Making the African Continental Free Trade Area (AfCFTA) Work for Micro, Small, and Medium-Sized Enterprises (MSMES) in Africa.

Introduction

In 2018, the African Continental Free Trade Agreement was signed by state parties. The Agreement seeks to create a single market for goods and services, facilitated by the movement of persons to deepen the economic integration of the African continent and by the Pan-African Vision of "An integrated, prosperous and peaceful Africa" enshrined in Agenda 2063, accelerate intra-African trade and boost Africa’s trading position in the global market.

As of October 2022 , 44 of the 54 signatories (81.5%) including Nigeria have deposited their instruments of the AfCFTA ratification. The benefits of the AfCFTA are endless. The African Development Bank estimates that the full implementation of the agreement could boost Africa’s income by $450 billion, bring 30 million people out of extreme poverty, and raise the incomes of 68 million others who live on less than $5.50 a day. The agreement will also boost intra-African trade which is currently low in the continent compared to other regions and is instrumental in the continent's economic recovery post-COVID-19 pandemic.

The agreement comprises several protocols, some of which are still being negotiated.?The specific objectives of the Agreement include: progressively eliminate tariffs and non-tariff barriers to trade in goods, progressively liberalise trade in services, cooperate on investments, intellectual property rights, and competition policy, cooperate on all trade-related areas, cooperate on customs matters and the implementation of trade facilitation measures, etc.

What are MSMEs and why are they important?

There is no global definition or categorisation of Micro, Small, and Medium-sized Enterprises (MSMEs). The definitions depend on the size of the individual country economies and the structure of the corporate sector. In Nigeria , generally, MSMEs are businesses with not more than 200 employees, with a total asset and annual turnover of not more than 500 million naira. The lowest in the category is the micro business with less than 10 employees and an annual turnover of not more than 20 million. MSMEs are the bedrock and growth engine of any economy. According to the World Bank , MSMEs constitute about 90% of businesses and more than 50% of employment worldwide. In Africa, MSMEs account for approximately 80% of jobs contributing to the socioeconomic growth of the continent. Within Sub-Saharan Africa, there are approximately 44 million Small and Medium-sized Enterprises (SMEs). Nigeria has over 37 million MSMEs accounting for more than 84% of jobs in the country and about 48 percent of the National GDP . The bulk of these MSMEs is Micro Enterprises accounting for about 99.8 percent of the total number of MSMEs in the country. In South Africa , MSMEs account for about 90% of the formal business entities, 50-60% of the workforce, and contribute 34% of the GDP. In Egypt , MSMEs account for 98% of the private sector's activity and contribute about 43% of the country's GDP. In other African countries like Uganda, Kenya, and Ethiopia, up to 90% of the population is employed within MSMEs.

The AfCFTA and MSMEs

While there is no protocol on MSMEs or small businesses, the preamble of the Protocol on Trade in Services refers to harnessing the potential and capacities of African micro, small and Medium service providers to engage in regional and global value chains. Article 27 of the same protocol provides for Technical assistance, and Capacity Building to improve the export capacity of both formal and informal service suppliers while paying particular attention to micro, small, and medium-sized enterprises.

MSMEs are the key beneficiaries of the AfCFTA. The AfCFTA provides an opportunity for growth, business expansion, and profit maximisation. By unlocking a market of over 1 billion people within the African Continent, the free trade area presents an opportunity for these businesses to scale and access other African markets. Thus, MSMEs will be able to increase their sale as they will now have access to consumers all over the continent. This will also promote regional value chains and integration into global value chains, which MSMEs will benefit largely from. MSMEs will also benefit from investment opportunities such as partnerships with potential foreign investors interested in investing in Africa. [xi]

However, the ability of these MSMEs to harness the potential of this Agreement remains limited by several factors. Many MSMEs have little or no knowledge of the workings of the export market. A lot of MSMEs owners are unaware of the agreement and the implications for intra-African trade. In a study carried out by the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA), it was discovered that only about 25% of 1,804 MSMEs were aware of the existence of the AfCFTA with firms in the Agriculture and Services Industry having the lowest level of awareness. Many face peculiar challenges such as finance to increase their production and capacity to export. In fact, access to finance is a major issue for MSMEs. This is usually due to the inability of these businesses to meet the high-interest rate and stringent collateral requirements of these financial institutions. As a result, most MSMEs finance their projects through informal sources of financing such as personal funds or funds gotten from friends and family which is highly unsustainable. Other constraints include a lack of skilled labour, a lack of infrastructure, trade barriers, insufficient market research, and complex bureaucratic procedures.

Towards making the AfCFTA work for MSMEs

The fulfilment of the objectives of the Agreement is dependent on how well MSMEs – the backbone of the African Economy – can take full advantage of the opportunities in the operation of the AfCFTA. Despite the economic significance of this marginalised group of traders to the continent, they face the most challenges when exporting. These challenges need to be addressed if MSMEs will be able to maximise the emerging opportunities in the AfCFTA. To this end, I make the following recommendations:

1.????There should be a dedicated Protocol to properly address the challenges of MSMEs in exporting while also accommodating their unique peculiarities. Sadly, the current legal regime on the AfCFTA does not fully take into consideration the delicate nature of MSMEs and their peculiar challenges in exporting. Snippets on small businesses are only provided for in the Trade in Services Protocol which is not enough.

2.????Further, each country in developing its strategy for implementation should allow for the participation of MSMEs in the decision-making process. Through town hall meetings or forums, MSMEs should be allowed to exchange and express their views on issues such as rules of origin, trade facilitation, potential bottlenecks related to the implementation of the AfCFTA, etc.

3.????There should be a massive awareness campaign on the AfCFTA by the Secretariat, business organisations, and relevant trade support institutions. Routine knowledge campaigns and sensitisation on the AfCFTA should be carried out by state parties for MSMEs in their countries, to educate them on the opportunities in the AfCFTA and how they can position themselves to take advantage of it.

4.????A continental harmonisation of product standards and rules among state parties of the AfCFTA. This will make compliance easy for MSMEs and increase market access. State parties should therefore look to bringing the said harmonisation, as its benefit is evident to all.

5.????Continental and Country-level capacity-building programmes and technical support for MSMEs should be initiated and engaged. MSMEs need to understand that export readiness is not something that is stumbled upon. It is an intentional process of counting the costs, conducting extensive research, undergoing training, and seeking professional help.

6.????MSMEs should be encouraged to register their businesses, to each have a corporate account, and to be more intentional about the documentation of their local transactions. This can serve as proof of their ability to fulfil contracts and pay back loans where there is no collateral.

7.????It is important to improve the efficiency of border procedures. The bureaucratic delays and “red tape” pose a burden for moving goods across borders for traders.

8.????MSMEs can make use of factoring provided by Afreximbank as an alternative financing instrument for supporting Small and Medium-sized Enterprises.

Conclusion

The AfCFTA promises so much for MSMEs. However, the degree to which these businesses will take advantage of this agreement is dependent on how well the issues highlighted above are dealt with. Considering the critical role MSMEs play in the African economy and the successful implementation of the Agreement, priority must be given towards addressing these challenges.

About the author

Eberechukwu is an intra-African trade advocate and corporate and commercial lawyer at?G. Elias , a leading business law firm in Nigeria. She is the founder of?AfCFTA Dialogues ; a platform dedicated to promoting better understanding of the AfCFTA. Through meaningful discussions and knowledge sharing, she aims to drive the successful adoption and exploitation of the AfCFTA by industries and businesses in Africa.

She graduated with First Class honours in Law from the University of Ibadan and the Nigerian Law School. She is a member of the?AfCFTA Youth Advisory Council .