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SSA supply-chain diversification is more likely to succeed
under the AfCFTA than under global supply-chain diversification
efforts.
Political stability, a favourable skills base, enhanced ICT
infrastructure, and high readiness for AfCFTA adoption make small
island economies to be better prepared in benefiting from the
AfCFTA.
Raw material producers, as well as producers of agricultural
products, and food and beverages are set to benefit especially from
the AfCFTA. IHS Markit sees that business opportunities and
competitive advantages across countries will be diverse.
Breaking down non-tariff barriers such as rules of origin and
health and safety regulations remains essential to reap the full
benefits of the AfCFTA and regional supply-chain
diversification.
We have developed a supply-chain diversification opportunity
index for the SSA region to assess which countries are better
positioned and could benefit most from investing in supply chain
diversification under the AfCFTA.
The AfCFTA was launched on 1 January 2021. In IHS Markit's view
this agreement will create enhanced supply chain diversification
opportunities across the continent over the medium to longer term.
SSA is however less likely to benefit from global supply-chain
diversification efforts compared to other regions such as Eastern
Europe, Southeast Asia, and Mexico, our analysis shows. Countries
in SSA currently lack the skills, infrastructure and production
capacity to produce goods that could be viable substitute products
for those produced by other large global producers such as China in
the global supply chain. This is shown by SSA's small share of
exports compared to total world exports. In addition, SSA compares
less favourably than other global producers regarding most risk
factors dictating investors' decisions, such as security,
operational, policy, and economic risks.
Key success factors
Under the AfCFTA, the biggest incentives and growth benefits
will come through the removal of tariffs, which ultimately will
reduce production costs and induce advantages of economies of
scale. Countries that display a readiness to adopt the agreement
and have a substantial share of inter-regional trade, as well as
pursue appropriate business-policy reforms to attract global and
regional investment are better positioned. Economies that show a
solid consumer base and adequate skills pool achieved through
inclusive growth and labour-force skills development, maintain
political stability, and prioritise the development of information
and communications technology (ICT) to enhance productivity and
cost efficiency are also on the higher ranks.
High score countries
Small island economies such as Cape Verde, Mauritius, São Tomé
and Príncipe, and Seychelles are well prepared to benefit from the
AfCFTA agreement, the supply-chain diversification opportunity
index shows. These economies have the advantage of political
stability, a favourable skills base, enhanced ICT infrastructure,
and high readiness for AfCFTA adoption. Botswana, Côte d'Ivoire,
Kenya, Namibia, Nigeria, Rwanda, Senegal, South Africa, Togo, and
Uganda are also expected to benefit. Most of these economies are
relatively large within their sub-regions, while Côte d'Ivoire,
Kenya, Senegal, and Togo have also made significant progress in
improving their business environment and have a high AfCFTA
readiness ranking.
Products and services beneficiaries
Benefiting greatly from economies of scale, the AfCFTA allows
access to a larger pool of producers and the opportunity of
centralised processing needed to be competitive in a global market.
Under the AfCFTA, this will benefit particularly downstream users
of products within the SSA region, as it will reduce input costs,
increasing their competitiveness. This, in turn, reduces costs for
the final consumer, improving living standards, while boosting the
competitiveness of the region as a whole. Products and services
that will benefit from larger trade blocks typically include raw
materials, agricultural products, and food and beverages. Food
production in Africa has especially great potential to expand.
However, in order to benefit from the bigger market provided by the
AfCFTA, more efficient agricultural practices will have to be
employed. IHS Markit expects as a result agricultural land area use
to come down in the long term.
Bottom line
The post-COVID-19 economic landscape in sub-Saharan Africa will
be characterised by higher poverty and inequality, and a rising
public-sector debt burden. Pre-COVID-19 GDP levels could be reached
again by 2023 at the earliest. The risk to this outlook remains
high, of which a second wave of COVID-19 in 2021, adverse weather
conditions, political instability, a slow return of foreign private
investment, and limited fiscal flexibility pose the most
significant. Nonetheless, the SSA region's medium- to longer-term
growth potential remains positive. The successful implementation of
the AfCFTA and easing of nontariff barriers is one of the biggest
growth opportunities. Investment will stretch from financial and
business services to agro-processing, light manufacturing, and raw
materials beneficiation. Business opportunities and competitive
advantages across countries will be diverse. However, that breaking
down non-tariff barriers such as rules of origin, safety, and
health regulations remain essential to reap the full benefits of
the AfCFTA and regional supply-chain diversification.
Posted 22 January 2021 by Alisa Strobel, Senior Economist and
Thea Fourie, Team Lead Sub-Saharan Africa Economics
