## 3. Is the African Continental Free Trade Area a Game Changer for the Continent?

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### Executive summary and key findings
- Intraregional exports:
  - Relatively diversified, contain higher value-added goods than exports to the rest of the world, and include a sizable share of manufactured products (for example, motor vehicles and clothing).
- Opportunities for further regional trade integration:
  - After controlling for lower income, smaller economic size, and generally longer distances, particular features of African countries limit their ability to trade versus other regions.
  - Some features are structural and require long-term change; others are policy-driven (tariffs, trade regulations, regulatory requirements) and their removal would boost regional integration.
  - Opportunities to expand intraregional trade are particularly sizable for some agriculture-related commodities (for example, food products) and manufacturing industries, and in some African subregional economic communities that trade significantly less than peers.
- Tariffs and nontariff bottlenecks:
  - Reducing tariffs alone is not sufficient; poor trade logistics and, to a lesser extent, infrastructure are major obstacles.
  - These bottlenecks are particularly important for land-locked and low-income countries.
- Distributional and country heterogeneity:
  - Fiscal revenue losses from lower tariffs are likely to be limited on average but may be significant in a few countries that still apply high export tariffs.
  - Deeper trade integration can adversely affect income distribution, particularly in countries with more diversified economies and large shares of skilled labor; however, effects are limited in size because large informality isolates some groups in the short term, and effects tend to fade over time.
  - Small countries, more diversified economies, and established regional trade hubs already open to international competition are likely to benefit more than economies dominated by agriculture and natural resources.

### Regional trade integration: patterns and statistics
- Trade openness and volumes:
  - During 1990–2017, Africa’s trade openness (imports and exports of goods and services) increased from about 53 percent of GDP to 67 percent of GDP, after peaking around 2011.
  - Total imports (and exports) of services rose from US$27 billion (US$20 billion) in 1990 to about US$90 billion (US$89 billion) in 2017.
- Intraregional trade growth:
  - Intraregional trade rose from approximately 5 percent of total African imports in 1990 to about 12 percent in 2017.
  - These statistics understate actual intraregional trade because they do not capture widespread informal cross-border trade.
- Distribution and hubs:
  - Trade hubs include Côte d’Ivoire, Kenya, Senegal, and South Africa.
  - South Africa is the source of about 35 percent of all intraregional imports in Africa (and about 40 percent of intraregional manufacturing imports).
  - Algeria, Egypt, and Nigeria collectively represent about half of the region’s total GDP but account for about 11 percent of regional trade.
- Composition of trade:
  - African exports to the rest of the world during 2007–17 were heavily oriented toward minerals, which on average accounted for about 75 percent of total exports, with manufactured goods accounting for 16 percent.
  - Intraregional exports (2007–17) averaged about 40 percent manufactured goods (for example, trucks, motor vehicles), 44 percent minerals (for example, copper), and 16 percent agricultural products (for example, maize).
  - Compared with other regions, intraregional trade in Africa is more focused on minerals and less on manufacturing; intra-industry trade is lower than in other regions, signaling less regional value-chain integration.

### Experience of subregional economic communities (RECs)
- REC coverage and trade shares:
  - Most African countries are part of RECs; 75 percent of intraregional trade took place in five RECs in 2017, with SADC alone accounting for half of such trade flows.
- Tariff patterns and effects:
  - Several RECs apply near-zero preferential tariffs to trade within the community; however, near-zero preferential tariff rates do not necessarily imply no tariffs because not all members are part of associated free trade agreements.
  - Tariffs on trade between countries from different RECs remain relatively high, on average about 12–15 percent.
- Heterogeneous outcomes:
  - In some RECs, trade flows spiked after tariff reductions (for example, SADC).
  - In other RECs (for example, CEMAC), tariff reductions were not associated with larger subregional trade flows, suggesting high nontariff trade costs and limited export diversification.
  - Countries in underperforming RECs have some of the highest nontariff trade costs and relatively undiversified exports.
- Overlap and rules:
  - Many countries belong to multiple RECs with different trade rules (for example, rules of origin), raising the cost of trading within the continent and posing a challenge for AfCFTA implementation.

### Tariffs, estimated trade gains, and limitations
- AfCFTA tariff ambition and direct estimates:
  - Under the AfCFTA, countries are expected to eliminate tariffs on 90 percent of products; targeting tariff lines could yield tariff reductions as low as 15 percent in terms of import values (UNECA 2018).
  - Eliminating tariffs on 90 percent of currently taxed intraregional trade flows would increase intraregional trade by about US$16 billion or about 16 percent over recent average levels (Online Annex 3.3).
  - The estimated elasticity of trade flows to tariffs in Africa is somewhat limited; more limited tariff reductions would have smaller overall effects on trade.
  - Computable general equilibrium (CGE) models estimate that eliminating tariffs on intraregional trade would increase trade in the region by about 15–25 percent over the medium term.

### Role and importance of nontariff barriers
- Distance and nontariff constraints:
  - Distance appears to be a greater barrier to intraregional trade in Africa than in other regions (Online Annex 3.3), indicating factors beyond tariffs make trading goods particularly costly.
  - Typical nontariff barriers include quotas, licenses, complex or dissimilar rules of origin, sanitary and phytosanitary measures, and technical barriers, as well as inadequate business and regulatory environments.
  - African countries have among the highest nontariff trade costs in the world (Figure 3.14).

### Relative importance of trade logistics, infrastructure, and other factors
- Augmented gravity-model findings:
  - Logistics and infrastructure, plus access to credit, business climate, and education, play a stronger role than tariffs in hindering intraregional trade (Figure 3.15).
- Trade logistics:
  - Trade logistics are the most significant direct impediment to intraregional trade in Africa.
  - Bringing the quality of logistics to the global average level (an improvement of about 19 percent) would lower cross-border movement costs and increase intraregional trade by over 12 percent.
  - Improving customs services, including clearance procedures and brokerage services, is particularly important for intraregional trade flows (Online Annex 3.3).
- Infrastructure quality:
  - Bringing the quality of infrastructure to the global average (an improvement in infrastructure quality of about 40 percent) would spur a 7 percent increase in intraregional trade flows.
- Other factors:
  - Access to credit, the business climate, and human capital also support intraregional trade; financial deepening to a level comparable to the global aggregate would support a significant expansion in trade.

### Interaction of nontariff factors with tariff policy (threshold effects)
- Threshold model results:
  - Empirical analysis using a global panel threshold model (1990–2017) shows nontariff factors such as infrastructure and trade logistics undermine tariff policies’ potential to promote trade (Online Annex 3.4).
  - Lower tariffs have relatively limited effects on trade flows if infrastructure quality is low (for example, below some minimum threshold).
  - For countries with poor infrastructure, improvements could potentially double the trade-increasing effect of tariff reductions; this effect is particularly strong in landlocked countries.
  - For low-income countries, both the low quality of infrastructure and level of human capital hinder the effectiveness of tariff reductions in boosting trade integration.

### CGE and welfare estimates
- Comparative impacts:
  - CGE studies confirm reducing nontariff trade costs has a much larger impact on trade flows than eliminating tariffs alone.
  - Reducing nontariff barriers by half would more than double the trade-increasing effects relative to tariff elimination alone.
- Welfare and GDP effects:
  - Eliminating tariffs on intraregional trade is estimated to increase welfare up to 0.5 percent over the medium term.
  - Combining elimination of tariffs with reducing nontariff barriers by half would increase welfare over the medium term up to 0.6–3.8 percent, and GDP by about 1 percent (Online Annex 3.5).

### Sectoral and distributional effects; implications for services
- Sectoral impacts:
  - Empirical gravity results indicate tariff reductions may boost intraregional trade particularly for the mineral, manufacturing, and agriculture-related sectors (Figure 3.13).
- Services:
  - The AfCFTA debate has mainly focused on goods, but liberalization of trade in services, including financial services, is equally important for welfare; barriers to trade in services in Africa remain relatively high (AfDB 2019).
  - Liberalizing trade in services requires coordinating trade policies and domestic regulatory reforms and considerable technical capacity.

### Distributional impacts and inequality
- Model estimates and heterogeneity:
  - The medium-term impact of increased trade on income inequality is limited but differs across economies (Figure 3.20).
  - In agriculture-oriented and, to some extent, natural-resource-exporting economies, trade openness decreases income inequality slightly.
    - Footnote: The Gini coefficient is estimated to decline by 0.2 percent for each 1 percent increase in trade flows. Hence, if the AfCFTA is expected to increase trade flows by 16 percent, the Gini coefficient could decline by as much as 3 percent from its initial level.
  - In manufacturing exporters, trade openness somewhat increases inequality as manufacturing exports tend to benefit firms that hire high-skilled and better-paid workers.
- Informality:
  - The informal sector is assumed to produce mainly nontradable goods and services, which are not affected by trade.
  - Informality is associated with greater income inequality (if concentrated in low-skill activities) but tends to mitigate the short-term effects of trade liberalization on income distribution.
  - The large size of informality in many African countries insulates a large share of the population from the impact of trade integration.

### Structural reforms and amplifying gains from the AfCFTA
- Complementary reforms:
  - Complementary structural reforms that boost efficiency in sectors where developing economies have comparative advantage can amplify the positive effect of deeper trade and increase GDP more than trade alone.
  - A stochastic general equilibrium model calibrated for a stylized African agriculture-exporting economy finds complementing the AfCFTA with structural reforms would significantly increase the AfCFTA’s impact on GDP for developing and agriculture-based economies.
  - Effective structural reforms can raise the impact on GDP of expanded trade by as much as one-third (Figure 3.19).
- Examples:
  - Policies that increase productivity in key agricultural exports (for example, increasing yields) and facilitate workforce shifts across sectors.

### Fiscal revenue impacts of the AfCFTA
- Historical context and averages:
  - During 2010–15, customs revenue averaged about 2.5 percent of GDP (16 percent of total tax revenue).
  - Overall regional imports, including zero-rated imports within RECs, averaged about 17 percent of total imports.
- Cross-country heterogeneity:
  - During 2010–15, most countries’ customs revenues averaged less than 2 percent of GDP, but in a few countries they exceeded 5 percent of GDP.
  - For some countries, imports from the region exceed 35 percent of total imports (for example, Côte d’Ivoire, Malawi, Zambia, Zimbabwe), suggesting risks of large revenue losses.
- Static revenue-loss estimates:
  - Applying the effective average tariff rate to import data and assuming elimination of all tariffs on intraregional imports produces an average estimated revenue loss of about 0.3 percent of GDP (includes VAT losses due to smaller tax bases).
  - Using most-favored-nation (MFN) effective rates yields an average loss estimated at about 0.5 percent of GDP (represents an upper bound for possible revenue losses since the AfCFTA requires elimination of tariffs on only 90 percent of trade items).
  - Revenue losses in some countries could exceed 1 to 2 percent of GDP (for example, Democratic Republic of the Congo, Sierra Leone, Zimbabwe).
- Dynamic revenue-loss estimates:
  - On average, dynamic effects imply a revenue loss of about 0.5–0.8 percent of GDP, depending on assumed elasticities.
  - For a few countries, dynamic revenue losses may be as large as 3–5 percent of GDP.
- Policy implication:
  - Countries with large potential revenue losses should define clear domestic revenue mobilization policies on entering the AfCFTA.

### Policy priorities and recommendations to realize AfCFTA gains
- Prioritize reducing nontariff bottlenecks:
  - Improving trade logistics and customs-related services, including clearance procedures and brokerage services.
  - Upgrading infrastructure (roads, railroads, electricity, ports).
  - Establish mechanisms to identify and monitor removal of other nontariff barriers, such as quotas, licenses, subsidies, restrictive application of rules of origin, and sanitary and phytosanitary measures.
- Strengthen financial and institutional frameworks:
  - Develop and harmonize regional payment systems to facilitate cross-border payments.
  - Create swap arrangements across central banks and a multicurrency clearing center in the region to reduce risks from trading in several different regional currencies.
  - Further coordinate the supervision of pan-African banks that can facilitate intraregional trade, accompanied by adequate prudential frameworks.
- Complementary reforms in business climate and human capital:
  - Medium-term policies to address education and skills gaps and obstacles to business.
- Services liberalization:
  - Liberalize trade in services while coordinating trade policies and domestic regulatory reforms; recognize technical complexity and need for detailed sectoral information.
- Distributional and adjustment policies:
  - For less-diversified and agriculture-based economies, combine trade policies with structural reforms to improve agricultural productivity and strengthen competitive advantage.
  - Mobilize domestic revenues in some countries to mitigate expected revenue losses from tariff reductions.
  - Temper temporary adverse effects on income distribution—particularly in diversified economies—through targeted social programs (for example, income support) and training programs to ease worker mobility across firms and industries and promote employment.

*Prepared by a team led by Geremia Palomba, coordinated by Reda Cherif and Yunhui Zhao, comprising Russell Green, Salifou Issoufou, Thomas McGregor, Adrian Peralta-Alva, Amadou Sy, Bruno Versailles, and Jason Weiss; research assistance by Hilary Devine and Miguel Pereira Mendes.*

### 3. Is the African Continental Free Trade Area a Game

### ch3 - 3. Is the African Continental Free Trade Area a Game Changer for the Continent?

### Executive summary and key findings
- Intraregional exports are relatively diversified, contain higher value-added goods than exports to the rest of the world, and include a sizable share of manufactured products (for example, motor vehicles and clothing).
- Despite expansion, significant opportunities for further regional trade integration remain:
  - After controlling for lower income, smaller economic size, and generally longer distances, particular features of African countries limit their ability to trade versus other regions.
  - Some features are structural and require long-term change; others are policy-driven (tariffs, trade regulations, regulatory requirements) and their removal would boost regional integration.
  - Opportunities to expand intraregional trade are particularly sizable for some agriculture-related commodities (for example, food products) and manufacturing industries, and in some African subregional economic communities that trade significantly less than peers.
- Tariffs and, more important, nontariff bottlenecks currently limit intraregional trade integration:
  - Reducing tariffs alone is not sufficient; poor trade logistics and, to a lesser extent, infrastructure are major obstacles.
  - These bottlenecks are particularly important for land-locked and low-income countries.
- Removing trade barriers may have uneven effects:
  - Fiscal revenue losses from lower tariffs are likely to be limited on average but may be significant in a few countries that still apply high export tariffs.
  - Deeper trade integration can adversely affect income distribution, particularly in countries with more diversified economies and large shares of skilled labor; however, effects are limited in size because large informality isolates some groups in the short term, and effects tend to fade over time.
  - Small countries, more diversified economies, and established regional trade hubs already open to international competition are likely to benefit more than economies dominated by agriculture and natural resources.

### Regional trade integration: patterns and statistics
- Trade openness and volumes:
  - During 1990–2017, Africa’s trade openness (imports and exports of goods and services) increased from about 53 percent of GDP to 67 percent of GDP, after peaking around 2011.
  - Total imports (and exports) of services rose from US$27 billion (US$20 billion) in 1990 to about US$90 billion (US$89 billion) in 2017.
- Intraregional trade growth:
  - Intraregional trade rose from approximately 5 percent of total African imports in 1990 to about 12 percent in 2017.
  - These statistics understate actual intraregional trade because they do not capture widespread informal cross-border trade.
- Distribution and hubs:
  - Trade hubs include Côte d’Ivoire, Kenya, Senegal, and South Africa.
  - South Africa is the source of about 35 percent of all intraregional imports in Africa (and about 40 percent of intraregional manufacturing imports).
  - Algeria, Egypt, and Nigeria collectively represent about half of the region’s total GDP but account for about 11 percent of regional trade.
- Composition of trade:
  - African exports to the rest of the world during 2007–17 were heavily oriented toward minerals, which on average accounted for about 75 percent of total exports, with manufactured goods accounting for 16 percent.
  - Intraregional exports (2007–17) averaged about 40 percent manufactured goods (for example, trucks, motor vehicles), 44 percent minerals (for example, copper), and 16 percent agricultural products (for example, maize).
  - Compared with other regions, intraregional trade in Africa is more focused on minerals and less on manufacturing; intra-industry trade is lower than in other regions, signaling less regional value-chain integration.

### Experience of subregional economic communities (RECs)
- REC coverage and trade shares:
  - Most African countries are part of RECs; 75 percent of intraregional trade took place in five RECs in 2017, with SADC alone accounting for half of such trade flows.
- Tariff patterns and effects:
  - Several RECs apply near-zero preferential tariffs to trade within the community; however, near-zero preferential tariff rates do not necessarily imply no tariffs because not all members are part of associated free trade agreements.
  - Tariffs on trade between countries from different RECs remain relatively high, on average about 12–15 percent.
- Heterogeneous outcomes:
  - In some RECs, trade flows spiked after tariff reductions (for example, SADC).
  - In other RECs (for example, CEMAC), tariff reductions were not associated with larger subregional trade flows, suggesting high nontariff trade costs and limited export diversification.
  - Countries in underperforming RECs have some of the highest nontariff trade costs and relatively undiversified exports.
- Overlap and rules:
  - Many countries belong to multiple RECs with different trade rules (for example, rules of origin), raising the cost of trading within the continent and posing a challenge for AfCFTA implementation.

### How the AfCFTA could affect regional trade integration
- Potential impact of tariff reductions:
  - Eliminating tariffs on 90 percent of existing intraregional trade flows—the most ambitious target under the AfCFTA—would increase regional trade by about 16 percent, or US$16 billion, over time.
  - Tariff reductions should be comprehensive to have significant effects on intraregional trade flows.
- Importance of addressing nontariff bottlenecks:
  - Tariff reductions should be complemented with policies addressing nontariff bottlenecks.
  - Even small improvements in addressing such bottlenecks are likely to have sizable effects.
  - Improving trade logistics, such as customs services, and addressing poor infrastructure could be up to four times more effective in boosting trade than tariff reductions.
  - Reducing nontariff obstacles would improve the effectiveness of tariff reductions, especially in landlocked and low-income countries.
- Policy priorities for AfCFTA implementation:
  - Policies to reduce nontariff bottlenecks, particularly poor trade logistics and infrastructure, should be central to fostering deeper trade integration in Africa.
  - To ensure benefits are shared, implement policies addressing adjustment costs from integration:
    - For less-diversified and agriculture-based economies, combine trade policies with structural reforms to improve agricultural productivity and strengthen competitive advantage.
    - In some countries, mobilize domestic revenues to mitigate expected revenue losses from tariff reductions (IMF 2018b).
    - Temper temporary adverse effects on income distribution—particularly in diversified economies—through targeted social programs (for example, income support) and training programs to ease worker mobility across firms and industries and promote employment (IMF 2017a).

### Empirical assessment and scope for further integration
- Gravity model findings:
  - Empirical gravity estimations covering 148 countries during 2000–15 suggest African countries are, on average, expected to trade less than countries in other regions after accounting for size, development, and distance.
  - Factors implying less trade include structural characteristics and policy-related constraints such as tariffs, poor logistics and infrastructure quality, and limited credit.
- Subregional and industry prospects:
  - Significant room exists for further trade integration in certain subregions and industries.
  - Several RECs—such as CEMAC, AMU, COMESA, and ECOWAS—cover many countries and trade less than top-performing RECs, indicating potential for additional integration within these subregions.

*Prepared by a team led by Geremia Palomba, coordinated by Reda Cherif and Yunhui Zhao, comprising Russell Green, Salifou Issoufou, Thomas McGregor, Adrian Peralta-Alva, Amadou Sy, Bruno Versailles, and Jason Weiss; research assistance by Hilary Devine and Miguel Pereira Mendes.*

### 3. IS THE AFRICAN CONTINENTAL FREE TRADE AREA A GAME CHANGER FOR THE CONTINENT?

### 3. IS THE AFRICAN CONTINENTAL FREE TRADE AREA A GAME CHANGER FOR THE CONTINENT?

### Tariffs, estimated trade gains, and limitations
- Under the AfCFTA, countries are expected to eliminate tariffs on 90 percent of products; targeting tariff lines could yield tariff reductions as low as 15 percent in terms of import values (UNECA 2018).
- Eliminating tariffs on 90 percent of currently taxed intraregional trade flows would increase intraregional trade by about US$16 billion or about 16 percent over recent average levels (Online Annex 3.3).
- The estimated elasticity of trade flows to tariffs in Africa is somewhat limited; more limited tariff reductions would have smaller overall effects on trade.
- Computable general equilibrium (CGE) models estimate that eliminating tariffs on intraregional trade would increase trade in the region by about 15–25 percent over the medium term.

### Role and importance of nontariff barriers
- Distance appears to be a greater barrier to intraregional trade in Africa than in other regions (Online Annex 3.3), indicating factors beyond tariffs make trading goods particularly costly.
- Typical nontariff barriers include quotas, licenses, complex or dissimilar rules of origin, sanitary and phytosanitary measures, and technical barriers, as well as inadequate business and regulatory environments.
- African countries have among the highest nontariff trade costs in the world (Figure 3.14).

### Relative importance of trade logistics, infrastructure, and other factors
- Augmented gravity-model results show logistics and infrastructure, plus access to credit, business climate, and education, play a stronger role than tariffs in hindering intraregional trade (Figure 3.15).
- Trade logistics are the most significant direct impediment to intraregional trade in Africa:
  - Bringing the quality of logistics to the global average level (an improvement of about 19 percent) would lower cross-border movement costs and increase intraregional trade by over 12 percent.
  - Improving customs services, including clearance procedures and brokerage services, is particularly important for intraregional trade flows (Online Annex 3.3).
- Infrastructure quality is another important nontariff bottleneck:
  - Bringing the quality of infrastructure to the global average (an improvement in infrastructure quality of about 40 percent) would spur a 7 percent increase in intraregional trade flows.
- Access to credit, the business climate, and human capital also support intraregional trade; financial deepening to a level comparable to the global aggregate would support a significant expansion in trade.

### Interaction of nontariff factors with tariff policy (threshold effects)
- Empirical analysis using a global panel threshold model (1990–2017) shows nontariff factors such as infrastructure and trade logistics undermine tariff policies’ potential to promote trade (Online Annex 3.4).
- Lower tariffs have relatively limited effects on trade flows if infrastructure quality is low (for example, below some minimum threshold).
- For countries with poor infrastructure, improvements could potentially double the trade-increasing effect of tariff reductions; this effect is particularly strong in landlocked countries.
- For low-income countries, both the low quality of infrastructure and level of human capital hinder the effectiveness of tariff reductions in boosting trade integration.

### CGE and welfare estimates
- CGE studies confirm reducing nontariff trade costs has a much larger impact on trade flows than eliminating tariffs alone.
- Reducing nontariff barriers by half would more than double the trade-increasing effects relative to tariff elimination alone.
- Eliminating tariffs on intraregional trade is estimated to increase welfare up to 0.5 percent over the medium term.
- Combining elimination of tariffs with reducing nontariff barriers by half would increase welfare over the medium term up to 0.6–3.8 percent, and GDP by about 1 percent (Online Annex 3.5).

### Sectoral and distributional effects; implications for services
- Empirical gravity results indicate tariff reductions may boost intraregional trade particularly for the mineral, manufacturing, and agriculture-related sectors (Figure 3.13).
- The AfCFTA debate has mainly focused on goods, but liberalization of trade in services, including financial services, is equally important for welfare; barriers to trade in services in Africa remain relatively high (AfDB 2019).
- Liberalizing trade in services requires coordinating trade policies and domestic regulatory reforms and considerable technical capacity.

### Distributional impacts and inequality
- Model estimates suggest the medium-term impact of increased trade on income inequality is limited but differs across economies (Figure 3.20):
  - In agriculture-oriented and, to some extent, natural-resource-exporting economies, trade openness decreases income inequality slightly. (Footnote: The Gini coefficient is estimated to decline by 0.2 percent for each 1 percent increase in trade flows. Hence, if the AfCFTA is expected to increase trade flows by 16 percent, the Gini coefficient could decline by as much as 3 percent from its initial level.)
  - In manufacturing exporters, trade openness somewhat increases inequality as manufacturing exports tend to benefit firms that hire high-skilled and better-paid workers.
- Reducing tariffs on intermediate inputs for agricultural production (for example, fertilizers and equipment) amplifies the poverty-reduction/income-equalizing effects in agriculture-oriented economies.

### Structural reforms and amplifying gains from the AfCFTA
- Complementary structural reforms that boost efficiency in sectors where developing economies have comparative advantage can amplify the positive effect of deeper trade and increase GDP more than trade alone.
- A stochastic general equilibrium model calibrated for a stylized African agriculture-exporting economy finds:
  - Complementing the AfCFTA with structural reforms would significantly increase the AfCFTA’s impact on GDP for developing and agriculture-based economies.
  - Effective structural reforms can raise the impact on GDP of expanded trade by as much as one-third (Figure 3.19).
- Structural reforms include policies that increase productivity in key agricultural exports (for example, increasing yields) and facilitate workforce shifts across sectors.

### Policy priorities and recommendations to realize AfCFTA gains
- Prioritize reducing nontariff bottlenecks, especially:
  - Improving trade logistics and customs-related services, including clearance procedures and brokerage services.
  - Upgrading infrastructure (roads, railroads, electricity, ports).
- Strengthen financial and institutional frameworks to support trade:
  - Develop and harmonize regional payment systems to facilitate cross-border payments.
  - Create swap arrangements across central banks and a multicurrency clearing center in the region to reduce risks from trading in several different regional currencies.
  - Further coordinate the supervision of pan-African banks that can facilitate intraregional trade, accompanied by adequate prudential frameworks.
- Pursue complementary reforms in the business climate and human capital:
  - Medium-term policies to address education and skills gaps and obstacles to business.
- Coordinate sectoral regulatory reforms to liberalize trade in services, recognizing the technical complexity and need for detailed sectoral information.

*Italicized source: Regional Economic Outlook: Sub‑Saharan Africa — chapter 3 (IS THE AFRICAN CONTINENTAL FREE TRADE AREA A GAME CHANGER FOR THE CONTINENT?)*

### 2. Manufacturing Exporter

### 2. Manufacturing Exporter

### Trade integration and income distribution
- Aggregate finding: Greater trade integration is not associated with increased income inequality over the medium term.
- Short-term effect: Greater trade integration is associated with higher inequality in the short term, with a possible decline in the share of income accruing to the poorest.
- Informal sector:
  - The informal sector is assumed to produce mainly nontradable goods and services, which are not affected by trade.
  - Informality is associated with greater income inequality (if concentrated in low-skill activities) but tends to mitigate the short-term effects of trade liberalization on income distribution.
  - The large size of informality in many African countries insulates a large share of the population from the impact of trade integration.
- Sectoral heterogeneity: Trade liberalization is associated with better income distribution in economies with relatively larger agricultural sectors.
- Empirical confirmation: The empirical analysis largely confirms model predictions, with the initial adverse distributional effect of trade openness fading over time.

### Fiscal revenue impacts of the AfCFTA
- Historical averages and context:
  - During 2010–15, customs revenue averaged about 2.5 percent of GDP (16 percent of total tax revenue).
  - Overall regional imports, including zero-rated imports within RECs, averaged about 17 percent of total imports.
  - Two decades ago the picture was radically different before many African countries joined the WTO and signed several trade agreements.
- Cross-country heterogeneity and exceptions:
  - During 2010–15, most countries’ customs revenues averaged less than 2 percent of GDP, but in a few countries they exceeded 5 percent of GDP.
  - For some countries, imports from the region exceed 35 percent of total imports (for example, Côte d’Ivoire, Malawi, Zambia, Zimbabwe), suggesting risks of large revenue losses.
- Static revenue-loss estimates:
  - Applying the effective average tariff rate to import data and assuming elimination of all tariffs on intraregional imports produces an average estimated revenue loss of about 0.3 percent of GDP (includes VAT losses due to smaller tax bases).
  - Using most-favored-nation (MFN) effective rates yields an average loss estimated at about 0.5 percent of GDP (represents an upper bound for possible revenue losses since the AfCFTA requires elimination of tariffs on only 90 percent of trade items).
  - Revenue losses in some countries could exceed 1 to 2 percent of GDP (for example, Democratic Republic of the Congo, Sierra Leone, Zimbabwe).
- Dynamic revenue-loss estimates (accounting for trade diversion and GDP changes):
  - On average, dynamic effects imply a revenue loss of about 0.5–0.8 percent of GDP, depending on assumed elasticities.
  - For a few countries, dynamic revenue losses may be as large as 3–5 percent of GDP.
- Implication: Countries with large potential revenue losses should define clear domestic revenue mobilization policies on entering the AfCFTA.

### Policy implications and recommendations
- Priorities to boost intraregional trade:
  - Reduce tariffs where they cover a large proportion of trade flows, but recognize tariff reductions alone may not suffice.
  - Address nontariff bottlenecks—particularly poor trade logistics, customs services, and clearance procedures—to support intraregional trade integration.
  - Improve infrastructure and trade logistics, with emphasis on benefits for landlocked and low-income countries.
  - Establish mechanisms to identify and monitor removal of other nontariff barriers, such as quotas, licenses, subsidies, restrictive application of rules of origin, and sanitary and phytosanitary measures.
- Financial and institutional measures:
  - Further develop regional payment systems and introduce swap arrangements across central banks and a multicurrency clearing center to support trade integration.
  - Liberalize trade in services while coordinating trade policies and domestic regulatory reforms.
- Distributional and adjustment policies:
  - Combine trade policies with structural reforms that boost agricultural productivity in agriculture-based and less diversified countries to leverage comparative advantage.
  - Design targeted social programs (for example, income support) and training programs to ease worker mobility across industries and promote employment, mitigating adverse effects on income distribution.
  - For countries facing significant fiscal revenue losses, design domestic tax revenue-raising strategies while being mindful of possible growth and distributional effects.

*Regional Economic Outlook: Sub‑Saharan Africa — chapter excerpt*

---


_Source: https://www.imf.org/-/media/files/publications/reo/afr/2019/april/english/ch3.pdf_