OPINION: It’s time we pushed for greater intra-Africa trade

This week Kigali hosts the Africa CEO forum, and a key focus area will be Africa trade integration. Whilst, at the global level we are seeing moves to increased fragmentation - whether in relation to EU and Brexit, or the China and USA trade war - for Africa the narrative is as to how to accelerate the integration process with the ultimate aim of increased economic growth. The most recent manifestation of this intent was in March 2018 with the signature of the agreement for the creation of a Continental Free Trade Area (CFTA).

Issues to be addressed during the Africa CEO forum include: identification of priorities to boost intra-African trade and investment; how to better protect Africa’s interests and industries; how to mobilize the private sector around cross-border infrastructure and logistical projects; identification of insights to draw from the East African Community (“EAC”) – considered the most successful regional model; how to create a truly pan-African financial services industry.

Insights into the current thinking of CEOs both globally and within the Africa region can be gleaned from PwC’s 22nd Annual Global CEO Survey, which was released at the 2019 World Economic Forum annual meeting in Davos. This survey revealed a prevailing sentiment of caution this year in the face of increasing uncertainty - with CEOs around the world less optimistic about the strength of the global economy and growth prospects for their own organisations.

CEO confidence

At the root of this drop in CEO confidence are not so much the existential threats that featured prominently in the past (for example, terrorism and climate change), but much more concerns in relation to factors that affect the ease of doing business in the markets in which they operate and the consequent impact on confidence and resultant willingness to take risks and invest. At the global level the top three threats cited (and respective percentage of respondees) were (1) over-regulation (35 per cent), (2) policy uncertainty (35 per cent), and (3) availability of key skills (34 per cent). Interestingly for Africa the same concerns were in the top three, but in all cases cited by a higher percentage of respondees, and with policy uncertainty at the top of the list: (1) policy uncertainty (49 per cent), (2) availability of key skills (45 per cent), and over-regulation (43 per cent). If we are to realise the articulated shared objective of using regional integration to drive private sector growth then it is key to address concerns on policy uncertainty and with that policy coherence.

The EAC is cited as Africa’s most successful regional model, but it still has a long way to go to meet its aspirations. Yes, goods can in principle move freely within the EAC, but in practice non-tariff barriers still frequently get in the way. In addition, although the November 2009 signature of the EAC Common Market Protocol sought to pave the way for similar freedom for movement of labour, services, capital and the right to establishment, in practice progress on this front has been disappointing.

Significant focus

Whilst there has been significant focus on how goods can move tax free within the EAC, the same cannot be said for services. A general concern in relation to intra-Africa trade in services is that the tax regimes act to discourage such activity by imposing costs (in particular high non-resident withholding taxes and sometimes irrecoverable Value Added Tax) that would not apply on similar transactions taking place between two parties in the same country. So, why erect these barriers on trade in services between countries?

One mechanism that had been hoped would help alleviate some of these distortions had been an EAC double tax treaty - a first version of which was originally signed in 1997. Subsequently, following renegotiation an amended version was signed by all EAC Ministers for Finance on 30 November 2010. But neither the 1997 nor 2010 versions ever came into force as relevant ratification procedures were not completed. In the case of the 2010 agreement I understand that ratification remains pending by Burundi and Tanzania, both of whom appear reluctant to take this step. Even if ratified it would not completely eliminate withholding tax on intra-regional cross border changes but at least the reduced rates would significantly reduce withholding tax costs.

Clearly measures such as the recent signature of the CFTA are to be welcomed as a step towards greater African trade integration - but again this initiative focuses on goods. As services become an ever more important part of our economies, there should be a commensurate focus on reducing tax distortions that inhibit regional trade in services.