger market. The larger, more viable economic space would allow African markets to function better and promote competition, as well as resolve the challenge of multiple and overlapping RECs, helping thereby to boost inter-REC trade. Moreover, the sheer size of the single market would provide a more conducive environment for industrial diversification and regional complementarities than what is viable under existing individual country approaches to development.

The United Nations Economic Commission for Africa (UNECA) calculates that the CFTA could increase intra-African trade by as much as $35 billion per year, or 52 percent above the baseline, by 2022. Imports from outside of the continent would decrease by $10 billion per year, and agricultural and industrial exports would increase by $4 billion (7 percent) and $21 billion (5 percent) above the baseline, respectively. If coupled with complimentary trade facilitation measures to boost the speed and reduce the cost of customs procedures and port handling, the share of intra-African trade would more than double over the baseline, to 22 percent of total trade by 2022.

Looking at the potential impact on the EAC for instance, one can see the potential for significant gains from a CFTA. Despite significant increases in intra-community trade within the EAC, the levels of trade between the EAC and other African countries, particularly those outside of the Tripartite area, remains limited. There has been renewed interest in expanding trade and investment links further afield. For example, Nigeria – which officially became the largest economy in Africa in 2014 – and the ECOWAS sub-region could present a significant export market for EAC businesses. In 2012, EAC exports to ECOWAS amounted to $132 million, for a market of close to 300 million people. West Africa currently relies on extra-African imports of coffee and tea, and the EAC could be in a position to tap into this market, if high tariffs and weak transport links can be addressed. In May 2014, Kenya and Nigeria signed trade pacts aimed at deepening trade ties, following high-level political meetings and several large Nigerian business delegation visits to East Africa. Trade with neighbouring Central African States (ECCAS) has shown significant growth, with exports to the region expanding by close to 40 percent between 2010 and 2012, from $1.2 billion to almost $1.7 billion. The CFTA would further open doors to West and Central Africa, through the reduction and eventual elimination of tariffs and improved trade facilitation and infrastructure.

Current Status of the CFTA

The January 2014 AU Heads of State meeting reaffirmed the commitment to the CFTA roadmap, and highlighted the need to launch the CFTA negotiations in 2015.

CFTA Table 2

The second meeting of the Continental Task Force on the CFTA took place in Addis Ababa in early April 2014. The meeting put forward draft objectives and guiding principles for negotiating the CFTA, which were presented to the Extraordinary Session of the Conference of AU Ministers of Trade (CAMOT) in Addis Ababa between April 23 and 28 this year. The session was attended by officials from member states, six RECs (including the EAC), and private sector organisations (East African Buisness Council, CBC, Federation of West African Chambers of Commerce). 

Key recommendations from the ministers included the following:

  • Further discussions on and refining of the Draft Objectives and Principles and the Draft Institutional Arrangements for the CFTA, should be undertaken and presented to the 9thSession of CAMOT (scheduled for early December 2014).

  • The AU Commission should prepare Draft Terms of Reference of the CFTA-Negotiating Forum based on best practices in the RECs and/or the Tripartite FTA and submit a draft for discussion at the next meeting of senior trade officials.

During the June AU Heads of State Meeting in Malabo, the High Level African Trade Committee (HATC) called on member states to maintain the momentum in the CFTA time table, and authorised trade ministers to meet as often as needed to ensure the launch remains on track.

The Role of RECs

Even though member states have the sole mandate to negotiate and agree to international trade agreements, the RECs can play an important role in facilitating the negotiations and building national-level capacity and ownership, especially if the CFTA structure is to build on the Tripartite FTA as well as ECOWAS and ECCAS FTAs (CFTA acquis). 

In terms of the implementation strategy for the broader Boosting Intra-African Trade (BIAT) initiative, the April Extraordinary Session of the CAMOT recommended the following:

  • The AU Commission, REC Secretariats and UNECA should continue their consultations with all Member States in order to ensure ownership;

  • There is need for more coordination between AUC and RECs including the exchange of information on integration so that regional processes will feed into continental processes;

  • Member States and REC Secretariats should designate national and regional focal points and establish the technical working groups for the BIAT/CFTA in line with the July 2012 Summit Decision.

Opportunities and challenges

Negotiating an agreement of this magnitude will be an enormous undertaking, and will require the political will of leaders across the continent. Important issues to be considered include:

  • The AU includes many smaller least-developed countries, as well as economic powerhouses such as Nigeria and South Africa. It will be important that the CFTA negotiating framework allows for all member states to effectively participate and the negotiations reflect the interests of the poorest countries on the continent. Capacity building on the key technical issues will be a vital component to ensure all countries can effectively engage.

  • The TFTA negotiations included two phases, the first covering tariff liberalisation, rules of origin, customs procedures and simplification of customs documentation, transit procedures, non-tariff barriers, trade remedies and other technical barriers to trade and dispute resolution, and the second covering trade in services, facilitating movement of business people, competition policy and intellectual property. It may be more practical for the CFTA to cover all of these areas from the get-go, to conform to modern FTA structures.

  • Constructive engagement with the private sector and civil society will be vital to generate the momentum to drive the process forward. The private sector must be engaged from the start, including via national and regional chambers of commerce, to understand the process and potential economic benefits from the agreement. In November 2013, the Pan-African Chamber of Commerce and Industry (PACCI), representing 35 national chambers, signed a Memorandum of Understanding with the African Union outlining its support to the CFTA process and highlighting the need to engage with the business community.

The way forward

The meeting of trade ministers in December will be a critical milestone as the AU Commission will present key negotiating principles for consideration prior to the January 2015 High Level African Trade Committee, currently chaired by the President of Ghana, John Dramani Mahama.

To ensure the successful launch of the negotiations by June 2015, there will be a need for further thinking on the key technical issues and structure for the negotiations, as well as a concerted drive to engage with the private sector and the public at large across the continent to ensure this will not be just another Addis-driven “top-down” political exercise.

Ilmari Soininen is a senior consultant with Saana Consulting and a grant officer with the DFID Trade Advocacy Fund.

This article is published under Bridges Africa, Volume 3 - Number 9 by the International Centre for Trade and Sustainable Development.