The African Continental Free Trade Area (AfCFTA) and Trade in Services: Opportunities and Strategies for Southern Africa

At the request and funding from the Sub-Regional Office for Southern Africa of the United Nations Economic Commission for Africa (UNECA), International Economics Consulting Ltd. (IEC) has authored a study on the opportunities and strategies for Southern Africa in the context of the African Continental Free Trade Area (AfCFTA) and Trade in Services. The study highlights the service sectors and trade in services in the Southern African region and provides an overview of the status of the AfCFTA Trade in Services negotiations and any pending issues to be addressed. The report also outlines the opportunities and strategies that will enable Southern Africa to become a competitive and efficient services sector.

The services sector is considered to be one of the most dynamic and promising sectors of almost all economies. Over the past two decades, the share of agriculture and industry in relation to the gross domestic product (GDP) has declined in the Sub-Saharan African economy. For instance, in the year 2000, agriculture accounted for 17.5% of the region’s GDP but by 2019, it only constituted 15.3% of GDP. During the same period, the services sector’s contribution to GDP rose from 46.4% to 50.9%.  As Africa’s middle class continues to grow rapidly, the services sector is expected to expand further, resulting in enhanced services sector exports and increasing wealth and revenue to the region. Despite making up a larger share of the GDP, trade in services in the region has nonetheless witnessed a decline in recent years. Between 2015 to 2019, services exports were estimated at an average of USD 22.9 billion, with a decline of 6.7% compared to the figures for the period 2010-2014.  Moreover, the services sector is also hindered by certain structural inefficiencies that need to be addressed. The dominance of the services sector in Southern Africa can largely be traced to the influence of South Africa which contributes up to 67% of the region’s combined services economy. These deficiencies emphasise the need for greater structural transformation, increased value-addition and enhancing the job-creating potential of the sector.

The downturn experienced by the sector is, however, expected to change with the AfCFTA. The Agreement with 54 Contracting Parties which became operational on 1 January 2021, constitutes a market of 1.2 billion people and a USD 3.4 trillion economy of goods and services. The liberalisation of trade, through the elimination of tariff and non-tariff barriers on practically all trade in goods and services, offers tremendous opportunities for the region. Negotiations are being pursued on five priority sectors namely: business and professional services; telecommunication services; financial services; transport; and tourism. It is expected that the liberalisation of the services sector in Southern Africa can yield benefits beyond the sector itself. In order for this to be possible, however, existing obstacles and trade-restrictive practices need to be addressed. For instance, some market entry regulations applied by the SADC Member States, such as quantitative restrictions on the number of suppliers or licensing requirements, are considered much more trade-restrictive than those applied by emerging economies and OECD countries. Such barriers to trade in services will restrict the private sector’s ability to trade.  Additionally, supply-side constraints such as market development problems, limited access to financing for exports, and limited access to networks and institutions that facilitate trade amongst others, all impede the ability of the countries in the region to fully take advantage of the opportunities provided by international markets.

Trade in services has the potential to contribute to Southern Africa’s economic growth. However, in order to make the services sector competitive, the existing barriers to growth need to be addressed. Reforms need to be undertaken to increase FDI flows, open markets and increase competition. By opening their markets and fostering competition, economies in Southern Africa will be in a position to secure better access to world-class services at attractive prices. Competition law will play a crucial role in security market access to foreign investors and will be able to drive innovation and the quality and delivery of services. Mutual Recognition Agreements (MRAs) could also be a way to tackle some of the regulatory barriers and can strengthen intra-regional services trade. Finally, promoting digitally enabled services is also an essential way of increasing the competitiveness of the services industry and thus, the basic legislative, infrastructure and skills frameworks will need to be in place.

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