2018 Conference of Ministers: AfCFTA and fiscal space for jobs and economic diversification

News

2018 Conference of Ministers: AfCFTA and fiscal space for jobs and economic diversification

2018 Conference of Ministers: AfCFTA and fiscal space for jobs and economic diversification
Photo credit: World Bank

The 51st session of the Economic Commission for Africa and the Conference of African Ministers of Finance, Planning and Economic Development will be held at the United Nations Conference Centre in Addis Ababa from 11 to 15 May 2018.

The ministerial segment will be preceded by a preparatory meeting of the Committee of Experts, which will open on Friday, 11 May 2018. The ministerial segment will open on Monday, 14 May 2018. Further inspiring discussions and findings are anticipated from a number of parallel side events scheduled to be held on 13 May 2018.

The plenary sessions of the Conference will commence with a high-level policy dialogue on the theme, “African Continental Free Trade Area and fiscal space for jobs and economic diversification”, followed by plenary sessions on a series of subthemes.

The discussions will benefit from the contributions of seasoned and high-level panellists from within and outside Africa and will build on the issues paper and technical background materials, which synthesize the results of recent research on the matters under consideration, with a view to achieving an agreed outcome that will have important implications for the continent’s future.


Overview of recent economic and social conditions in Africa

Africa’s growth rebounds in 2017

Africa’s economic growth performance modestly recovered in 2017, rising to 3 per cent, after experiencing its lowest level (1.7 per cent) in 2016 since the beginning of this century. Africa is the second fastest-growing region after East and South Asia (6 per cent), followed by South-Eastern Europe (2.5 per cent), and the Latin American and Caribbean region (1 per cent)

Africa’s economy expanded due to the slight increase in commodity prices and improved domestic conditions supported by improved macroeconomic management. Growth in private consumption and increase in investments led the recovery in Africa’s growth, despite relatively low commodity prices, adverse weather conditions and fragile global economic conditions, which affected some countries. The recovery in some major economies (such as Angola, Morocco and Nigeria) and the continued robust growth in other economies (such as Côte d’Ivoire, Ethiopia, Ghana, and the United Republic of Tanzania) underpinned the continent’s growth. Nevertheless, low growth performance in large economies muted the continent’s growth, including in Nigeria (0.9 per cent) and South Africa (0.6 per cent).

However, the recent growth rates registered in both 2016 and 2017 are below the 7 per cent Sustainable Development Goals target and could not significantly reduce poverty in the continent where 41 per cent of the population lives below the poverty line. The continent should therefore ramp up efforts to boost growth by underscoring the importance of measures to promote shared growth, through structural transformation and job creation. In order to enhance Africa’s economic performance and move towards the 7 per cent target mentioned previously, domestic demand needs to be strengthened. Government spending on infrastructure needs to be aggressively increased to fill the infrastructure gap in Africa. The rise in public investment should not cause any further deterioration in fiscal balances and African Governments need to continue their efforts to consolidate their fiscal position. Enhancing tax administration, fighting illicit capital outflows, and tapping excess liquidity in the banking sector are potential sources to finance public investment, particularly in infrastructure.

Africa’s fiscal deficit is narrowing albeit high

The overall fiscal deficit share in gross domestic product (GDP) declined due to fiscal consolidation through the reduction in fiscal expenditures and raising or introducing new taxes. Fiscal deficits declined by 0.7 percentage points from 5.9 per cent in 2016 to 5.2 per cent in 2017 and are projected to decline further to 4.9 per cent in 2018. While underlying factors behind the fiscal shortage vary across countries, this trend demonstrates continued commitment to sound macroeconomic management practices through fiscal consolidation boosted by the slight recovery in commodity prices since early 2016. All the subregions and economic groups registered an improvement in their fiscal positions in 2017, a trend projected to continue in 2018. However, in some countries, fiscal deficit widened as a result of increased public expenditure, especially on infrastructure development.

Relatively high fiscal deficits coupled with exchange rate depreciations have put pressure on rising public debt levels in some countries as Africa’s total debt share in gross domestic product hovers around 32 per cent. It is elevated to levels above 40 per cent in Southern Africa and among oil importing countries. Significant non-concessional borrowing for infrastructure development has led to high debt-servicing costs in several countries, such as Botswana and Mozambique.

This aggregate picture, however, masks the significant debt levels in 13 countries, three of which, all small island developing States, have debt shares above 100 per cent of their GDP (Cabo Verde: 111 per cent; Mauritius: 117.5 per cent; and Seychelles: 165 per cent); four with debt shares between 76 and 100 per cent (Djibouti: 80 per cent; Mauritania: 75.4 per cent; Sao Tome and Principe: 84 per cent; and Tunisia: 79 per cent); and the remaining six with debt shares between 50 and 75 per cent (Gambia: 69 per cent; Ghana: 52 per cent; Liberia: 51 per cent; Namibia: 60 per cent; Senegal: 53 per cent; and Zimbabwe: 69 per cent). 3 The rising public debt levels, currency depreciations and growing recourse to non-concessional borrowing for infrastructure development are fast raising debt-servicing costs, thereby diminishing fiscal space for the affected countries.


Assessment of progress on regional integration in Africa

Amid rising protectionism in some parts of the world, regional integration in Africa is critical to meeting the continent’s development ambitions. There is a consensus that the inclusive development goals of Africa cannot be achieved without dynamic industrial sectors and an increase in formal intra-African trade. The fragmentation of African economies, however, limits the ability of African businesses to build their competitiveness. Further integration is, therefore, required to achieve economies of scale and to boost African production and trade.

The Economic Commission for Africa (ECA) estimates that the African Continental Free Trade Area has the potential to boost intra-African trade by more than 52 per cent through the elimination of import duties alone. It is estimated that the benefits would double if combined with trade facilitation measures to further reduce non-tariff barriers. The majority of the benefit is focused on industrial goods, providing fertile ground for the development of regional value chains. Trade facilitation measures will also be important to ensure that the benefits are felt more widely, given the challenges often faced in accessing even regional markets. In particular, there is scope for improving conditions for informal cross-border traders, the majority of whom are women.

The present paper aims to provide an assessment of regional integration in Africa, beginning with an overview of the state of regional integration in Africa, as evaluated by the African Regional Integration Index. Central dimensions of regional integration in Africa are also discussed herein. Finally, the paper sheds light on several key issues related to the African Continental Free Trade Area.

Regional integration in Africa: key dimensions

Trade integration

Africa currently counts four functioning free trade areas among the regional economic communities that are recognized by the African Union: COMESA, EAC, ECOWAS and SADC. Intra-African trade has also been liberalized through mechanisms outside the African Union-recognized regional economic communities, including the Pan-Arab Free Trade Area, the Central African Economic and Monetary Community (CEMAC) and the Southern African Customs Union (SACU).

Except for a few regions, trade between African countries has slightly increased or remained stable over the years, but has been generally low in value. Intra-African exports of goods reached 18 per cent of total exports of goods in 2016, up from 9 per cent in 2000, while the corresponding shares for imports were 13 and 14 per cent, respectively. In comparison, in 2016, the shares of intraregional trade in Asia and the European Union were, respectively, 59 and 64 per cent for exports and 61 and 60 per cent for imports.

At the subregional level, among the African Union-recognized regional economic communities, EAC and SADC remained the best performers in terms of exports of goods within their respective subregion in 2016, while SADC performed relatively well in respect of imports within its subregion. These notwithstanding, none of the subregions recorded a share of trade within their respective subregion of more than 25 per cent.

Progress is being made in liberalizing trade through lower tariffs between African countries. Looking at the tariffs applied to imports within economic communities in 2017, EAC had no tariffs on intra-EAC trade; that was also the case for 80 per cent of ECOWAS countries. The average tariff applied by UMA was 5 per cent, with the figures varying from 0 per cent for Libya to as high as 13 per cent for Mauritania. The corresponding figures for the other African Union-recognized regional economic communities were as follows: 0.33 per cent for SADC; 5.07 per cent for IGAD; 3.75 per cent for ECCAS; 0.94 per cent for COMESA; and 14.16 per cent for CEN-SAD.

With trade trends within regional economic communities looking promising, it will also be important to tackle the barriers between the regional economic groupings. The African Continental Free Trade Area is designed to address exactly this, by bringing the whole continent under one free trade agreement. The African Continental Free Trade Area builds on the progress made by the regional economic communities and the Tripartite Free Trade Area Agreement among COMESA, EAC and SADC.

Productive integration

The integration of Africa into regional and continental value chains is limited by over-reliance on trade in primary commodities, with a limited share in manufactured goods. During the period 2000-2016, intraAfrican exports accounted, on average, for 57 per cent of primary commodity exports. The corresponding share for manufactured goods was only 16 per cent. These figures reflect the limited capacity of African countries to develop regional value chains by adding and retaining value locally or regionally. The situation has been underpinned by several factors, including gaps in infrastructure facilities that are key to boosting industrial activities; lack of capacity (financial and human) to support industrial projects; barriers to trade; and the fragmentation of African economies, which makes it difficult for manufacturers to benefit from economies of scale.

Boosting productive integration among African economies requires scaling up industrial activities across the continent. Examples of sectors with the potential for value chain development include the cotton-to-textile sector in West, East and Southern Africa; cocoa-to-chocolate products in West and Central Africa; coffee and its by-products in East and Southern Africa; and olives and their by-products in North Africa. Such development would require addressing the constraints faced by the manufacturing sector while removing barriers to trade and promoting investment. Doing so calls for the effective implementation of continental initiatives, including the African Continental Free Trade Area, the Action Plan for Accelerated Industrial Development in Africa and other regional or national industrial strategies in an integrated and coordinated manner.

African Continental Free Trade Area and the African development agenda

Progress made in respect of the African Continental Free Trade Area

The economic integration of Africa reached a new milestone on 21 March 2018 in Kigali, when 44 States members of the African Union signed the Agreement Establishing the African Continental Free Trade Area. In total, 50 countries signed either the Agreement itself or the Kigali Declaration, which was indicative of the commitment of the signatories to join the African Continental Free Trade Area upon the finalization of national legal requirements. The signing of the Agreement marks significant progress towards realizing the vision for African regional integration, as set out in the Abuja Treaty, which envisages the eventual establishment of a pan-African economic community.

The signing of the Agreement was the culmination of the negotiations launched in June 2015 in Johannesburg, South Africa. In early March 2018, the negotiations forum was convened for a tenth time to finalize outstanding matters and conclude legal vetting in preparation for the signature of the Agreement. During negotiations forum, participants also agreed on a transition and implementation work programme to finalize offers for goods and services and to prepare product-specific rules of origin, as part of the built-in agenda.

Following the recommendation of the Executive Council at its eighteenth extraordinary session, held on 19 March 2018, the Assembly of the African Union, at its tenth extraordinary session, held on 21 March 2018, adopted the Agreement Establishing the African Continental Free Trade Area, the Protocol on Trade in Goods, the Protocol on Trade in Services and the Protocol on Rules and Procedures on the Settlement of Disputes. The Agreement will enter into force upon ratification by 22 States members of the African Union.

The outstanding issues in the first phase of negotiations include the annexes to the adopted protocols and the schedules on goods and services. The annexes to the Protocol on Trade in Goods, the annexes to the Protocol on the Rules and Procedures on the Settlement of Disputes, and the List of Priority Sectors on Trade in Services are expected to be adopted by the Assembly in July 2018. The Schedules of Tariff Concessions and the Schedules of Specific Commitments on Trade in Services are expected to be concluded and adopted during the Assembly session to be held in January 2019.

The second phase of the negotiations is expected to begin in late 2018. That phase will focus on provisions for investment, competition and intellectual property rights. A facilitative environment for e -commerce is also being mooted as a possible additional topic for the second phase. The negotiations are expected to be completed by January 2020.

Towards an effective African Continental Free Trade Area

The benefits of the African Continental Free Trade Area will depend on both the effective implementation of the Agreement itself and a range of supporting policies to address other barriers to trade, investment and industrialization. Such policies need to include measures to overcome the short-term costs to particular countries and to economic groups within countries.

Overall, it is expected that the tariff revenue losses will not be considerable. However, countries with high initial tariffs on intra-African trade and with larger volumes of intra-African imports will experience the highest revenue impact. Exclusion lists within the African Continental Free Trade Area can provide an avenue for decreasing tariff revenue losses. It has been estimated that, even with a 1 per cent exclusion list, the average African country could reduce tariff revenue losses under the Free Trade Area from 8 to 1 per cent of total tariff revenue. Overly liberal exclusion lists should be avoided, however, as they could erode the value and benefits of trade liberalization.

A critical step for ensuring that less industrialized countries within the continent benefit from the African Continental Free Trade Area is the effective implementation of the Action Plan for Boosting Intra-African Trade, which identifies seven priority clusters for boosting intra-African trade, namely, trade policy, trade facilitation, productive capacity, trade-related infrastructure, trade finance, trade information and factor market integration. Trade liberalization alone cannot deliver transformative results; other barriers to intra-African trade and investment must also be addressed. So far, the implementation of the Action Plan has been hindered by a lack of dedicated institutions, a shortage of funding and an absence of monitoring mechanisms. As the African Continental Free Trade Area initiative moves forward, it will be important to link the implementation and monitoring of the Agreement to effective implementation and adequate resources, including those linked to the Aid for Trade initiative, for activities under the Action Plan.

Within countries, in order to alleviate the impact of structural adjustment costs, a gradual and measured approach to implementation should be considered. Exclusion lists and safeguard measures can be used for that purpose, but can result in distorted consumption and are, therefore, not optimal. Another approach would be to apply adjustment assistance to vulnerable groups facing adverse effects from the African Continental Free Trade Area. For example, smallholder farmers are likely to need assistance to connect to value chains and to take advantage of new opportunities. Similarly, informal cross-border traders, many of whom are women, should be supported in joining the formal sector so as to benefit from the Free Trade Area.

Trade facilitation measures are of particular relevance to efforts to ensure that gains are inclusive. The chapter on trade facilitation under the Agreement and the global momentum around the topic as a consequence of the entry into force of the Trade Facilitation Agreement under the World Trade Organization both highlight the fact that trade facilitation can be an area of quick wins. At the continental level, landlocked countries, which have economies that are more sensitive to issues surrounding ease of access to ports and value chains, can gain from the effective implementation of the provisions on trade facilitation, transit and customs cooperation.

At the national level, trade facilitation measures can be used to support small-scale businesses and female entrepreneurs, who face greater barriers to trade. The perishable nature of agricultural goods also means that agricultural producers could benefit from related processes becoming smoother and faster across the continent. Support will need to be provided to small and mediumsized enterprises in the form of market information, trade facilitation and trade finance.

The effective implementation of the Agreement will further depend on a strong institutional structure. At the continental level, the responsibility for coordinating the implementation of the Agreement will rest with the secretariat of the African Continental Free Trade Area, which will form an autonomous institutional body within the African Union system and have an independent legal personality, akin to an agency of the African Union. It will work closely with the African Union Commission and its departments. The Commission will provide the necessary transitional support until the secretariat is fully operational. Funding for the secretariat will come from the overall budget of the African Union.

The regional economic communities will remain important implementing partners and be represented in a committee of senior trade officials of the African Continental Free Trade Area. Their role will include the coordination of implementation and of measures to address non-tariff barriers, harmonize standards and monitor implementation. At the national level, it will be critical to have a strategy for the Free Trade Area and dedicated institutional arrangements in place to carry out implementation and to fully utilize the opportunities arising from the Free Trade Area. Among the structures that complement the Free Trade Area, the African Business Council will aggregate and articulate the views of the private sector.

Given the high ambitions for the Agreement, the monitoring and evaluation framework for the African Continental Free Trade Area should not be limited to compliance. Instead, it should also consider to what extent the Agreement is delivering on its development aims and supporting inclusive transformation. Systematic evaluations and reviews should be carried out to assess the impact of the Free Trade Area at the economy and sector level, in addition to its impact on vulnerable groups. Special consideration should be given to the impact of the Free Trade Area on gender equality. An observatory on trade is foreseen as part of the institutional set-up under the Agreement, with a view to ensuring its effective monitoring and evaluation.