As the world economy slumps, African countries embrace intra-regional trade
By and large, the world is caught in a phase of global economic transition: the possibility of the US and Europe exiting the zero-interest-rate terrain lurks in the horizon, despite seeming remote in the recent past; in China, the government is attempting to rebalance growth from over-reliance on exports as aggregate growth moderates toward the 6-to-7 percent band in 2015 (data from the statistical agency indicates growth in the second quarter stood at 6.9 percent) and in Japan, Abenomics is still firefighting further economic downturn.
In Africa, economies are grappling with spillovers from adverse economic conditions in emerging markets such as China and Brazil, as well as a slump in commodity prices that has left countries exposed to elevated fiscal and foreign exchange pressures. In February, Nigeria, Africa’s largest oil producer, slashed capital expenditure to 8.9 percent of planned expenditure from 23.7 percent in 2014, while the tanking of copper prices has seen the Zambian Kwacha depreciate 96.7 percent year-over-year as of 28 October this year. This explains why African economies are increasingly reaching for more robust regional integration and trade, in a bid to put foam on the runway and cushion themselves from a volatile external environment.
As far as regional integration within the East African Community goes, it is not the typical occurrence of rhetoric moving ahead of evidence. For instance, all that is needed in cross-border travel for citizens of Kenya, Uganda and Rwanda is the national identity card, a major shot in the arm in the quest for the unfettered movement of labour. This is a major gain for the region as far as investor attraction and ease of doing business are concerned, especially from the standpoint of investors with a regional footprint, whose staff keep travelling across borders.
The three countries have also mutually eliminated the requirement of work permits, creating a more vibrant environment for labour — and human capital mobility across borders. In December 2014, members of the West African trading bloc Economic Community of West African States (ECOWAS) agreed to a common external tariff, which is a further step toward policy harmonisation, part of the integration process. These developments are injecting fresh impetus in Africa’s growth curve, especially against the backdrop of comparatively low intra-regional trade ─ intra-African trade accounts for a paltry 12 percent of the continent’s total trade compared to North America’s 40 percent.
The greater promise lies in the fact that bolstering integration is not an isolated and detached exercise for separate regions within the continent. The pursuit of the Tripartite Free Trade Area (TFTA) harmonising COMESA (Common Market for Eastern and Southern Africa), EAC (East African Community) and SADC (Southern African Development Community), with the declaration having been signed in Egypt in June 2015, promises to unleash a market of immense potential bound to whet investor appetite in the years to come.
Despite evidence of lethargy by states in actualising the TFTA, African economies can leverage the expected synergies to lower both tariff and non-tariff barriers to regional trade and create an economic ecosystem that favours the growth of investment. From an investor’s perspective, enhanced access to a more vast market (26 countries with an estimated population of 632 million, accounting for 58 percent of Africa’s GDP) will be a major milestone in a continent that often suffers the drawback of small and fragmented markets.
From an industrial standpoint, the TFTA, through reduced protectionism by member states, promises to catalyse an environment of highly competitive and efficient production that will yield considerable gains to consumers. For widely untapped economies such as Ethiopia, which are increasingly stealing the thunder as the next manufacturing hub in frontier markets due to low production costs, the TFTA is laden with potential for expansion.
The slump in commodity prices and its after-effects have fanned scepticism around Africa’s economic fortunes and led many to believe that the ‘Africa Rising’ narrative was a false dawn for the continent. For long-term investors, however, it is important to take cognizance of the favourable developments on the intra-regional trade front and angle to tap into the opportunities engendered.
Original Post by: LSE