New Bloc to Sell Africa to Africans
Jul 20, 2015
Heleen Goussard
The Tripartite Free Trade Area brings together 26 African states promising to boost local economies, writes Heleen Goussard
AFTER an eight-year negotiation period, the Tripartite Free Trade Area (TFTA) was launched on June 10, bringing together 26 African states with the aim of stimulating intra-African trade by creating a common market.
These countries make up three major regional communities — the Southern African Development Community, the East African Community and the Common Market for Eastern and Southern Africa.
The free trade area is a long-term project with significant stumbling blocks, including ratification by all 26 participating countries and the implementation of the agreement without causing significant economic disruption for weaker economies. However, the principle of promoting intra-African trade is receiving a lot of attention, along with the development of infrastructure that enables such trade.
It is 50 years after the end of European rule in most parts of Africa, and more than a third of Africa’s trade remains with western Europe — historical ties still have a large influence on these markets.
This is not surprising given shared languages and cultural connections between many countries. Kenya, Sudan, Uganda, Egypt, Lesotho, Botswana, SA, Namibia, Malawi, Zimbabwe, Zambia, Tanzania and Swaziland were all former British colonies and make up half of the countries in the TFTA, with most of the remainder having French, Portuguese or German languages and cultures in common.
The continent’s largest economy, Nigeria, is not included in TFTA.
Once the agreement is fully implemented, the way in which member states benefit will, in many ways, depend on their economic, political, trade and regulatory realities. It will also depend on the enablers of development such as infrastructure. Gathering data and information on these subjects in the continent is not always easy.
ACCORDING to the latest Bright Africa report, released earlier this month, bilateral intraregional trade between these markets is only a small percentage of gross domestic product (GDP). The tripartite agreement seeks to encourage this trade by giving African firms preferential access to exponentially larger markets.
Domestic consumption in the TFTA countries is fairly well diversified — far more so than manufacturing and exports, indicating an opportunity for African companies to start supplying African domestic demand. Domestic consumption is the most important factor driving overall GDP, and in most regions, this is fairly well spread across several sectors.
Many African countries and regions rely heavily on extractive industries for exports. Countries with more exposure to extractive industries have done well in the past decade as commodity prices have been at historically high levels, but as prices have fallen in recent times, the opposite side of this reliance has been exposed.
The most immediate economic effect when commodity prices fall is pressure on the currency, which must find a new demand-supply equilibrium. Next is pressure on government revenues, which can have a significant effect on the state’s ability to fund commitments and balance budgets.
The ability of TFTA countries to develop healthy trade with fellow members will give them access to alternative sources of foreign currency and tax revenue, allowing for a more stable and diversified economy.
Africa imports the largest share of its goods from western Europe. These are mainly made up of capital goods such as machinery and vehicles, with refined oil and fuel products also making up a large share. Manufactured goods, plastics and pharmaceuticals make up smaller contributions to imports.
Within the TFTA, significant opportunity exists for Africa to supply its own refined fuel needs from its abundant oil resources. Capital goods and machinery do not represent an immediate opportunity for African economies as they will not have a competitive advantage.
East Asia, and China in particular, is the second-largest source of imports, while relatively little is imported from North America, only slightly more than from eastern Europe. The profile of imports from East Asia is similar to imports from western Europe, with the obvious exception of refined oil and fuel, where very little is imported from East Asia.
Western Europe and East Asia are Africa’s largest trading partners, with two-thirds of exports going to these regions. Almost three-quarters of exports are of crude oil and gas, and more than 90% are extracted hydrocarbons and metals.
Agriculture makes a small contribution in the form of cocoa, tea, coffee and fruit. About 8% of exports is from other nonextractive industries such as assembled electrical equipment and vehicles.
Exports to East Asia are even less diversified than those to western Europe, with 97% extractive in nature. The remainder is made up of agricultural products such as cotton, wood and plant oils.
The trend in recent years has been a decrease in exports to the US and a corresponding increase in exports to western Europe and China. The main reason for this shift has been the advent of shale oil and gas in the US, which has led to lower demand for African crude oil.
To enable trade within the TFTA, there needs to be good infrastructure to move goods from one area to another.
The World Bank estimates that the cost of bridging Africa’s infrastructure gap requires an annual expenditure of $93bn, or about 5% of the total GDP of the continent.
In China, about 8%-9% of GDP was spent annually on the construction of infrastructure to fuel its impressive growth in the past three decades, and almost half of the expenditure was funded through central government sources. The low level of government revenue in Africa represents a serious barrier to infrastructure development and countries have focused on partnerships between public and private entities to ensure it takes place.
The Turkana Wind Project in Kenya and construction in the Kenya-Ethiopia corridor are examples of such partnerships. SA, Kenya, Tanzania and Senegal all recently established public-private partnership units to enable such projects.
The shortage of funding for infrastructure spending has been one of the factors pushing African governments to international debt markets in recent years, as global investors searched for yields. While this availability of debt has been a positive source of funding for governments, it remains relatively small compared to other funding sources.
SA has about 750,000km of roads, with the next best region East Africa, which has only about half of that. The Maghreb, Egypt and Sudan have a very high proportion of tarred roads as their populations are concentrated in small areas with vast unutilised areas. Nigeria, SA and Kenya have tarred only 15%, 21% and 7% of their total respective road networks.
SA has 20,000km of installed rail infrastructure and, given its relatively small size compared to other regional groupings, this translates to a high rail per land area. In absolute terms, the Maghreb region has 8,933km of installed rail, but if the underproductive land area is excluded from its total land area, the region would rank much higher.
The East Africa region is expected to add an additional 3,234km of rail infrastructure in the next three years, which will rank it third in absolute terms behind SA and Southern Africa excluding SA.
The lack of intraregional trade represents a significant opportunity for African companies and economies within a preferential trade bloc to displace imports from outside of Africa with African products.
The success of the TFTA will partially rely on the development of infrastructure.
• Goussard is an associate at RisCura and a contributing author on the Bright Africa report
Heleen Goussard
The Tripartite Free Trade Area brings together 26 African states promising to boost local economies, writes Heleen Goussard
AFTER an eight-year negotiation period, the Tripartite Free Trade Area (TFTA) was launched on June 10, bringing together 26 African states with the aim of stimulating intra-African trade by creating a common market.
These countries make up three major regional communities — the Southern African Development Community, the East African Community and the Common Market for Eastern and Southern Africa.
The free trade area is a long-term project with significant stumbling blocks, including ratification by all 26 participating countries and the implementation of the agreement without causing significant economic disruption for weaker economies. However, the principle of promoting intra-African trade is receiving a lot of attention, along with the development of infrastructure that enables such trade.
It is 50 years after the end of European rule in most parts of Africa, and more than a third of Africa’s trade remains with western Europe — historical ties still have a large influence on these markets.
This is not surprising given shared languages and cultural connections between many countries. Kenya, Sudan, Uganda, Egypt, Lesotho, Botswana, SA, Namibia, Malawi, Zimbabwe, Zambia, Tanzania and Swaziland were all former British colonies and make up half of the countries in the TFTA, with most of the remainder having French, Portuguese or German languages and cultures in common.
The continent’s largest economy, Nigeria, is not included in TFTA.
Once the agreement is fully implemented, the way in which member states benefit will, in many ways, depend on their economic, political, trade and regulatory realities. It will also depend on the enablers of development such as infrastructure. Gathering data and information on these subjects in the continent is not always easy.
ACCORDING to the latest Bright Africa report, released earlier this month, bilateral intraregional trade between these markets is only a small percentage of gross domestic product (GDP). The tripartite agreement seeks to encourage this trade by giving African firms preferential access to exponentially larger markets.
Domestic consumption in the TFTA countries is fairly well diversified — far more so than manufacturing and exports, indicating an opportunity for African companies to start supplying African domestic demand. Domestic consumption is the most important factor driving overall GDP, and in most regions, this is fairly well spread across several sectors.
Many African countries and regions rely heavily on extractive industries for exports. Countries with more exposure to extractive industries have done well in the past decade as commodity prices have been at historically high levels, but as prices have fallen in recent times, the opposite side of this reliance has been exposed.
The most immediate economic effect when commodity prices fall is pressure on the currency, which must find a new demand-supply equilibrium. Next is pressure on government revenues, which can have a significant effect on the state’s ability to fund commitments and balance budgets.
The ability of TFTA countries to develop healthy trade with fellow members will give them access to alternative sources of foreign currency and tax revenue, allowing for a more stable and diversified economy.
Africa imports the largest share of its goods from western Europe. These are mainly made up of capital goods such as machinery and vehicles, with refined oil and fuel products also making up a large share. Manufactured goods, plastics and pharmaceuticals make up smaller contributions to imports.
Within the TFTA, significant opportunity exists for Africa to supply its own refined fuel needs from its abundant oil resources. Capital goods and machinery do not represent an immediate opportunity for African economies as they will not have a competitive advantage.
East Asia, and China in particular, is the second-largest source of imports, while relatively little is imported from North America, only slightly more than from eastern Europe. The profile of imports from East Asia is similar to imports from western Europe, with the obvious exception of refined oil and fuel, where very little is imported from East Asia.
Western Europe and East Asia are Africa’s largest trading partners, with two-thirds of exports going to these regions. Almost three-quarters of exports are of crude oil and gas, and more than 90% are extracted hydrocarbons and metals.
Agriculture makes a small contribution in the form of cocoa, tea, coffee and fruit. About 8% of exports is from other nonextractive industries such as assembled electrical equipment and vehicles.
Exports to East Asia are even less diversified than those to western Europe, with 97% extractive in nature. The remainder is made up of agricultural products such as cotton, wood and plant oils.
The trend in recent years has been a decrease in exports to the US and a corresponding increase in exports to western Europe and China. The main reason for this shift has been the advent of shale oil and gas in the US, which has led to lower demand for African crude oil.
To enable trade within the TFTA, there needs to be good infrastructure to move goods from one area to another.
The World Bank estimates that the cost of bridging Africa’s infrastructure gap requires an annual expenditure of $93bn, or about 5% of the total GDP of the continent.
In China, about 8%-9% of GDP was spent annually on the construction of infrastructure to fuel its impressive growth in the past three decades, and almost half of the expenditure was funded through central government sources. The low level of government revenue in Africa represents a serious barrier to infrastructure development and countries have focused on partnerships between public and private entities to ensure it takes place.
The Turkana Wind Project in Kenya and construction in the Kenya-Ethiopia corridor are examples of such partnerships. SA, Kenya, Tanzania and Senegal all recently established public-private partnership units to enable such projects.
The shortage of funding for infrastructure spending has been one of the factors pushing African governments to international debt markets in recent years, as global investors searched for yields. While this availability of debt has been a positive source of funding for governments, it remains relatively small compared to other funding sources.
SA has about 750,000km of roads, with the next best region East Africa, which has only about half of that. The Maghreb, Egypt and Sudan have a very high proportion of tarred roads as their populations are concentrated in small areas with vast unutilised areas. Nigeria, SA and Kenya have tarred only 15%, 21% and 7% of their total respective road networks.
SA has 20,000km of installed rail infrastructure and, given its relatively small size compared to other regional groupings, this translates to a high rail per land area. In absolute terms, the Maghreb region has 8,933km of installed rail, but if the underproductive land area is excluded from its total land area, the region would rank much higher.
The East Africa region is expected to add an additional 3,234km of rail infrastructure in the next three years, which will rank it third in absolute terms behind SA and Southern Africa excluding SA.
The lack of intraregional trade represents a significant opportunity for African companies and economies within a preferential trade bloc to displace imports from outside of Africa with African products.
The success of the TFTA will partially rely on the development of infrastructure.
• Goussard is an associate at RisCura and a contributing author on the Bright Africa report
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