Economic insights from Malabo

GDP


The thread that passed through each conversation was integration. Regional integration has been placed firmly on the front burner across African countries. This was not surprising as the Africa Continental Free Trade Area (AfCFTA) agreement came into effect on the 30th of May. Based on estimates, the African economy could 4.5% to its GDP, provided that governments do away with bilateral tariffs and non-tariff barriers. Furthermore, the AfCFTA is expected to be the largest global trade bloc consolidating an integrated market of 1.3 billion consumers with a combined gross domestic product of about US$3.3trn. A borderless continent could result in a GDP growth of 6% y/y for Africa compared with 3.5%y/y recorded in 2018.

A senior representative from Chad noted that free market access through the AfCFTA is a solution for uncontrolled emigration that entices young Africans. Meanwhile, a member of the Madagascar delegation pointed out that regional integration constructed on the basis of common institutional and financial institutional and financial policies is not sufficient and as such, it is essential to secure the support of the public because citizens have to be convinced by the process.

Both viewpoints are valid. All things being equal, boosting regional integration would facilitate trade, bolster job creation and assist with wealth creation. However, there are also very important concerns that were discussed and require fixing before countries begin opening up their borders.

The first concern that does not necessarily stick out due to the continent’s huge population size which is widely perceived to be positive for consumption is low disposable income. The domestic private sector is muted. The average income per day in Africa is US$4.7, in some countries it is as low as US$2 per day. For Nigeria, using the newly approved minimum wage as the baseline, the income per day is US$2.8. Therefore, demand is incredibly soft and so this potential free flow of commodities and services could suffer from low or no demand. To fix this, strengthening domestic private sectors across countries by creating wealth and boosting purchasing power needs to be a focal point on government agendas.

An obvious challenge is poor infrastructure. There are lots of examples from countries across Africa, Gabon is worth highlighting. Transporting timber in its raw form to other African countries from Gabon is expensive. To put this in perspective, it costs 5 times more than sending it to India due to poor or non-existent transport links. The 57,000 kilometre Trans Africa highway has missing links or sub-standard sections along about 20% of its length. Logistics are also particularly important for the 16 landlocked countries which depend on coastal countries for sea-borne trade. Investments to improve strategic logistics projects such as the road corridors and the African integrated high-speed rail network are needed to facilitate cross-border traffic. Based on data from the Africa Development Bank, Africa has a financing gap of an estimated US$170bn annually for infrastructure including transport, energy, ICT and soft infrastructure.

A ripe manufacturing sector is also essential for trade activities amongst African countries. A year and a half after its currency devaluation (by over 100%), an unlikely development occurred in Egypt. The currency devaluation should have resulted in increased exports for Egypt. However, exports dipped instead. The problem was that there were more assembly plants (i.e. vehicle assembling) as opposed to manufacturing plants. As such, the cost of imported assembly kits spiked due to the currency devaluation thus resulting in a slowdown of imported inputs used for assembling which by extension, affected export volumes.

The president of the host country, Equatorial Guinea raised a pertinent point, national security. Although the idea of free movement is exciting, security threats exist. There is also the risk of an influx of nationals within the low-income bracket from other countries. Given the registered attacks recorded in some countries, police forces within each country need to be well trained to assist with controlling possible abuse of this proposed free movement. Integration is possible but when it is accompanied with violent attacks, it will take the continent several economic steps back.

It is true that trading with partners outside Africa means Africa is offshoring jobs for its youth to countries outside the continent. At the minimum, about 25 million jobs per year are offshored from Africa. Meanwhile, 10 million jobs per year are required for new entrants into the continent’s job market. For instance, exporting raw products to countries outside Africa creates jobs for nationals in the recipient (importing) country across the value-chain of the imported product. Examples are raw cocoa and chocolate bar value chain and then timber and paper or furniture value chain.

Equatorial Guinea was once one of the poorest countries globally but has managed to radically transform its economy and now has one of the highest per capita income on the continent. The general mood from Malabo was commitment to regional integration for shared prosperity.a

The fastest growing African economies in 2018 were Senegal (7%), Rwanda (7.2%) and Ivory Coast (7.4%) all non-resource rich countries supported by agricultural products, consumer demand and rising public investment. Meanwhile, economic fundamentals in most African countries have improved, and inflationary pressures have subsided in countries with stable exchange rates.The general expectation is that regional integration would enhance trade, promote industrialisation, create jobs and boost economic growth. Africa could add at least 4.5% to its GDP on the back of enhanced trade activities.
Chinwe Egwim Economist, FBNQuest Merchant Bank

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AfCFTAChinwe Egwim
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