How AfCFTA can strengthen regional value chains and SMEs growth

BY OLAKUNLE MOHAMMED

Earlier this month, United Bank for Africa (UBA) Plc, signed an agreement with the Africa Continental Free Trade Area (AfCFTA) Secretariat to provide financing to Small and Medium scale Enterprises (SMEs) across Africa. This partnership seeks to address a critical challenge hindering SME growth on the continent: the lack of financial access and other obstacles such as non-tariff barriers, inadequate infrastructure, digital technology adoption, limited logistics networks, and regulatory disparities across countries. The AfCFTA is actively addressing these challenges, aiming to unlock the full potential of SMEs and drive their growth, while strengthening Africa’s regional value chain.

In December 2021, Kenya imposed a ban on Ugandan poultry products, prompting Uganda to respond in kind by banning Kenya’s agricultural exports. This non-tariff barrier significantly hampered trade between these East African countries until earlier this year when Kenyan President William Ruto reversed the ban on Ugandan agricultural produce.

Similarly, West Africa’s trade relations faced challenges following the closure of Nigerian land borders in August 2019 to curb smuggling. Although some borders reopened in December 2020 during the COVID-19 pandemic, the protectionist policy affected Nigeria’s exports and balance of trade. The policies implemented in Kenya and Nigeria had a profound ripple effect on SMEs within and outside these countries, forcing some to shut down or seek alternative markets for their goods.

Mozambique’s initially commendable introduction of the Temporary Import Permit (TIP) has now become a significant hindrance for individuals and businesses involved in transit cargo from South Africa to the Port of Maputo. The manual processing of TIPs at the entry point incurs prohibitive costs, leading to reduced cargo movements and frustrating delays.

After the introduction of electronic payment systems for TIPs, only a few have embraced the technology, while manual queues and potential corruption persist, further exacerbating the problem. The recurring border problem affects the efficiency of trade routes and undermines the competitiveness of imports and transit imports into Mozambique. This border problem captures the pressing challenges of technology adoption, logistics networks, and poor infrastructure faced by African trade, particularly for SMEs and traders dealing with perishable products.

Access to finance remains the most significant hurdle for businesses in Africa, as emphasised by the United Nations Economic Commission for Africa’s (UNECA) 2020 Economic Report. The World Bank Enterprise Survey further reveals that 24.7 percent of firms in Africa identify access to finance as their primary obstacle. This challenge aligns with UNECA’s findings that SMEs in Africa face difficulties surviving and expanding into larger firms, with many collapsing within their first three years.

Moreover, prohibitive collateral requirements, high-interest rates, and strict credit checks imposed by lending banks worsen SMEs’ lack of access to capital. Additionally, the lack of proper documentation and audited financial information further hinders SMEs’ access to finance, largely due to lack of enforceable legal requirements.

Despite the aforementioned challenges, SMEs remain the backbone of African economies, comprising around 90 percent of all private businesses, providing approximately 85 percent of employment, and contributing about 35 percent to the continent’s GDP.  However, some African governments lack prioritization of SME policies in areas like tax regimes, ease of doing business, access to finance, and infrastructure. These policies hinder SME growth and integration into regional value chains. With the implementation of AfCFTA, SMEs are poised to expand their market reach, seize new opportunities, and improve their position in the African supply chain.

One of the key initiatives of the AfCFTA is to improve access to finance and markets. For SMEs, this is an initiative that encourages their growth and contribution to the socio-economic development of Africa. The UBA-AfCFTA agreement exemplifies collaborative transformation, providing $6 billion in financing for SMEs in import-dependent sectors like agro-processing, automotive, pharmaceuticals, and transport and logistics. This funding will enable SMEs to explore intra-African/domestic alternatives, reduce import reliance and promote local production.

Additionally, the partnership opens opportunities for financial institutions, credit financiers, and foreign investors to support SMEs as Special Purpose Vehicles (SPVs). This empowers African businesses with legal backing and capital to expand products, explore regional markets, and enhance logistics and delivery.

Digital trade plays a crucial role in the growth of SMEs. Under the AfCFTA, the Trade Facilitation Agreement (TFA) encourages the adoption of ICT in customs procedures, streamlining processes such as information provision, document submission, and goods inspection.

Digital trade addresses the challenges posed by inadequate infrastructure, allowing businesses to overcome physical barriers and inefficient logistics.

Through digital platforms, supply chain management becomes streamlined, enabling real-time tracking and efficient inventory management. This enhances logistics processes, reduces costs, and facilitates the movement of goods across borders, driving intra-African trade and economic growth. This is what the AfCFTA hub, a digital platform has brought into reality. The hub is providing businesses with vital information on market opportunities and regulatory requirements across Africa. This gives SMEs the requisite market information to navigate intra-African trade seamlessly.

To facilitate cross-border digital trade, an accessible payment system is crucial. The Pan-African Payment and Settlement System (PAPSS) has been introduced. This is a centralized platform for payment transactions across the continent. This system ensures efficient and secure cross-border payments, making it easier for SMEs to engage in trade and expand their operations. By leveraging digital trade, payments, and technology, SMEs can tap into the vast opportunities offered by the AfCFTA. These advancements promote efficiency, connectivity, and financial inclusion, empowering SMEs to thrive in the digital era of intra-African trade.

Undoubtedly, the AfCFTA as a continental union will become instrumental in bridging the trade and infrastructural gap among African nations. There has always been cross border project to address infrastructure deficits in Africa nations such as Serenje-Nakonde Road Project, Douala Bangui N’djamena Corridor (a road rail project), Brazzaville-Kinshasa Road Rail Bridge Project, Kinshasa-Ilebo Railways, and modernisation of Dakar-Bamako Rail Line. But, the AfCFTA will facilitate more infrastructure projects that will make movement of goods and people within Africa less cumbersome, especially for African businesses.

The foundation for the continental trade bloc is coming together, albeit slowly. Nonetheless, it is putting the requisite collaboration, partnership, policies and guidelines needed to make the regional integration sustainable and improve its value chain. By addressing challenges, leveraging digital trade, and investing in infrastructure, the AfCFTA has the potential to strengthen regional value chains and drive SME growth. But, for SMEs to thrive in Africa, the leaders and policymakers need to build AfCFTA’s policies within it, not on it.

Mohammed is a master’s student at the University of East Anglia, and a Free Trade Fellow at Ominira Initiative.