AfCFTA Becomes a Reality: Benefits and Disadvantages for SMEs in Africa

AfCFTA Becomes a Reality: Benefits and Disadvantages for SMEs in Africa

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June 25, 2019 5

Yohamin Teshome

The African Continental Free Trade Area (AfCFTA) is going to finally become a reality, as it is expected to enter full force in July 2019. The AfCFTA agreement seeks the creation of a single African market for goods and services, with free movement of business persons and investments. A move that is expected to usher in the establishment of an African Customs Union. The Free Trade Area will represent a GDP of US $2.6 trillion and a population of 1.7 billion people. AfCFTA will bolster manufacturing and agricultural activities, two key sectors with huge potential to create much-needed employment for the teeming young population of Africans seeking opportunities to improve their lives.

Benefits of an African Free Trade Area for SMEs

African Small and Medium Enterprises (SMEs), are expected to largely benefit from AfCFTA because it entails lower or no tariffs and free access to market and market information. The instrument will indeed lead to removal of tariff restrictions and other barriers on intra-African trade. It will also be easier for Africans to establish businesses in different African countries. Intra-African Trade in agriculture is also expected to increase, resulting in increase in wages and employment. It will allow businesses to access cheaper raw materials and intermediate goods. It will also improve the conditions of regional value chains and access to global value chains.

The agreement will give SMEs an advantage to grow beyond domestic market into regional one. Other African markets would be much easier for them to enter as opposed to the difficulties they will encounter trying to enter the global market.. This is of a huge importance bearing in mind that SMEs account for 80 percent of businesses in Africa. AfCFTA will also allow SMEs to supply larger regional companies, a feat that is almost impossible without AfCFTA.

Benefits for Bigger Countries Versus Smaller Countries?

Bigger countries will benefit from selling manufactured goods to a bigger market and smaller countries will benefit by feeding their products into regional value chains. Agriculture dependent countries will benefit from a bigger market to supply their food products to. The elimination of intra-African tariffs will also make it easier to add value to natural resources and diversify into different markets.

Nigeria: Why hasn’t it signed the agreement yet?

The agreement has been signed by 52 countries and ratified by 22 countries, 9 of those are from West Africa. All the big countries- Egypt, Ethiopia and South Africa- have ratified the instrument. Nigeria is the only big absentee among the big countries. Most fear that absence of Nigeria will weaken the credibility of the instrument. Nigeria is still reluctant to sign  the Continental Trade Area agreement. President Buhari stated that he will need more consultation at domestic level before signing AfCFTA. That is mainly because the Nigerian Manufacturing Association (NMA) strongly opposed it, stating that the agreement could be dangerous to the Nigerian economy and to the laborer’s rights.

Challenges and Possible Disadvantages of AfCFTA that Cause Nigeria’s Reluctancy?

Heterogeneity of the market and quality and standard regulations: Africa is a huge continent with markets that have different sizes and characteristics. Nigeria, Egypt and South Africa contribute over half of the continent’s cumulative GDP while six of the small islands contribute only 1% of the Continental GDP.  Market regulations also vary a lot from country to country. Therefore the harmonization of the regulations will be a main challenge. Standardizing quality requirements for goods and services will not be an easy task.

SMEs: Foreign businesses supply goods and services at lower rates than local SMEs causing the latter to lose market. This is due to the fact that the agreement allows foreign businesses to enter domestic market with low or no tariff barriers.

Labor issues: Laborers may be forced to work with lesser rights and protection in order to win the competition. The Nigerian Labour Congress criticized the agreement labelling it as “a renewed, extremely dangerous and radioactive neo-liberal policy initiative.”

Environmental issues: The tough competition may also bring SMEs to ignore environmental regulations. In order to cut costs, SMEs may disregard such regulations during manufacturing or waste dumping.

Theft of intellectual property: The absence, in most, and heterogeneity in other countries, of laws regulating theft of intellectual property may be a serious issue. The African Union should also address this issue in order to protect SMEs that may otherwise be reticent in Africa in investing in more creative ideas and researches.

The agreement will become operational following the extraordinary African Union Summit to be held in July 2019, in Niamey. It was declared by the African Union Commission Chairperson, Moussa Faki Mahamat, who expressed his happiness for Ghana depositing the ratification instrument, on 29 April 2019, bringing the number of countries who ratified to 22, the number required to enter the instrument into force.

Yohamin Teshome is a young passionate african whose interest bothers on humanitarian, gender equality, children’s rights and extra and intra continental migration issues. She has a masters degree in international Relations and speaks five languages.

Tosin Odubela
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