October 23, 2018

EAC TFTA a big move for region’s economical growth and stability

After more than seven years of negotiation, the signing of the Tripartite Free Trade Agreement (TFTA) in June last year was heralded by many in Kenya as a turning point in regional integration.

While there is substantial potential for the TFTA to significantly deepen economic ties across the continent and further boost intra-regional trade – which currently stands at roughly one-tenth of overall trade volumes – the scope and complexity of the undertaking are likely to delay the most meaningful benefits of the TFTA for Kenya and the rest of Africa.

While all 26 member states have signed an in principle agreement, implementation will be the next step. The regulatory regimes governing the three participating regional economic communities (RECs) and the different member states will need to be harmonised, which could push the effective start date of the TFTA beyond the anticipated deadline of 2017.

Trade specifications

The TFTA is an economic integration initiative pursued by three of the continent’s RECs – the East African Community (EAC), the Common Market for Eastern and Southern Africa (COMESA) and the Southern African Development Community (SADC).

Once implemented, the agreement will create a 26-member integrated economic entity spanning Egypt to South Africa, covering some 17.3m sq km and creating a market of around 632m people, equivalent to more than half the population of Africa. With a combined GDP of $1.2trn, the new trade bloc would account for around 60% of the continent’s economic activity.

Notably, the agreement establishes a framework to incorporate other Central and West African nations that were excluded from the initial agreement at a later date, paving the way for an even larger trading zone.

While progress has been made in recent months, the agreement still has several hurdles to overcome.  All countries have yet to sign the final agreement, and the TFTA will still need to be ratified by the legislatures of each state. National laws and tariff structures will also need to be adjusted to reflect the terms of the deal, as negotiations continue over rules of origin, trade remedies and dispute settlements.

Deepening ties

The TFTA, which is based on the pillars of market integration, infrastructure expansion and industrial development, is an important step towards the broader goal of economic integration across the continent, as envisaged in the 1994 Abuja Treaty on the Establishment of an African Economic Community, signed under the auspices of the Organisation of African Unity.

Africa remains the least economically integrated continent in the world in terms of intra-regional trade flows. While intra-continental trade accounts for around 40% and 60% of total trade in the Americas and Europe, respectively, that figure stands at just 12% for Africa.

The EAC has seen greater progress in this regard than other regions on the continent. While intra-regional trade in ECOWAS or the Arab Maghreb Union in West and North Africa, respectively, accounts for one-tenth of overall trade volumes, the EAC averages around 30%.

Similarly, Kenya tends to outperform the regional average, with 48% of the country’s exports bound for other African countries in 2014, according to the Kenya National Bureau of Statistics. However, receipts from its African counterparts accounted for just 9% of Kenyan imports, compared to 61.2% from Asia, with India ranking as the primary source country since 2010.

With Africa’s share of global trade at around 3%, according to figures from the African Union, expanding intra-regional trade is crucial to improving export revenues and creating jobs, as well as helping to buffer markets from external macroeconomic pressures, such as the current economic slowdown in Asia and the anticipated tightening of credit markets in the US and Europe.

Kenya gains

Overall, Kenya’s trade balance is expected to see substantial gains from the agreement. According to a recent analysis by the Ugandan Ministry of EAC Affairs, Kenya is expected to be one of only five countries in the bloc to see exports increase by more than $100m following full implementation of the TFTA. Moreover, with 41.2% of Kenya’s exports destined for TFTA member states in 2011, compared to the 13.4% share of imports from TFTA participants, Kenya enters the bloc from a position of relative strength.

In particular, Kenya’s industrial and manufacturing sector is likely to be reignited by greater access to the broader TFTA market. Manufacturing is one of the priority sectors identified by the government as a key engine for future growth in its Vision 2030 development plan. Importantly, the TFTA gives Kenyan exporters preferential access to six new markets not already covered by the EAC or COMESA, namely Angola, Botswana, Lesotho, Mozambique, Namibia and South Africa.

“The TFTA and the Continental Free Trade Area agreements launched [in 2015] provide an opportunity for Kenya to become a manufacturing hub for Africa, and this needs to be harnessed,” Phyllis Wakiaga, CEO of the Kenya Association of Manufacturers, told local media in July.

Mixed results

However, the effect the TFTA will have on other economic sectors is less clear. Many countries included in the agreement remain heavily dependent on agriculture, including Kenya, where agriculture directly accounts for over 27% of the country’s GDP, 20% of formal jobs and more than half of total employment.

At present, agricultural products enjoy some of the most protective tariffs in sub-Saharan Africa, with an average tariff of 24.9%, according to the World Bank’s Overall Trade Restrictiveness Index, compared to 14.4% for total trade in the region.

Perhaps foreseeing the difficulties inherent to liberalising the sector, the signatories of the agreement restricted the movement of goods deemed “sensitive,” many of which are agricultural products, until at least 2017.  Agricultural goods like sugar, maize, wheat and rice will be subject to duty and quota restrictions, as will other products such as cement, plastics, electronics and paper. The intention is to give these industries time to adjust to increased competition from players in other markets included in the TFTA.

Challenges & solutions

Other aspects of the deal have also prompted concerns about its feasibility. The sheer scope of what the TFTA aims to achieve – the unification of extremely different economies and regulatory frameworks – is an ambitious goal in itself, particularly in a region often characterised by institutional inefficiencies. According to Transparency International’s annual survey on the perception of corruption in the public sector, sub-Saharan African countries consistently rank as some of the worst performers in the world. For its part, Kenya ranked 145th out of 174 nations in 2014, compared to 136th in 2013.

In physical terms, a lack of transport infrastructure and connectivity amongst member states could prove to be another stumbling block for intra-regional trade growth. In East Africa alone, transport costs are estimated to be 60% higher than in the US and Europe. According to the 2015 East Africa Logistics Performance Survey, the average dwell time for a container in the ports of Dar es Salaam and Mombasa stood at nine and five days, respectively, compared to a global average of just three days.

This, however, may be an area on which the bloc can improve. Across the continent, a raft of large-scale transport infrastructure projects are under way. This should help ease some of the stress on road networks, which remain the primary means of transporting goods across the continent.

In Kenya alone, ongoing transport projects include the $4bn Mombasa-Nairobi standard gauge railway, with plans in place to extend it through to Naivasha and eventually connect to Uganda via the Kenyan city of Malaba. The Lamu Port-Southern Sudan-Ethiopia Transport Corridor, a $24.5bn package of projects stretching across northern Kenya including a railway, highways, and a crude oil pipeline, amongst other features, is also in the works.

These projects are taking place alongside significant upgrades and expansions to the Port of Mombasa, worth some KSh34bn ($333.1m), and the country’s airports, including long-term expansion plans at Nairobi’s Jomo Kenyatta International Airport, at a cost of around $653m, according to the Kenya Airports Authority.

 

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