Saturday, 01 October 2022

In Business

The AfCFTA for Small Businesses in Africa

The AfCFTA is here, a reality that Small Businesses in African economies must maximise the leverages available. There are many challenges that befall small businesses in Africa, and it is these challenges that the ACFTFA was created to solve.

The African Continental Free Trade Area (AfCFTA) is a free trade area, outlined in the African Continental Free Trade Agreement among 54 of the 55 African Union nations.  AfCFTA is the largest in the world in terms of participating countries since the formation of the World Trade Organization.

The objectives of the ACFTFA include Create a single continental market for goods and services, with free movement of business persons and investments, and thus pave the way for accelerating the establishment of the Continental Customs Union and the African customs union; expand intra African trade through better harmonization and coordination of trade liberalization and facilitation regimes and instruments across RECs and across Africa in general; resolve the challenges of multiple and overlapping memberships and expedite the regional and continental integration processes; and enhance competitiveness at the industry and enterprise level through exploiting opportunities for scale production, continental market access and better reallocation of resources.

There are many institutional, economic, business, political, and social challenges that face Africa today. These challenges also include marginalization of Africa from the global economy, scarce development finance, healthcare, poor infrastructure, climate change, poor leadership, and weak governance.

Open borders, improved contracts, and better structured value chains are some of the key benefits to small businesses from the African Continental Free Trade Area (“AfCFTA”). The AfCFTA commits the majority of the participating countries to 90 percent tariff cuts within a five-year period.

According to the United Nations, investing in Africa is good business and a sustainable corporate strategy for foreign investors. Advanced and emerging countries' governments and the private sector should leverage these profitable, emerging investment opportunities. The best time to invest in Africa is now.

For the most part, foreign direct investment inflows to Africa have generally been attributed to five factors. These are regulations (ease of doing business), the general investment climate, broader economic reforms, information communication and technology development, and improvements in infrastructure.

In all this, the small business is not aware of the various leverages being created that they can tap into. One way they can tap into these levers is by the activation of the AfCFTA. This AfCFTA is the biggest free-trade agreement in Africa (with 54 countries and 8.7 million square kilometres), and it’s the largest regional trade cooperation among developing countries in the world, separating Africa from a collection of trade blocs composed of 33 other regions in the world.

The greatest challenge to this agreement for small businesses, is how will it work for them, and what are the benefits the agreement brings to their businesses and lives in general. The benefits will be to small business owners who expand their market, reduce costs in terms of logistics and other transaction costs, create a huge market for their goods and services, and generate employment opportunities for them and the entire continent.

Small businesses are growing businesses with the potential to become major players in local economies. However, as current statistics suggest, Globalisation has had a detrimental effect on SMEs as they find it difficult to compete with larger corporations which have preferential arrangements with large multinationals.

That main objective of "creating a single continental market for goods and services, with free movement of business persons and investments, and thus pave the way for accelerating the establishment of the Continental Customs Union and the African customs union", requires not only government commitment, but also investment commitment from financial institutions that desire to tap into multinational small businesses, that start doing business in more than one country, to outsource resources. Working Capital financing is an important aspect of this trade agreement for the small business sector, as it requires financial products such as Asset Based funding, Discounting, Bridging finance, and Project Partnerships.

After Retail of Fast-Moving Consumer Goods, the five major businesses to invest in Africa for small to medium businesses are Automobile, Solar Power, Agribusiness, Affordable Housing, and Waste Recycling; all requiring resources in one African country or the other by business owners. The current situation on the continent is dire and government response is slow. This has spawned the growth of non-governmental organisations (NGOs) whose primary purpose is to bring relief to suffering areas. The AfCFTA will greatly assist NGOs by reducing costs and creating a large market for their goods and services. Examples of these are in community development, legal aid, health care, relief food distribution etc.

Agriculture is Africa's largest economic sector, representing 15 percent of the continent's total GDP, or more than $100 billion annually. It is highly concentrated, with Egypt and Nigeria alone accounting for one-third of total agricultural output and the top ten countries generating 75 percent.

Ultimately, small businesses will benefit from this AfCFTA as it creates opportunities for them to sell products into new markets as well as diversify their offerings into new facets of business that they may not have been doing before this agreement was signed.

This agreement makes sense in that the continent has a young, vibrant population, and significant economic potential, which has made it an attractive prospect for foreign investors for a number of years now.

Because of the youthfulness of African business, African economies are growing fast. Among the countries with the highest GDP growth rate worldwide, African nations dominated the ranking.

Between 2014 and 2018, 16 percent of FDI into Africa originated from China. Chinese direct investment on the African continent represented the main source of FDI, whereas the United States and France held eight percent of the total FDI, respectively. On the basis of FDI stock data through 2018, the Netherlands overtook France as the largest foreign investor in Africa. The investment stock held by the United States and France in Africa declined by 15% and 5% respectively, owing to profit repatriation and divestment.

Sources: UNCTAD, AU, IGI

Cabanga Media Group publishes of thoughtful economic and business commentary magazines and online media, in several African markets, that include South Africa, Botswana, East Africa Community, Ethiopia, Egypt, Nigeria, and Zambia.