African SIDS and the African Continental Free Trade Area (AfCFTA): Challenges and Opportunities

International Economics Consulting Ltd. (IEC) has conducted an assessment on the challenges and opportunities for African Small Island Developing States (SIDS) in the context of the African Continental Free Trade Area (AfCFTA), at the request of the United Nations Economic Commission for Africa (UNECA) and the African Trade Policy Centre (ATPC) and by partial funding from the European Union through its ‘Deepening Africa’s Trade Integration through Effective Implementation of the AfCFTA to support Economic Integration’ project. This report covers five SIDS namely Cabo Verde, the Comoros, Mauritius, São Tomé and Princípe, and Seychelles.

SIDS face numerous unique economic and development challenges resulting from their small landmasses and small populations, and their remoteness from major markets. Given the constraints of their small domestic markets and their narrow sectoral bases, SIDS’ economic growth rely substantially on international trade and have limited number of export commodities and export markets, resulting in economic vulnerability in the face of changes in export demand and commodity prices. As a result, trade is significantly more volatile for them. The vulnerabilities that SIDS face have been heightened as a consequence of the COVID-19 crisis. However, despite the common challenges and threats that the five African SIDS face, they are also a very heterogeneous group of countries, exhibiting significant variations in terms of their economic classifications, relative development progress, business environment as well as their level of export diversification.

Given all the vulnerabilities that SIDS encounter, they can reduce the impact of exogenous shocks by increasing the resilience of their economies and by participating in regional value chains. One of the immediate benefits to be derived from the implementation of the AfCFTA is through the elimination of tariffs and other duties, the removal of identified non-tariff barriers and the implementation of trade facilitation measures. Although the extent of the benefits cannot be assessed as of yet, since the scope and depth of national commitments are still being negotiated, a full or partial liberalisation of the priority sectors, by opening goods and services markets simultaneously, will make the AfCFTA a game-changer for Africa’s development. It will create opportunities that will boost intra-African trade and allow countries in the region to access and integrate into the global economy.

Moreover, the full implementation of the AfCFTA has the potential of lifting 30 million people from extreme poverty. The regional estimates however conceal the strong discrepancies between countries, including SIDS. For instance, incidences of extreme poverty are the lowest in Mauritius and Seychelles at 0.4% and 0.9% of the population correspondingly. Contrastingly in the Comoros, at least 44.1% of the population lives in extreme poverty. Thus, the poverty-reducing impacts might be negligible in Mauritius and Seychelles and much more significant in Comoros. Likewise, across both trade in goods and trade in services, and other gains to be derived from the AfCFTA, it can be expected that these will be distributed unevenly across countries. In this light, it is also crucial for SIDS to ensure that their implementation strategy will ensure sustainability and ownership across the government and beyond. Governments will be required to establish policies that appropriately mitigate the risks of the AfCFTA and compensate firms and individuals and other stakeholders that are placed at a relative disadvantage during its adoption. Governments must champion a policy that will require coordination, collaboration, and consensus-building that responds effectively to likely social dislocations.

The AfCFTA, by creating a continental single market for goods, services, and investment, constitutes the largest free trade area created since the World Trade Organisation was established and will contribute to new dimensions of trade and integration for Africans. The study conducted by IEC elucidated the gains to be derived from the full implementation of the AfCFTA and also cautioned that the gains would not be distributed evenly, not only across the continent but even more so for the SIDS given the fundamental variations in their starting points. Nevertheless, all SIDS can expect to acquire advantages from reduced trading costs so long that tariffs are eliminated, and all trade facilitation measures are implemented. A comprehensive set of recommendations has been proposed in the report to ensure that SIDS can take full advantage of the potential of the AfCFTA. Moreover, domestic reforms are also needed in a wide range of areas, such as improving the general business and investment environment and respecting the principles of good governance and the rule of law.

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