History was made on Friday, January 1, 2021, as it officially marked the launch and trading under the much talked about African Continental Free Trade Area (AfCFTA) which is expected to deepen intra-Africa trade.
Whilst The AfCFTA holds tremendous prospects for boosting intra-African trade by 52.3 percent, according to the African Trade Policy Centre (ATPC), it may as well pose several challenges to businesses in fragile economies on the continent.
The African version of the Free Trade Area, the African Union (AU) and the ATPC says, will bring together fifty-five African countries with a combined population of 1.2 billion people and a combined Gross Domestic Product (GDP) of $2.5 trillion.
Whilst the prospects are huge, it may be tempting to ignore possible challenges that may arise as a result of the integration of the continent. It is interesting to note that some of the opportunities created by the AfCFTA could also become possible challenges to some businesses, which if ignored, may defeat the purpose of the agreement.
One of such is the reduction in trade costs that make it easier to transact businesses across the continent.
“With average tariffs of 6.1 percent, businesses currently face higher tariffs when they export within Africa than when they export outside it. AfCFTA will progressively eliminate tariffs on intra-African trade, making it easier for African businesses to trade within the continent and cater to and benefit from the growing African market”, the ATPC said.
Moreover, the World Bank expects a reduction in trade costs of about 4.3% in Ghana as a result of the implementation of the AfCFTA.
One may ask: is this not good news? Yes, it is, but …
Lower trade costs make it lucrative for large businesses that are well established in other countries to kick out domestic infant businesses due to the latter’s inability to compete.
Such large companies come along with all the benefits of economies of scale that result in lower average costs, and therefore lower prices. Except for differences in quality, which may not be considered by consumers due to low-income levels in most of these economies, rational economic agents will always prefer goods at lower prices.
For Ghana, won’t this jeopardize the call for the patronage of domestically produced goods?
Industries that are fortunate to be doing well may withstand this competition. But, smaller businesses, most of which are infantile, stand to bear the brunt as this may force them to collapse, since they may not be able to withstand the competition.
Competition may force some domestic firms out of business, resulting in job losses that may compound already high unemployment rates, and increase poverty levels; running contrary to the rationale for the establishment of the AfCFTA.
Africa’s largest economy, Nigeria, until 11th November 2020, was initially reluctant to join the bloc for fear of exposing local industries to dumping by countries outside Africa.
Whilst it may be too late to call it to quit, moving forward, we may have to ask as well as provide answers to certain simple but very important questions:
Are Ghanaian businesses prepared enough to take advantage of these opportunities created by the AfCFTA? Has the government created that enabling environment for businesses in Ghana to thrive despite the competition?
Ghana is one of the countries that fought so hard to achieve this dream of African integration and it’s by no coincidence that the AfCFTA secretariat is situated here in Ghana. But, are we prepared for the AfCFTA?
Lack of access to credit has often been cited as the major challenge facing businesses in Ghana and elsewhere in the African Continent even before the outbreak of COVID-19.
It can be remembered that in December last year, the President of the Ghana Union of Traders Association, (GUTA) Dr. Joseph Obeng, bemoaned the cost of borrowing in Ghana, which he said if not addressed by the government as a matter of priority, will edge out Ghanaian businesses by their competitors as a result of the implementation of the AfCFTA.
“If you import from outside, suppliers there are getting their credit for 3-5%, and here our credit cost is 23%. It means that Continental Free Trade or not, they have an advantage of about 20% to edge you out, even if duties are not demanded from you”, the GUTA President said.
There is also the likelihood of businesses resorting to selling their products to other countries within the bloc where prices are higher than that of the domestic market. When this happens, it may result in shortages, which may fuel inflationary pressures in the home country. It may also pose a threat to food security in some of these countries.
Smuggling of goods is also expected to increase, which comes at a huge cost to the development of the nation. When such smuggled goods turn out to be raw materials or intermediate goods, it will affect the production capacities of domestic manufacturers that rely on such raw materials.
Whereas the successful implementation of the AfCFTA is one of the significant milestones achieved by the African continent in history, the member states should be prepared to handle the challenges that may emanate from its implementation.
Businesses should also make frantic efforts to innovate to remain relevant whilst being able to withstand any outside competition that may thwart their efforts to harness the full benefits of the agreement. The government, banks, and other major stakeholders should continue to work assiduously towards creating an enabling environment for businesses to operate to spark the desired economic growth in the country.
