The Free Trade Agreement: Is Ghana positioned well to benefit?

On March 21, 2017, 44 African leaders gathered at Kigali, Rwanda, to sign the framework that establishes the African Continental Free Trade Agreement (AfCTFA) – aimed at creating a single continental market for goods and services as well as a Customs union with free movement of capital and business travellers.

In line with this commitment, parliaments of at least 22 countries were supposed to ratify this agreement 30 days after the meeting in Kigali.

To respond favourably to this, Ghana recalled its parliament which was on recess to come and ratify the agreement. On Thursday, March 26, the agreement was subsequently ratified by parliament.

One central goal of the agreement is to boost African economies by harmonising trade liberalisation across sub-regions and at the continental level. As a part of the AfCFTA, countries have committed to remove tariffs on 90 percent of goods.

According to the U.N. Economic Commission on Africa, intra-African trade is likely to increase by 52.3 percent under the AfCFTA and will double upon the further removal of non-tariff barriers.

And according to the Africa Union, Africa has a market of 1.2bn people and a combined economic output of US$2.5 trillion; and the population is expected to double by 2050, the UN says.

But intra-African trade accounts for only about US$170bn, or 18 percent, of the continent’s total annual formal commerce, according to the African Export-Import Bank. This compares with about 68 percent for the EU.

With a market of this size, it is expected that the AfCFTA will only improve fortunes of the continent and create a prosperous economy for all beneficiary countries.

This point was underscored by Nana Akufo-Addo, President of Ghana, who was reported by the FT newspaper to have said after the deal: “We now have the construct for meaningful intercontinental trade. An increase in trade is the surest way to develop fruitful relations between our countries, enhance development and attain prosperity”.

But the big question is: who stands to benefit from this agreement?

It is common knowledge that countries with large manufacturing bases – such as South Africa, Kenya and Egypt, are likely to be the receive the biggest gains in this agreement.

But quite surprisingly, one of the largest economies in Africa, Nigeria, did not join in signing the agreement – with the country’s President, Muhammadu Buhari, saying he needs more time to consult with unions and businesses to assess the risks an open market would pose to his country’s manufacturing and small-business sector.

The situation in Ghana

Considering that countries with large manufacturing bases are those that will really benefit from this agreement, it raises a question about Ghana’s chances in this pact.

Are the manufacturing sector and small-businesses resilient enough to repel any risk or ‘attack’ the open market will pose? Is the country’s economy productive enough to export goods and services to other countries?

Well, a look at the performance of the manufacturing sector will help answer.

The country’s manufacturing sector is currently growing at a slow pace. The provisional 2017 GDP figures released by the Ghana Statistical Service (GSS) show that the manufacturing sector grew by only 3.7 percent in 2017.

The figures are even more disappointing when compared on quarterly basis. The manufacturing subsector grew at a measly 1.3 percent in Q4 of 2017; down from 6.2 and 2.5 percent in Q2 and Q3 respectively.

Since 2006 when its contribution to GDP hit 10.2 percent, it has never grown past that figure. The sector’s contribution to the economy has consistently tumbled to record 4.5 percent in 2017. In fact, its contribution to the economy has dropped six years in a row since 2012 to date.

From the above figures it is clear that the country’s manufacturing sector is so much in distress, and the raise doubts about its ability to support the economy in this free-trade deal.

Challenges of manufacturing sector

A major factor crippling this all-important sector is the torrid business environment faced by manufacturing companies.

Ranked high among such challenges is the difficulty in accessing capital. In a country where lending rates are 30 percent and above, it is extremely expensive for companies to use the country’s financial sector to access capital for expansion.

Another challenge the manufacturing sector is bedevilled with is high cost of production owing to high tariffs and raw material cost. In most cases, companies must import raw materials before they can produce. And with the local currency not stable against the US$ and pound Sterling, their case seems worst.

As if these challenges were not enough, local manufacturing companies face very unfair competition from big foreign companies, which – because of economies of scale, cheap labour, stable macroeconomic environment, among other factors – are able to produce and dump their products in the country, selling at a cheaper price.

Expert opinion

Speaking to the Head of Economics at the University of Ghana, Professor Peter Quartey, on what government must do to ensure that the AfCFTA does not become a win-lose situation at the expense of Ghana, he said government must ensure that goods allowed into the country are those that Ghana does not have competitive advantage over.

“I think that in going into such agreements, we should be informed about what commodities we have the comparative advantage over that we can produce at a cheaper cost; that we can trade with our partner-countries – otherwise if we all produce the same commodities and we want to trade, that will be impossible.

“Trading doesn’t mean anything at all can come in, there are standards. So, you set the ground rules. If the products do not meet the standards set, then they cannot come in at all. But if there are rules and no enforcement, then that is how dumping can happen,” he said.

He further stated that government should support local industries build their capacities, and also provide an enabling environment that will make them thrive.

“Government should not engage directly in production. Government should rather provide the enabling environment for businesses to thrive. For example, availability of land. If government takes the lead to make land acquisition easy and stress-free for companies, it will encourage investment.

“Again, roads, electricity and water. Those are some of the things government can provide for the private sector. They need markets. Government can organise a trade fair or engage foreign markets. It can also source capital for local industries, but not directly engage in production,” he said.

Prof. Quartey again urged governments of all African countries to build the needed infrastructure that will facilitate easy movement of goods, services and humans, so that the trading process can be carried out smoothly.

So, in conclusion, if Ghana is to really benefit from the AfCFTA, then it should revive its manufacturing sector and produce more to satisfy local demand and export as well.