AFRICAN CONTINENTAL FREE TRADE AREA (AfCFTA): A CHOICE FOR AFRICA

AFRICAN CONTINENTAL FREE TRADE AREA (AfCFTA): A CHOICE FOR AFRICA Professor Godfred A. Bokpin, PhD (Economics), MPhil (Finance), BSc Admin (Accounting), Email: gabokpin@ug.edu.gh

AfCFTA: Presentation Outline • Africa today • AfCFTA: The Road So Far • AfCFTA: The Journey Ahead • AFCFTA: Opportunities and Risks • Challenges • Proposed Reforms

Africa Rising

Africa Today • Africa has more than 17% of the world population (2016), currently at 1.2 billion, 1.8 billion by 2040 • But only 5.04% share of the world purchasing power as at April 2019, Ghana (0.15), Nigeria (0.86) • Only 2.5% of the global trade. Africa's share of world exports has dropped by nearly 60% in the last three decades. • The only continent where income per capital has been declining even with positive GDP growth

Africa Today • Africa to have more youth than any continent and considered the young continent. • Growth hardly translate to job creation • 3 African countries are forecasted to meet Agenda 2063’s growth target of 7% a year during the 2016-20 period (Ghana leading) • 20 million jobs needed annually SSA alone

Africa Today • Share of vulnerable employment in Africa is projected to remain at 66% in 2022, far above the target of 41% by 2023. More than 70% for Ghana. • GDP growth for SA is 0.8% with unemployment rate above 54% (check xenophobia dynamics) • Though Since 2000, Africa's GDP has tripled but benefited foreign investors more (return on labour vrs return on capital) than locals leading to widening inequality. In 2018, six of the 10 fastest-growing economies in Africa were in West Africa (Côte d’Ivoire, Senegal, Ghana, Burkina Faso, Benin and Guinea), • Can Africa work 4 Africa?

Economic performance

Inflationary Trend

Employment in Agriculture, Industry & Service (% of total employment) for 2017

Inequality Crisis • Inequality is rising in Africa led by Nigeria and DRC. • Nigeria (87 million) now leads worldwide on inequality ahead of India (73 million) • 6 people fall into poverty per minute • Africa account for about two-thirds of the world’s extreme poor and 90% by 2030 • Fourteen out of 18 countries in the world—where the number of extreme poor is rising—are in Africa • Inequality is at crisis levels in West Africa especially

Cases of Grand Corruption Mobuto, Zaire US $ 5 billon More Than the Foreign Debt Duvaliers, Haiti US $ 500 million 87% of the Annual Government Budget Nigerian kleptocrats US $ 100 billion 1996-2005 $20 trillion stolen 3-More than double the GDP 4 times the Foreign Debt More than US GDP $18 Trillion in 2012

Would AfCFTA Work 4 All Africa? • “Richest Nigeria can live for 46 years if he blows USD 1 million away in a day • Today the wealthiest 1% of West Africans own more than everyone else in the region combined (Oxfam). • In Ghana, one of the richest men earns more in a month than one of the poorest women could earn in 1,000 years • 1000 more US dollar millionaires were created in Ghana in the period 2006-2016 • But only 60 of these were women” (Oxfam)

Oxfam has often mainly focussed on wealth…..

Can More Intraregional Trade help? • It must stated clearly that AfCFTA must benefit majority of African and not a tiny few • This is key to make it sustainable and lasting • It must tackle inequality head on and aid redistribution of wealth on the continent • It must enable inclusive growth for it to be sustainable

Change in Gini Coefficients and Income Shares (Percent change from 1 percent increase in trade openness)

AfCFTA: Africa Rising-Journey So Far • AfCFTA is anchored on AU’s Agenda 2063, The Africa We Want • In 2012, the African Union aimed at Boosting Intra-African Trade (BIAT) and fast-tracking the African Continental Free Trade Area (AfCFTA) • The AfCFTA negotiations launched at Summit in SA in 2015. • AfCFTA is to create a single continental market for goods and services, with free movement of business persons and investments

AfCFTA: Africa Rising 54 out of 55 countries in Africa have so far signed the AfCFTA, with 27 countries having ratified the Agreement AfCFTA Agreement was opened for signature on 21st March, 2018 at Extra-Ordinary Summit of the Assembly of African Union Heads of State and Government in Kigali, Rwanda. The fastest we have seen in recent times. At a time when the world is moving apart, Africa is getting closer and integrating faster. AfCFTA must work for majority African and not a tiny few

AfCFTA: Africa Rising • The requirement for bringing the Agreement into force was for 22 countries to ratify the Agreement • 22 countries deposited their Instruments of Ratification with the AU Commission. • On the 30th of May 2019, the AfCFTA entered into force. • creating an African Continental Free Trade Area with commercial significance is birthed. • AfCFTA is the most significant economic intervention since the setting up of OAU in 1963. more political then but assuming economic pedigree

AfCFTA: Africa Rising • Operational face of AfCFTA launched July this year • Ghana selected to host the secretariat • AfCFTA biggest free trade area by population (1.2 billion) • With GDP of over USD 3 trillion • Second only to the World Trade Organisation (WTO) in terms of Member States

AfCFTA: PROTOCOL ON TRADE IN SERVICES Phase 1 • “The scope of Trade in Services negotiations will cover all service sectors as well as all modes of supply defined under the WTO General Agreement on Trade in Services (GATS). • There shall be no a priori exclusion of any service sector or mode of supply of services in the negotiation. • The 5 priority Services Sectors adopted are: Transport, Communication, Financial Services, Tourism and Business Services

Operation Outcome in July, 19 So far • i. Adoption of an agreed set of Rules of Origin; • ii. Launching of key AfCFTA Operational Instrument • The Online platform for Tariff Negotiations; • The Africa Trade Observatory (ATO); • The Digital Payment and Settlement System (AFREXIM Bank); • The Online Platform for Reporting and Monitoring of Non-Tariff Barriers (UNCTAD); • The Mobile Application for AfCFTA business activities; • The MANSA Repository Platform to serve as a centralized database for customer due diligence;

THE PROTOCOL ON TRADE IN GOODS • 90 % tariff liberalization commitment for the continent has been adopted as the level of ambition for Trade in Goods for both Developing Countries (DCs) and Least Developed Countries (LDCs). • Special concession for 6 countries (G-6) to start at 85% tariff liberalization but will also reach 90% two years later. The G-6 States who will start at 85% level of ambition are Ethiopia, Madagascar, Malawi, Sudan, Zambia and Zimbabwe. • In the long run, the time frames for the general tariff liberalization, sensitive and excluded products are 10 years for DCs, 13 years for LDCs and 15 years for the G-6, subject to request and offer negotiations, for all State Parties to phase down this category of products.

Phase II: Journey Ahead • 3 additions protocols to be completed by 2021 • Investment - Provisions for the promotion, facilitation and protection of investment to galvanise the investment needed to restructure Africa’s economies. • Competition Policy - Provisions to enable fair competition and market outcomes to stimulate industrialisation, competition and development. • Intellectual Property Rights - Provisions to incentivize increased innovation, ensure a level playing field and support trade.

Maximising the Opportunities: readiness for Future of Production 2018 • AfCFTA can engineer economic growth and development for Africa like other regions with similar free trade area • Theories of comparative advantage and exploiting economies of scale is realisable • AfCFTA can anchor productivity growth, consumption and income growth on the continent • It hastens greater economic transformation and facilitate scaling up of regional supply chains through pooling of resources for investment in common regional infrastructure and engineer cross border investment in Africa (Africa 4 Africa) • A lever for value addition to our natural resources

AfCFTA: Africa Rising • Vision is to create one African market to overcoming the historic fragmentation and isolation of her economies (AU, 2019) • Currently very little financial and economic linkages within Africa • Only 17% of SSA exports are traded within its border whilst Asia is 60% and Europe is 70% • It probably offers the opportunity to break the cycle of exporting raw material only to reimport them as value added. • The signal effect is already in the statistics with Africa the only region to witness increases in FDI in the past three years

Intra-African and Trade Partners’ Trade Shares, 1990–2017 (IMF, 2019)

Intraregional Trade in Selected Regions, 2007–17 (Average share of total imports originating from the region) (IMF, 2019)

Intra-African Trade versus Trade with the Rest of the World, 1990–2017 (IMF, 2019)

Potential Benefits: FDI Flows “The African Continental Free Trade Area is already delivering results well before it enters into force. In December, 2018, we held the First Intra-African Trade Fair, in Cairo, Egypt, which attracted above target exhibitions and business transactions. At the Cairo Fair, we had 1,086 exhibitors, 86 above target. We also had business deals over US$32 billion, well above the target of US$25 billion” (Au, 2019). Africa becoming more attractive for FDI, with minimum wage rising in China and trade tensions escalating, Africa is in sight. But low wage and low productivity does not confer competitive advantage on Africa. Scaling labour productivity is a game changer informed by appropriate skill set in upskilling and reskilling (4IR)

Challenges • Avoid race to bottom in competing for FDI and other pull him down syndrome • A gain for one country is probably a loss to another (in terms of industries, disruption of existing skills, employment, fiscal revenue) • Address physical connectivity challenges • Both hard and soft infrastructure must be addressed unpinned by greater reforms to boost intraregional trade • Address labour mobility issues and job clustering

Readiness for the Future of Production Assessment Results, 2018

Fiscal Revenue Losses: Estimated Static and Dynamic Revenue Losses from Tariff Reductions

Infrastructure and Trade Logistics Gaps in Africa

Debt Build Up • Debt has been building up quickly after the HIPC&MDRI. • Sixteen sub-Saharan African countries are classified as having either a high risk of debt distress (Burundi, Cameroon, Cabo Verde, Central African Republic, Chad, Ethiopia, Ghana, Sierra Leone, Zambia) or being in debt distress (Republic of Congo, Eritrea, The Gambia, Mozambique, São Tomé and Príncipe, South Sudan, Zimbabwe)

Debt Distress Continent Source: IMF, Debt Sustainability Analysis Low-Income Developing Countries database.

Africa Leaks vrs AfCFTA Billions of dollars’ worth of gold is being smuggled out of Africa every year through the United Arab Emirates in the Middle East – a gateway to markets in Europe, the United States and beyond. Customs data shows that the UAE imported $15.1 billion worth of illegal gold from Africa in 2016 with much of the gold was not recorded in the exports of African states thus indicating large amounts of gold are leaving Africa with no taxes being paid to the states that produce them (Reuters, 2019).

Transnational Crime/illicit financial flows • Transnational crime in all its forms deprive Africa of much needed revenue to develop and reduce poverty. USD 50 billion lost annually, WA loses 9 billion in trade misinvoicing • Despite efforts, this continue to grow and Africa is at the receiving end. • It takes the following forms: Drug Trafficking , Small Arms & Light Weapons Trafficking , Human Trafficking, Organ Trafficking , Trafficking in Cultural Property , Counterfeiting, Illegal Wildlife Trade , IUU Fishing , Illegal Logging , Illegal Mining, Crude Oil Theft (Nigeria epicentre of crude oil theft)

Costs of Illicit Financial Flows to Africa • Africa loses USD 50 billion annually via illicit financial flows to developed countries mostly (AfDB). • It only receives USD 20 billion in foreign aid whilst it borrowed in all USD 18 billion in Eurobonds. • How much Africa loses through transnational crime far outweigh what it receives in aid. Africa and Ghana for that matter may not need to borrow/ask for aid if it is able to close these leakages

Fiscal and Monetary Policy Management is key • Private sector has experienced stable macroeconomic environment informed by prudent fiscal policy and sound monetary policy in between elections • Fiscal indiscipline then combined with loose monetary policy during election periods have constrained private sector. • Lack of sustained Macroeconomic Stability, a prerequisite for economic and social transformation has hindered private sector competitiveness • Painful costs of fiscal adjustment/consolidation is accommodated through private sector balance sheets and denied them space for expansion and made them more vulnerable to external competition

Introduction: Fiscal and Monetary Constrain to Private Sector • Fiscal policy has not guaranteed private sector leadership under the 4th Republic • Dwarfed revenue envelope in the face of rising expenditures is a constrain to private sector leadership and will undermine Ghana’s ability to profit optimally from the AfCFTA not withstanding we are hosting the secretariat • Monetary policy effectiveness in reducing inflation and engineering growth is seriously constrained even under inflation targeting • Theoretical benefits to be derived from AfCFTA hinges on assumptions largely predicated on fiscal and monetary policy • Firm level governance, business strategies to advantage of AfCFTA are also fundamental

Implications for the Private sector • Debt servicing is crowding out priority spending in easing the restrictions of the growth drivers of the private sector • Adds to the high productive cost base of doing business in Africa • Creating inhibitions on private sector competitiveness • Signalling uncertainty to the business community including fear/possibility of increasing taxes • Crowding out private credit in the domestic financial market

Implications for the Private sector • Financial stability is at risk in accommodating the private sector as engine of growth. • Private sector leadership is constrained by lack of infrastructural investment due to limited fiscal space • Using fiscal space for growth-enhancing investment is limited • ‘Soft’ fiscal dominance of monetary policy to set in (pressure to contain domestic borrowing costs, fear of floating dues to foreign currency exposure & quasi-fiscal operations

AFRICAN CONTINENTAL FREE TRADE AREA (AfCFTA): A CHOICE FOR AFRICA