AfCTA: Time for action, less talk

Kenya Airways: AfCTA a
 lifeline for struggling airlines

Africa began trading under the African Continental Free Trade Area (AfCFTA) agreement Five days ago, on 1 January 2021. By definition, a free trade area is a group of countries that have few or no barriers to trade in the form of tariffs or quotas between each other. Free trade areas tend to increase the volume of international trade among member countries.

 AfCFTA is the largest free trade area in the world, with a total population of 1.2 billion, a total GDP of $2.5 trillion, and total business and consumer spending in excess of $4 trillion a year. 

https://www.imf.org/external/pubs/ft/fandd/2018/12/afcfta-economic-integration-in-africa-fofack.htm

However, intra-Africa trade is hardly 15 percent of the total continental trade. The reason; barriers-both tariff and Nontariff. The goods exist and the markets too. What stands between them is politics and policy. 

The manufacturing sector operates at best at 40-50 percent due to small domestic markets. This is a demand issue. Capacity is not the problem, but lack of markets and AFCTA unleashes that market, setting the stage for African manufacturers to thrive. Africa for example, imports 92 percent of its medicines, according to a report by the Africa Trade Policy Centre, ATPC. 

The continent, says that report has only three plants that manufacture Active Pharmaceutical Ingredients, APIs, a key input in the manufacture of medicine. These plants are small and cannot meet continent-wide demand for APIs. They are weak because the demand for their products is low as Africa imports APIs from China and India.

 In agriculture, Africa’s agriculture and agro Business was worth

As in a supermarket similar
products should compete in AfCTA

US$ 310 billion in 2014, and it is projected to hit US$1 trillion in 2025, says Africa Development Bank. Of the total demand in 2014, Africa imports $35 billion worth. At this rate, estimates the Bank, imports of agricultural produce will hit $110 billion in 2025.

 In 2014, the $35 billion spent on imports of agricultural produce was crippling. At $110 billion, such imports will be devastating. To cut such a large import bill, Africa must produce an extra 174 million tons of food a year by 2025, says the Bank. 

 Lack of reliable markets makes agriculture unprofitable, forcing many poor farmers to produce just enough for family consumption and a “little extra for sale to meet basic needs,” experts say. To counter this lethargy, Africa Development Bank is now spearheading a campaign to establish Staple Crops Processing Zones SCPZs in order to create a market for agricultural produce. 

The rural-based Zones will turn agriculture into a profitable business lifting millions of Farmers from poverty as they buy farm produce and process it into finished value-added products.

 The SCPZs will reduce post-harvest losses and integrate agricultural value chains with supportive logistics, such as warehousing and cold chains. 

 So the problem is purely policy and logistics. According to the UN Economic Commission for Africa, UNECA, removal of import duties will increase intra-Africa trade by 52.3 percent to 23 percent of total intra-Africa trade. If non-tariff barriers are removed intra-Africa trade will double to 30 percent in the short run. https://au.int/en/document/36085-doc-qacftaenrev15marchpdf. 

 In a subsequent report, UNECA says that East Africa would gain US$1.8 billion in benefits including two million jobs compared to a loss of $181 million in lost tax revenue in the short run. The short-run is defined as a period up to a maximum of five years. Here we are talking about an additional US$360 million a year compared to a loss of $36.2 million. The lesson here is simple Tariffs should be used as a tool for development, not a stumbling block. The figures from UNECA show that any tax-dollar forfeited will generate $10 in additional benefits.

 

 The major non-tariff barrier is logistical for Africa suffers a dearth of transnational transport infrastructures such as roads and railway lines. Overland infrastructure is expensive and takes longer to develop. 

Without reliable overland transport, air transport is a viable alternative. According to the International Air Transport Association, IATA, there are 349 commercial Airports and 161 airlines in Africa, giving an average of six Airports for each country. https://www.icao.int/ There are 161 airlines that do 1.13 million flights a year, says IATA. 

 In January 2018, Africa liberalized Air transport by launching the Single Africa Air Transport Market, SAATM. This means that an “eligible” aircraft or airliner from one African country can fly over another African country’s airspace and land on its territory by using a simple prior notification procedure, says IATA.

 According to IATA, the liberalized Airspace creates opportunities for African Airlines to increase frequencies and traffic in the continent. Since air travel is faster, it will raise the efficiency of delivery leading to improved economic efficiency and lower costs. Since Air transport is an enabler, its growth will lead to growth in other sectors of the economy dependent on it. That was before AfCTA came into force and before the COVID-19 pandemic, which devastated African economies in 2020. AfCTA is seen by experts as the stimulus package for African economies because removal of barriers could raise Intra Africa trade to US$1.2 trillion from the current $600 billion. As for the airlines, AFCTA is a hanging fruit because increased freight means increased revenue.