After several delays and postponements, trading under the African Continental Free Trade Area (“AfCFTA”) finally commenced on the 1st of January 2021. The long-awaited trading has been a historic event for African States and Small and Medium-sized Enterprises (SMEs) in Africa. SMEs represent about 80 percent of Africa’s businesses and are responsible for more than 80% of Africa’s employment and 50% of its Gross Domestic Product (GDP).Notwithstanding that most SMEs on the African continent struggle to grow and expand because of multiple barriers that limit their capacity to compete on the market and trade with other neighbouring African countries. These constraints include lack of skilled labour, poor access to financing, trade barriers, lack of infrastructure, complex bureaucratic procedures, and corruption. This is unfortunate as SMEs play a crucial role in African trade but are disproportionately impacted by non-tariff barriers (NTBs) due to their limited resources and access to information.
In Mozambique, SMEs play a crucial role in the economic development of the country. They are at the heart and soul of the Mozambican economy. They comprise no less than 98.7% of the market but contribute only 28% to GDP. SMEs in Mozambique provide employment, diversification, mobilize social and economic resources, and provide a greater level of competition. There is room for SMEs in Mozambique to grow as they can take advantage of the country’s extractive sector. This year the President of the Republic recommended that medium and long-term strategies should be found to help micro, small and medium enterprises (MSMEs) eliminate weaknesses and weather crises in the business sector.
Any economic policy that facilitates imports and exports among member countries with lower or no tariffs, free access to the market and market information, and the elimination of trade barriers provides numerous benefits to SMEs. SMEs are thus a key beneficiary of the AfCFTA as the free-trade area provides significant opportunities for growth. One of the biggest opportunities offered by the AfCFTA is market access. Under the free-trade zone SMEs will be exposed to a more expanded market which is estimated to be as large as 1.3 billion people across Africa, with a combined GDP of $3.4 trillion. Further, trading under the AfCFTA provides for open borders, improved contracts, and better structured value chains which are key benefits for SMEs to grow.
One of the main objectives of the AfCFTA is to increase Africa’s intra-continental trade by 52.3 percent by 2022. SMEs will thus benefit from this as they will be able to increase their sale and boost their business because of their capacity to reach consumers from all over the continent. Therefore, local SMEs in the country will benefit from partnerships with potential foreign investors who would want to invest or launch their businesses in Africa. For example, the Nigerian government has imposed some restrictions on imported manufactured goods to drive foreign investors to invest in manufactured products in Nigeria or to partner with local businesses. As a result, there will be a significant boost in business and transfer of skills and technology through SMEs’ partnerships with potential foreign investors.
Increased intra- African trade will increase the economies of scale and provide an access to cheaper raw materials and intermediate inputs. The free trade also offers better conditions for regional value chains and integration into global value chains, catalysing the transformation of SMEs towards greater utilization of technology and knowledge, facilitating both intra-African and external direct capital flows. This in-turn creates a labour market and a demand pull throughout the continent. Further, the AfCFTA will increase facilitate exports diversification which gives SMEs an opportunity to expand their markets.
One of the major challenges that has hindered SMES in Mozambique to reach their full potential is the lack of access to finance, high interest rate and the stringent collateral requirements as well as lack of affordable credit facilities. The accessibility of finance by SMEs has hindered the growth of SMEs as only 5 % of the SMEs are financed through banking institutions, forcing them to use other financing lines for both investment and working capital. Practically many of the SMEs finance their projects through their own funds, family funds, and friends’ funds which is unstainable. Given that access to finance remains a key constraint to SME operations, availability of sustainable trade finance, will remain the key lubricant to propel the AfCFTA, the single largest trading bloc globally. With the coming into effect of the AfCFTA, African trade financing banks such as the African Export-Import Bank (Afreximbank) have provided factoring as a viable alternative financing instrument for supporting SMEs in Africa at a time when traditional commercial bank lending is tightening. Afreximbank offers support to SMEs that cannot obtain traditional bank funding and proffers the use of open account transactions which are cheaper than letters of credit and simply involve a business selling its receivables at a discount to a third party called a factor. With such structures in places, SMEs can access financing in the cheap and easy manner and thus expand their businesses.
Furthermore, the reduction of tariff revenues collected by African countries on intra-African trade will make it easier for more SMEs to join the “real” economy by ensuring a fairer distribution of the gains from free trade. The AfCFTA will provide greater support for trade facilitation and exchange of information from the pan-African, regional, and local bureaucracies which will be a great incentive for SMEs participation.
To ensure that SMEs can fully take advantage of the African Free Trade Area, it is important that SMEs understand what the AfCFTA entails and what the future negotiations will cover. SMEs should also ensure that their representatives participate as governments craft and operationalize the agreement. To do that, they need to be fully aware of the issues, potential benefits and opportunities and, most importantly, the role they can play. Although a true continent-wide free trade area may take time with many challenges, there appears clear progress towards success, promising economic benefits for SMEs across the Continent.
AUTHOR: CHIDO PAMELA MAFONGOYA
THE CENTURION LAW GROUP