OPINION: The AfCFTA and SMEs – opportunities and challenges

The African continent has approximately 18% of the world’s population, or 1.4 billion people, but contributes less than 3% of the global GDP. Given the continent’s rapidly rising pace of population increase, this is expected to reach 4.3 billion people, accounting for 39% of the global population by the end of the 21st century.

This big domestic market could represent a significant opportunity for economic growth. Nonetheless, this has not been the case. Currently, Africa accounts for just 2.9% of the world’s production and 2.6% of world trade.

Moreover, despite its great agricultural potential, the continent is now a net importer of food and agricultural products, including five staple commodities such as wheat, sugar, rice, beef and soybeans. Africa’s food import bill has more than tripled in recent decades, totalling over US$35 billion per year, and this is expected to rise to over US$110 billion by 2025. Much of these imported agricultural products might be produced locally, providing much-needed jobs and income to the continent’s youthful but unemployed population.

The consequences of this situation are conspicuous in the notably low level of intra-African trade. While trade between Africa and the rest of the world accounts for more than 80% of African trade, intra-African trade, measured as the average of exports and imports within the continent, stands at a mere 15.8%. In contrast, regions such as America, Asia and Europe demonstrate significantly higher levels of intra-regional trade at 47%, 61% and 67%, respectively, as of the year 2017. This disparity underscores the untapped potential for increased economic collaboration among African nations.

SMEs in the frame

In the light of these developments, the 12th Extraordinary Summit of the African Union, convened in Niamey on 7 July 2019, marked a historic milestone for the continent. This momentous occasion witnessed the successful launch of the operational phase of the African Continental Free Trade Area (AfCFTA). The AfCFTA agreement, initially adopted and opened for signature on 21 March 2018, in Kigali, Rwanda, came into effect on 1 January 2021. AfCFTA is a historic commitment by African leaders to foster economic integration and trade co-operation.

The agreement also represents a visionary initiative aimed at establishing the most expansive free trade area globally. Its ambitious scope encompasses the connection of 1.4 billion people spanning 55 African countries, collectively contributing to a combined gross domestic product valued at approximately US$3.4 trillion.

This ground-breaking trade pact holds the transformative potential to uplift an estimated 30 million people out of extreme poverty on the African continent. Perhaps, this commitment to the realisation of the AfCFTA’s goals is further underscored by the notable progress made as of January 2024, with 47 member countries of the African Union having formally become state parties to the agreement.

By fostering economic integration and removing trade barriers, the AfCFTA aims to unlock vast opportunities for intra-African commerce, creating a dynamic environment for sustained growth and development. The sheer scale of this initiative highlights its significance not only in terms of market size but also in its capacity to drive economic prosperity, job creation and poverty alleviation across the diverse nations on the continent.

However, unlocking the potential benefits envisioned by the AfCFTA hinges on the active participation of the private sector, with a particular emphasis on small and medium-sized enterprises (SMEs). SMEs, constituting over 80% of all businesses and contributing to 85% of employment across the continent, form the bedrock of the African economy.

The recently concluded Africa Prosperity Dialogues (APD 2024), held in Peduase, Ghana, from 25-27 January 2024, underscored the vital role of SMEs as key contributors to the success of the AfCFTA. Recognising the significance of SMEs as a driving force for economic prosperity, the APD emphasised their potential to spearhead the initiatives outlined in the AfCFTA.

Nevertheless, while SMEs play a significant role in providing employment, their economic impact in terms of gross domestic product remains relatively modest, constituting only 35% in Africa. Consequently, the successful implementation of the AfCFTA is expected to yield positive effects on the expansion and development of SMEs.

Increasing local content

Within the framework of the AfCFTA, numerous opportunities exist for SMEs to partake in cross-border trade. In the first place, the AfCFTA offers a significant avenue for small and medium-sized enterprises to access regional export markets. This implies that SMEs will gain entry to an extensive market comprising over one billion consumers.

This access empowers them to reach customers beyond their borders without encountering the prohibitive costs typically associated with international trade. Thus, SMEs can actively supply inputs to larger regional companies and manufacturers. Take, for instance, the global consumer goods giant Unilever, which operates multiple factories in Africa, producing a diverse range of products, from Blue Band Margarine to Geisha and Pepsodent.

However, when it comes to the essential upstream raw materials needed for manufacturing finished products, only 20% is currently procured within Africa. Two specific items, dried egg yolk used in mayonnaise production, and sorbitol, an ingredient in toothpaste, are currently imported but possess the potential for local production.

For instance, dried egg yolk can be sourced from the poultry industry, while sorbitol can be derived from starch crops such as wheat, potato, and cassava. These opportunities, among others, present viable prospects for small and medium-sized efnterprises in Ghana and throughout the continent to fully capitalise on.

Second, small and medium-sized enterprises can also take advantage of a unified payment platform, namely the Pan-African Payment and Settlement System (PAPSS). Launched in January 2022, PAPSS stands as a centralised payment and settlement system designed for intra-African trade in goods and services.

Utilising a digital, cloud-based infrastructure, the inception of PAPSS resulted from a collaborative effort between the African Export-Import Bank (AFREXIMBANK) and the African Continental Free Trade Area (AfCFTA) Secretariat. The cornerstone of the PAPSS framework is the PAPSS Instant Payment system, a key feature facilitating immediate wholesale and retail payments while ensuring seamless connectivity among banks.

Given the diversity of currencies on the African continent – totalling 42 – the introduction of PAPSS is a strategic move for businesses. Before the system’s implementation, local businesses and financial institutions had to depend on foreign banks to settle transactions involving two African currencies, often requiring the use of a third currency such as the American dollar or euros.

PAPSS addresses these challenges by enabling small and medium-sized enterprises to conduct trade transactions using their local currencies. This not only reduces processing costs but also expedites payment settlement.

For example, SMEs based in Ghana can now transact business with counterparts in Kenya without the necessity of conducting transactions in dollars or euros. The introduction of PAPSS is estimated to save approximately $5 billion in transaction costs for businesses across the continent annually, signifying a significant leap towards enhancing the efficiency and cost-effectiveness of intra-African trade. To date, the PAPSS network comprises eight central banks, with the Bank of Ghana playing a pivotal role within the network.

Moreover, small and medium-sized enterprises are poised to reap substantial advantages through their engagement with the AfCFTA Hub platform, a unified electronic gateway that seamlessly integrates various elements. This comprehensive platform effectively links e-government portals, business and consumer applications, as well as supranational platforms, creating a harmonious and interconnected continental ecosystem.

At its core, the AfCFTA Hub platform is designed to address key challenges faced by SMEs. One of its primary goals is to eradicate information asymmetry, ensuring that stakeholders across the continent have access to transparent and up-to-date information. By doing so, the platform aims to build mutual trust among participants in the business ecosystem, creating a solid foundation for collaboration and transactions.

Also, the AfCFTA Hub platform is a robust tool in the fight against fraud. Through its sophisticated infrastructure and security measures, the platform seeks to crush fraudulent activity, providing a secure environment for businesses to operate. This commitment to integrity and security not only protects SMEs but also contributes to the overall credibility of the continental trade landscape.

A significant aspect of the Hub is to simplify the AfCFTA process for SMEs and start-ups. By offering user-friendly interfaces and streamlined procedures, the platform aims to make participation in the African Continental Free Trade Agreement more accessible and manageable for smaller businesses. This simplification is geared towards empowering SMEs, enabling them to navigate the complexities of cross-border trade with greater ease.

Furthermore, the AfCFTA Hub platform will play a pivotal role in levelling the playing field in both e-commerce and e-logistics. By providing a centralised and standardised platform, it facilitates fair competition, allowing businesses of all sizes to participate and thrive. This inclusivity is crucial in fostering a dynamic and diverse marketplace, where SMEs can compete on an equal footing with larger enterprises, contributing to the overall growth and vibrancy of the African common market.

Logistics, freight and regulatory coherence

While there are vast opportunities presented by the African Continental Free Trade Agreement, it is imperative to acknowledge and address certain persistent challenges that may impede small and medium-sized enterprises from fully realising the potential benefits. Two major hurdles that loom large on the path to success are infrastructural constraints and regulatory challenges.

First and foremost, infrastructural limitations on the African continent pose a significant obstacle for SMEs looking to leverage the opportunities within the AfCFTA. Inadequate transportation networks and insufficient logistical support can hinder the smooth movement of goods and services across borders. A significant number of African countries demonstrate a sparse railway network density, averaging merely three kilometres per 1,000 square kilometres.

This is starkly juxtaposed with the extensive 400 kilometres per 1,000 square kilometres seen in Europe. The concentration of both freight and passenger transport is notably high in Northern Africa and the Republic of South Africa, collectively representing over 80% of the total transportation activity across the continent.

This lack of infrastructure will not only increase operational costs for SMEs but also undermine the efficiency of cross-border trade. For instance, the African Development Bank (AfDB) notes that transportation costs account for a significant portion, ranging from 30% to 50%, of the total export value in Africa.

This financial burden is particularly pronounced in 16 landlocked countries, such as Zimbabwe, South Sudan, Mali and Niger, where transport costs soar to as much as three-quarters of their entire export value. Addressing these infrastructural gaps becomes crucial for creating an environment conducive to seamless intra-continental trade.

Equally pressing are the regulatory constraints that SMEs may encounter when navigating the complexities of the AfCFTA. Varied regulations and bureaucratic hurdles across different jurisdictions, coupled with the tax implications stemming from cross-border trading, can create a maze of challenges for businesses seeking to expand their operations.

Compliance with varying legal frameworks, standards and documentation requirements might become a burdensome task, particularly for smaller enterprises with limited resources. Streamlining and harmonising regulatory frameworks is therefore essential to simplify the process for SMEs, enabling them to navigate the intricate landscape of the AfCFTA more effectively.

This opinion was written by Frank Bannor, director of research at the Danquah Institute (DI), Accra

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