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The Promise of the African Continental Free Trade Area (AfCFTA) to the East African States
15 May 2020
Insight Article
In a continent roiled in political upheavals, graft, and poor fiscal policies, there is hope that a common market may be the spark to ignite a new dawn
AN EMERGING ECONOMY?
Is East Africa really on a path to economic prowess across Africa? Statistics, particularly in the past three years, seem to agree. At a robust 5.9 per cent economic growth in 2019, the East African region has maintained a significant lead across Africa's five regional economic blocks. Based on recent data from the African Development Bank the East African block is soaring economically and has improved on the figures it posted in 2018. During that year, the overall GDP of the East African region stacked at 5.7 per cent – ahead of other regional economic blocks in the North, West, Central, and Southern African. Each of these different regions only managed a growth of 4.9 per cent, 3.3 per cent, 2.2 per cent, and 1.2 per cent respectively (Mpoke-Bigg, 2019).
Each state is earnestly jostling for the apex within the greater East African region. In 2019, Ethiopia recorded the most momentous economic growth, at approximately 8.0 percent (The World Bank Group, 2019). Other regional states such as Kenya, Tanzania, Uganda, and Rwanda equally posted growth of at least 5.0 percent. The economic emergence of the region, coupled with relative political stability within the last two years, has moulded the region into a budding destination for investment. Between 2017 and 2018, Ethiopia, Kenya, Tanzania, and Rwanda were ranked highly by the South Africa’s Rand Merchant Bank in its Investment Attractiveness Index – pointing to their increasing draw as investment termini (Anyanzwa, 2019). In early 2020, Kenya became the largest economy in East Africa, at the expense of Ethiopia and likewise climbed to the apex as the most attractive investment destination in the region. Suffice it to say, there is a growing promise that the East African region, led by its three key Regional Economic Communities (RECs) – COMESA, IGAD, and EAC could very well lead the way to an eventual economic transformation of the continent.
However, such imposing figures operate as a mask to the reality that the overall real GDP of the region still falls below that of Nigeria, South Africa, and Egypt – whose cumulative real GDP constitutes at least 50 percent of the gross GDP of the entire continent. While the region’s economic prospects insinuate a sustained effort towards growth, several systemic risks are lurking within the figures. The remarkable data outlined above conceal a number of raw, but disconcerting facts about the economy of the region.
Exhibit 1: GDP growth across the economic regions in Africa between 2015 to 2019
Policymakers across the three main RECs must expand their capacity to create institutional interventions to pave way for an enhanced private sector interaction across the region
For instance, a substantial portion of the growth in Kenya and Tanzania came from the agricultural sector, which is susceptible to the vagaries of nature and the growing threat of climate change (African Development Bank Group, 2019). Also, like most countries in Sub-Saharan Africa, these two countries rely heavily on primary commodity exports, which generally do not attract high returns and highly susceptible to price fluctuations. In Rwanda and Ethiopia, the industrial and service sectors have been the key drivers of growth, with other sectors contributing marginally.
Overall, the GDP of the region is composed of the service sector at about 59.0 percent, followed distantly by the agricultural sector at 25.7 percent.
Notably, industry and manufacturing account for a dismal 15.0 percent and 14.6 percent respectively. In essence, the region is yet to experience any meaningful structural transformation to enable it to diversify its economy or to escalate instances of value-addition as a basis for competitive industries. Pitted against some of the leading economies in Africa, the East African region is still reliant on primary commodities as exports, with most countries having to borrow heavily to meet their fiscal deficits (Signé, 2018). Such borrowing, especially from China and its EXIM Bank and a growing appetite for external bonds has led to colossal increases in external indebtedness and perennial current account deficits.
Furthermore, a number of countries within this region still have significant portions of the population mired in poverty. According to a 2016 World Bank report, the strong economic growth in recent years has not had a substantial effect on poverty reduction, unemployment, and general inequality. Poverty is rampant in countries across the EAC, but extremely high in Rwanda and Burundi. On the strength of the various socioeconomic indicators, states like Rwanda, Burundi, and Southern Sudan could very well be deemed as Least Developed Countries. Even so, key multilateral organizations and economic institutions postulate that a well-oriented structural transformation will offset some of the pronounced systemic vulnerabilities (Bicaba, Brixiova, & Ncube, 2018). The preponderant unanimity is that the East African region is yet to deplete its reservoir of economic potential. The most cited illustration of such potential, according to the African Development Bank (AfDB) is the extent of intra-regional trade, which is still below the anticipated optimum. Policymakers across the three main RECs must expand their capacity to create institutional interventions to pave the way for an enhanced private sector interaction across the region.
Box 1: Summary Economic Growth within EAC member-states*
The growth in the overall GDP in Eastern African was boasted by a general advance across the EAC member-states. Such growth, particularly in 2018, was underpinned by a significant rebound of agriculture in Kenya, Uganda, and Rwanda in the wake of a devastating drought in 2017.
Real GDP in Kenya expanded by 6.3 percent in 2018, significantly higher than the 4.9 percent posted in 2017. This growth came in the wake of increased agricultural output, intensification of manufacturing activities, growth in transportation, and a burgeoning service sector. Inflation stood at 4.7 percent in 2018, lower than the 8.0 percent recorded in 2017, due mostly to a remarkable decline in food prices.
Rwanda had the highest growth in real GDP, at 8.6 percent – motivated largely by strong progress within the nation’s industrial and service sectors. At the same time, a reduction in the cost of food and non-alcoholic beverages led to a decrease in inflation from 4.8 percent in 2017 to 1.4 percent in 2018. The current account deficit expressed as a percentage of the GDP increased from 6.8 percent in 2017 to 7.8 percent in 2018, owing to a deterioration in trade.
Uganda had a real GDP growth of 6.2 percent in 2018, slightly higher than the 5.0 percent posted in 2017. Uganda’s growth within this period was fuelled largely by massive investment in public infrastructure alongside an invigorated service and industry sectors. However, current account deficit as a percentage of the GDP also rose to 6.8 percent in 2018 – due mostly to the importation of capital goods.
On the back of a resurgent service sector and private investments, Tanzania’s economy expanded by 6.6 percent in 2018, slightly lower than that in 2017, which was 6.8 percent. The current account deficit as a percentage of GDP increased from 3.3 percent in 2017 to 3.7 in 2018 – due largely to more imports in 2018 of transportation equipment, materials for building and construction.
Burundi had a real GDP growth of 0.1 percent in 2018. At the same time, current account deficit expressed as a percentage of the GDP has widened to 13.4 percent within the same time.
Source: Economic Survey 2019, Kenya National Bureau of Statistics and East Africa Economic Outlook 2019, Africa Development Bank
Data covers the duration between 2017 and 2018. *Information from South Sudan not included.
While it is incumbent upon states to overhaul ineffectual macroeconomic factors in the quest for the highest forms of integration, healthful economic growth will remain inaccessible if the microeconomic aspects that are valuable to the private sector – particularly its informal part (DFID, 2008). As noted in the AfDB’s Private Sector Development Strategy, 2013-2017, the bureaucrats laden with the responsibility of intensifying intra-regional trade, the private sector should be of significant concern; for the reason that it is by far the biggest contributor to real GDP in virtually all the countries within East Africa. In Kenya, one of the leading economies in the region, recent surges have been intimately interlaced with the growth of the private sector.
Like in many states in sub-Saharan Africa, the private sector in East Africa is enormous in terms of its contribution to real GDP opportunities for employment, but structurally opaque. It is primarily bifurcated into two – the formal, which is comprised of large and healthy enterprises and the informal, which is unstructured and often-time poorly understood (African Development Bank Group, 2013). And yet, it is the informal section that employs a considerable majority. Data from the International Labour (ILO) estimates that the informal economy in sub-Sharan Africa accounts for at least 40 percent of the region’s cumulative GDP. In Kenya, at least 8 out of 10 workers earn a living from this sub-sector, a trend that is replicated across most of the states within the EAC.
However, despite the fact that private sector development holds the key to unlocking the full capacity for intra-regional trade and the overall transmutation of several households into the middle-class, policy intervention necessary for such regeneration is still insufficient.
Even supposing that the EAC is the most integrated RECs in the continent, there is still a large portion of cross-border trade that is informal and therefore only mildly understood. This makes it difficult to find ways to systematize the sub-sector without introducing bottlenecks to its vibrancy. The effect of this conundrum is that the EAC’s collaborative efforts with the East Africa Business Council (EABC) and other such entities are restrained in terms of its level of representation. This not necessarily disastrous, but such consultative frameworks must seek ways of shaping the informal sector towards decorousness without disrupting its substructure. With a more engaged private sector, the EAC can then embark on the full implementation of its objective of creating the East African Monetary Union, which will equally lead to enlightened deliberations in the quest for a functional Africa Continental Free Trade Area (AfCFTA).