Report: How free trade area will benefit Africa
What you need to know:
African countries are expected to generate more benefits from the continental free trade area, whose agreement Tanzania is yet to sign, through increasing economic growth of between one and six per cent, bridging economies that host nearly 80 per cent of the continent’s population.
Dar es Salaam. A new report by the Economic Commission for Africa (ECA) has revealed that the establishment of Africa’s continental free trade area (AfCFTA) will give the continent more benefits in the long run, rather than feared short-term consequences.
In its Economic Report on Africa 2019, ECA has said the agreement will favour small and medium enterprises (SMEs), which are responsible for 80 per cent of the continent’s population and contribute half of the GDP.
The overall effect of the AfCFTA will be to spur a slight increase in the economic welfare of Africa due largely to the expansion of intra-African exports.
“The AfCFTA has the potential to contribute to growth and structural transformation in Africa,” says ECA in its report titled Fiscal Policy for Financing Sustainable Development of Africa.
“All countries would benefit from trade expansion, following removal of tariff and non-tariff barriers,” says the report.
The report specifically reveals that the least developed countries would gain more through expansion of industrial exports.
The AfCFTA is, however, expected to have a moderate and gradual effect on revenue from tariffs on intra- African trade for several reasons, the ECA report further notes.
The report shows that as of March 2019, the particular products to be excluded from liberalisation under the AfCFTA have yet to be determined by each country.
Nevertheless, ECA calculations, using a number of informed scenarios to approximate the implications of the AfCFTA for tariff revenue, forecast that reducing and removing tariffs on African trade flows would result in a 6.5–9.9 per cent decrease in tariff revenue for the continent in the long run.
“While tax collected on African trade flows will fall, the overall effect of the AfCFTA on total government revenue may be more balanced, especially over the medium term, because import duties are only a small component of government revenue, accounting on average for only 15 per cent of total tax revenue in Africa,” it says.
This means that reductions to tariff revenue, which are expected to be limited, will affect only a small share of tax generation for most countries.
While the AfCFTA will reduce tariff revenue, it is expected to stimulate GDP growth by as much as 1–6 per cent, which would increase the broader tax base and boost revenue collection from other sources.
Tariff reductions under the AfCFTA are to be phased in over 5 years for developing countries and 10 years for least developed countries.
There is also an even longer phase-in period for “sensitive” products of 10 years for developing countries and 13 years for least developed countries.
