AfCFTA - a big opportunity for SMEs?

The African Continental Free Trade Area (AfCFTA) agreement, which came into effect on January 1, 2021, is a major milestone for the continent. 9 September 2021 was a milestone date for Tanzania too as it became the 39th country in Africa to deposit its instrument of ratification of the Agreement. The Agreement aims at creating a single market for goods and services and facilitating cross-border trade. The agreement has the potential to unlock significant economic growth and development opportunities for the continent.

According to the African Development Bank, the AfCFTA possesses the transformative potential to establish a consumer market encompassing 1.3 billion individuals. Moreover, projections from The World Bank indicate that by 2035, the AfCFTA is expected to contribute an incremental income of $450 billion to Africa's economy, alongside a substantial surge of more than 81 percent in intra-African exports. Citing the UN Economic Commission for Africa, it is anticipated that this trade agreement, unifying the African market, will pave the way for the African economy to surpass the $29 trillion milestone by the year 2050.

These are big numbers and the opportunity is clearly immense, but what does this mean for small and medium sized enterprises (SMEs)?  Well, AfCFTA is expected to provide increased opportunities for all types of businesses to expand their customer base and increase their exports - so not just large businesses, but also SMEs which are such an important component of the commercial landscape in Africa. Indeed, according to a report by the Economic Commission for Africa, SMEs account for about 85% of employment and contribute about 35% to GDP in Africa. The World Bank estimates them to represent about 90% of businesses and more than 50% of employment worldwide, where formal SMEs contribute up to 40% of national income (GDP) in emerging economies. Therefore, effective implementation of AfCFTA must have a positive impact on the growth of SMEs.

Opportunities in sectors ranging from agro-food processing, textiles, leather value-added products, cosmetics and technology, are ones that come to mind in the context of SMEs, in particular for those SMEs ready to embrace innovation and entrepreneurship.  But the opportunity is not just about direct cross border trading, but also about increased in-country opportunities for SMEs that can become part of the value chain supplying the ultimate exporter.  Another potential positive impact of the AfCFTA is the potential for increased access to funding and investment including for SMEs.

One possible challenge of the AfCFTA for SMEs is the potential for increased competition from larger businesses and multinational corporations. The agreement aims to create a single market for goods and services, which can lead to increased competition among businesses. This can be particularly challenging for SMEs, which may not have the same resources and capabilities as larger businesses. According to the World Bank, SMEs in Africa face significant barriers to entry, including a lack of access to finance, limited access to markets, and high costs of doing business.

Overall, for SMEs to fully benefit from the agreement, they need to be equipped with the right tools and strategies to take advantage of the opportunities AfCFTA presents. A key strategy for SMEs will be to effectively leverage technology to enhance operations, increase efficiency, reduce costs, and improve their overall competitiveness and generally achieve more sustainable outcomes/growth. One example is to use e-commerce platforms, which can help SMEs reach new customers and expand their reach beyond their domestic markets (for example, to sell our coffee to West Africa) and do so at reasonable cost. Additionally, e-commerce platforms can also help SMEs reduce their costs by automating certain processes, such as inventory management and accounting.

Another aspect that SMEs will need to be on top of is regulatory aspects including tax implications arising from cross border trading activity.  More generally,  SMEs will need to build up their understanding of the AfCFTA agreement and find mechanisms to effectively engage with relevant stakeholders to eliminate bottlenecks (whether Government, business support organisations, business associations, trade regulators).  Whatever the case, while there are clearly several challenges for SMEs seeking to realise opportunities arising under AfCFTA, these are surmountable - and the incentive to overcome these challenges is there as clearly the opportunity is huge.

By Goodluck  Msuya - Associate, Tax services at PwC Tanzania.