Opportunities for African SMEs under AfCFTA

Thursday September 19 2019



Wambugu Wa Gichohi

Wambugu Wa Gichohi 

The operationalization of the Africa Continental Free Trade Agreement (AfCFTA) expected to start on July 1, 2020 avails unprecedented opportunities for growth-seeking African Small and Medium Enterprises (SMEs) and large corporates.

AfCTA creates the world’s largest trading block (by number of countries) since the World Trade Organization (WTO), a single market with a combined $1.2 billion people and a cumulative GDP of $2.5 trillion, making it the world’s eighth largest economy.

The UN Economic Commission for Africa projects it to have the potential to raise intra-African trade by 15 per cent to 25 per cent, or $50 billion to $70 billion, by 2040.

As of 2016, intra-African exports stood at $65billion, equivalent to only 17.6 per cent of Africa’s total exports. The largest exporters to African markets are South Africa taking 35.4 per cent of the $65billion, Nigeria 7.7 per cent and Egypt 4.7 per cent.

On imports, South Africa (17 per cent), Botswana (7 per cent), Zambia (7 per cent), Namibia (6 per cent), Mozambique (5 per cent) and Zimbabwe (4 per cent) are the largest importers from other African countries.

These figures reveal that 82.4 per cent of African exports are to non-African markets, leaving the vast African markets to import from the rest of the world.

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Further, Africa loses about $80 billion annually (in the service sector only) in intra-African trade mainly due to lack of knowledge of what is available in other African markets by African suppliers. This gap is filled by suppliers from the rest of the world.

It is important that African businesses prepare themselves to take up opportunities under AfCFTA. The market is large enough for them to trade with each other as opposed to trading with external entities.

However, the situation on the ground is worrying and unless addressed urgently, the current trend of huge imports from non-African sources and exports to non-African markets will continue. This is explained here-below.

According to a recent study by the World Bank, there are an estimated 445 million Micro, Small and Medium Enterprises (MSMEs) across Africa, out of which only 30 million are formal SMEs and only 70 million formal micro enterprises.

This leaves 335 million informal enterprises-the majority (in headcount) in African trade, who should be the main beneficiaries of the opportunities under AfCFTA.

On the corporate side, the African Trade Commission (ATC) estimates there are about 700 large corporations in Africa.

Out of these only 49 have their roots in East Africa, with most of the rest concentrated in South and North Africa. Between them, the 700 control 40 per cent ($1.4 trillion) of all revenues attributed to trade in Africa, with 60 per cent under control of MSMEs.

According to a 2018 World Bank report, there are four main challenges facing intra-African trade. AfCFTA addresses these, removes existing trade barriers and creates seamless intra-African trading opportunities.

First is unfinished liberalization which has sustained high levels of trade taxes. Second is an unsupportive investment climate in most of Africa, making it nearly imposible for businesses to set up and operate viable enterprises.

Third, Africa is geographically, logistically and regulatorily fragmented, making it not just expensive but sometimes unviable to move goods from one country to another. Finally, behind-the-border, trade-related (non-tariff) barriers. This calls for customs reforms and trade facilitation in order to fasten intra-African trade.

While AfCFTA promises real prospects for growth-oriented businesses, it should be cause to worry for the majority of the 335million informal businesses across Africa who are the direct beneficiaries.

Remaining informal automatically locks them out of AfCFTA. Franchising forces enterprises to formalize and the sooner MSMEs and big corporates embrace the model, the faster we will achieve the desired outcomes under AfCFTA.

The writer is the Project Promoter and Lead Franchise Consultant at Africa Franchising Accelerator Project aimed at achieving faster African socio-economic integration under AfCFTA.

We work with country apex private sector bodies to increase the uptake of franchising by helping indigenous African brands to franchise. We turn around struggling indigenous franchise brands to franchise cross-border.

We settle international franchise brands into Africa to build a well-balanced franchise sector. We create a franchise-friendly business environment with African governments for quicker African economic integration.

wambugu.wagichohi@worldaheadafrica.com, franchising@tpsftz.org

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