The headline of this post captures the consistent question I kept getting from folks after publishing an essay arguing that the recently launched African Continental Free Trade Agreement would potentially open additional avenues for South African products to destinations where the country hasn’t largely participated in over the recent past.
So for a background; on 14 August 2019, we learned that Nigerian President, Muhammadu Buhari, has instructed the country’s central bank to stop providing foreign currency for food imports. President Buhari took it to Twitter to explain his rationale behind this step (see here). In brief, Buhari wants to improve Nigeria’s agricultural production and attaining more food security. And his hope, I think, is that a reduction in imports in the face of solid domestic food demand will be a catalyst for domestic production.
From a South African perspective, Nigeria is potentially an important market because of its purchasing power and population. My hope, as I explained in this essay, was that countries such as Nigeria would in future be areas that South Africa would have to expand its agricultural footprint under the African Continental Free Trade Agreement. This might still hold, but it is not clear how long will the Nigerian government restrict the foreign exchange for food imports.
As things stand, Nigeria’s action will have minimal impact on South Africa’s agriculture and food industry. Over the past five years, Nigeria accounted for a mere 2% of South Africa’s agricultural exports to the African continent. The products involved are apples, pears, prepared food, wines, grapes, fruit juices, sauces and seasonings, amongst other products. While these are high-value products, it’s a small share of South Africa’s agricultural (and food) exports that goes to Nigeria and can be diverted to other markets within the continent where South African has a footprint or in the global market.
What will be interesting to watch over the next few months is whether Nigeria succeeds in this policy approach (Let us face it; there are better ways of improving one’s agricultural sector than limiting foreign exchange for imports. This is a topic for another day). Over the past five years, Nigeria’s agricultural and food imports averaged US$4.7 billion, as shown in Figure 1 below. The products on top of the imports list are wheat, sugar, milk, palm oil, sauces and seasonings, bottled water, apples, pears, maize and vegetables oil.
Figure: Nigeria’s agricultural trade
Source: ITC, Agbiz Research
There is a potential to reduce the imports of some of these products, but this won’t be an overnight event. It will take years of investment in agricultural production and value chain. I will revisit this topic in a few months’ time when we have some evidence on how this policy approach has been accommodated by the Nigerian people and businesses.
The bottom-line view is that this development will have minimal impact over the foreseeable future to farmers in South Africa.
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The South African agricultural sector, and specifically the expansion in the sector over the recent past, is heavily reliant on exports. In fact, South Africa exports roughly 49% of its agricultural products in value terms. Hence, the newly launched African Continental Free Trade Agreement (AfCFTA) would potentially open additional avenues for South African products to destinations where the country hasn’t largely participated in over the recent past. This would practically mean, an increase in the share of South Africa’s agricultural exports to the continent, rather than mainly focusing on growing other well-established markets.
Moreover, the AfCFTA is expected to make 90% of trade within the continent duty-free by July 2020, and this is set to increase to 97% over the next decade as more duties on an additional number of products are phased down. While some African countries will be deprived of revenue currently derived from trade tariffs, the expectation is that the benefits will exceed the costs, as countries will eventually benefit from trade creation, production diversification, job creation, industrialisation with increased corporate income tax revenue as a corollary, and higher personal income tax revenue.
However, the African continent is beset by other systemic problems such as poor quality or lack of infrastructure, unconducive business environments that make trade across borders particularly costly and nearly prohibitive, corruption and weak institutions which render legal recourse and dispute settlements redundant, among others.
With the AfCFTA providing a potential opportunity to unlock further growth in trade, this will not be possible unless and until the abovementioned issues are sufficiently addressed. The precedent of African countries collaborating politically and economically set by the AfCFTA should translate to deep and fundamental reforms that unlock the existing barriers to intra-regional trade.
The make-or-break of the AfCFTA will come when trade under the agreement officially kicks off in July of 2020. Although the African Export-Import Bank has reserved $100 billion to help member countries alleviate trade adjustment costs and facilitate the creation of a common payment system, concerns still remain. Previous experiences from the Regional Economic Communities such as SADC show that tariff phase-down have been matched with, and exceeded by non-tariffs barriers (NTB), such as the excessive documentation needed for cross-border trade transactions, administrative bottlenecks and stipulated trade quotas aimed at curbing the quantity of traded goods.
The extent of these NTBs effectively reversed the potential gains of the SADC Free Trade Area. In the AfCFTA scenario, policymakers have indicated that NTBs will also be given equipollent attention as its contemporaneous existence could threaten the growth of intra-African trade and impede the effective operationalisation of the AfCFTA.
Overall, this relationship would not be one way. South Africa remains an importer of poultry meat (edible offal of fowls), rice, wheat, sugar, palm oil, soybeans, beer, fish, sunflower oil, soybean oilcake, and tobacco, amongst other agricultural commodities. Ideally, the African countries can also have room to participate in the South African market by supplying these products.
But most African countries do not have the capacity to export significant volumes of the aforementioned agricultural products, at least not to the extent of satisfying South Africa’s import requirement. The onus, however, lies on the Member States and their respective industries to realise that there is demand in South Africa, and start investing in production and providing an enabling environment for such industries to thrive.
With thanks to Tinashe Kapuya, PhD.
Written for and first published by the Agricultural Business Chamber of South Africa (Agbiz)
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