As the African Continental Free Trade Area (AfCFTA) begins to operate fully, concerns have been raised by some stakeholders that the agreement will lead to loss of substantial revenues to some member-states – especially countries which heavily rely on Customs duties, given the many tariff waivers that come with the deal.
For instance, Ghana relies heavily on revenue derived from Customs (CEPS); as in 2019 the country generated GH¢11.2billion from that sector, only second to domestic tax (direct – IRS) – indicating that if the trade pact should have negative impact on tariffs, its economy will be among those countries most affected.
However, a study by the World Bank has revealed that the short-term impact on tax revenues will be quite small for most countries, as a decline, if any, of less than 1.5 percent is expected; further adding that the trade pact’s effect on total revenues would seldom cause a decline of more than 0.3 percent for most countries. And even countries that may experience higher revenue shortfalls from the trade deal, such shortfalls, the study says, won’t exceed 0.9 percent of total tax revenue.
The Bretton Wood institution cited the small share of import revenues for most countries on the continent, and the fact that the trade agreement allows for an exclusion list that does not come under the free tariff regime.
“First, imports from African countries account for a small share of tariff revenues for most countries (less than 10 percent on average). Second, most tariff revenues can be shielded from liberalisation with exclusion lists, because these revenues are highly concentrated in a few tariff lines (1 percent of tariff lines account for more than three-quarters of intra-Africa tariff revenues in almost all African countries).
These results are consistent with other studies which show that, “even under full liberalisation, the number of countries expected to experience significant tariff revenue losses is small, and exclusion lists have the potential to significantly reduce such losses”, stated the study, titled ‘The African Continental Free Trade Area, Economic and Distributional Effects’.
On other hand, the study emphasised that continental free trade will in the medium-term lead to increased revenues for member-states, as volumes of trade will see a significant increment.
“In the medium-term, the overall impact on import tariff revenue is expected to be positive in the AfCFTA scenario at the regional level. Although tariffs decline, the increase in volume of imports leads to higher tariff revenue collection, with an increase of 3 percent at the continental level compared with the baseline in 2035. Faster economic growth leading to a higher level of economic activity is likely to increase the total revenue from other taxes as well,” the World Bank study stated.
The trade pact connects 1.3 billion people across 55 countries with a combined GDP valued at US$3.4trillion. AfCFTA will significantly boost African trade, particularly intraregional trade in manufacturing. The volume of total exports is expected to increase by almost 29 percent by 2035 relative to the baseline. Intracontinental exports will also increase by over 81 percent, while exports to non-African countries will rise by 19 percent.
Under the AfCFTA scenario, manufacturing exports will gain the most, 62 percent overall, with intra-Africa trade increasing by 110 percent and exports to the rest of the world rising by 46 percent. The agreement will also boost regional output and productivity, and lead to a reallocation of resources across sectors and countries.
By 2035, total production of the continent will be almost US$212-billion higher than the baseline. Output will increase the most in natural resources and services (1.7 percent), with manufacturing seeing a 1.2 percent rise, the World Bank states.