SMEs: Scaling Growth Via AFCFTA

Ugo Aliogo writes on how Small Medium Scale Enterprises can scale growth through the African Continental Free Trade Area

The World Economic Forum (WEF) in its January 2023 report stated that the African Continental Free Trade Area (AfCFTA) agreement, which was signed in 2018, ratified in 2019 and officially launched in 2021, created a single market in Africa, offering tremendous opportunity for unlocking business potential across Africa and the world.

Taking into account the additional benefits from increased foreign direct investment (FDI) expected from the AfCFTA, the World Bank projects that the AfCFTA could lift 50 million people out of poverty, raise overall incomes by 8 per cent, increase intra-African exports by up to 109 per cent and increase international exports by 32 per cent by 2035.

The report revealed that the adoption of the AfCFTA would accelerate intra-African trade and develop regional and local value chains, creating new business dynamics that offer investors access to a population of 1.7 billion people with combined business and consumer spending reaching $6.7 billion by 2030.

The report said four high-potential sectors were initially selected by the AfCFTA to analyse in its Private-Sector Engagement Strategy as sectors representing opportunities for companies looking to invest in Africa: automotive; agriculture and agro-processing; pharmaceuticals; and transport and logistics. These four sectors are expected to see rapid acceleration in production and trade volumes under the AfCFTA, given that they have a high potential to meet local demand with local production.

The Secretary-General of the AfCFTA Secretariat, Mr. Wamkele Mene, said AfCFTA offers the opportunity for women led Small Medium Scale (SMEs) businesses to scale and expand their market as an SME.

He also stated that for instance in Togo, businesses would now have access to new markets in East Africa, in Southern Africa, and in Central Africa, adding that they offer an opportunity to expand into a market of 1.3 billion people with a combined Gross Domestic Product (GDP) of $3.4 trillion.

He added: “It is a significant opportunity if we have the right mechanisms to support our SMEs. That’s why we are launching the Trade Finance Facility. That’s why we are also launching the African Trade Gateway, along with African Export–Import Bank (Afreximbank). The African Trade Gateway will be a digital platform that will provide market and due diligence information about your counterparts, including the rules of origin, customs procedures, as well as payments transfers platform.

“Some countries will indeed be immediate beneficiaries because they have the export capacity already. It is also true that there will be countries that will experience short-term revenue loss. To mitigate that, along with Afreximbank we are mobilizing funds for what we call an AfCFTA Adjustment Facility.

“This fund is not going to be for budget support; it will be to support specific value chains in specific productive sectors of the economy, for example, textiles and agro-processing. In collaboration with Afreximbank, we have mobilized $1 billion, and there is an opportunity to increase that sum. We project a need of between $7 billion and $10 billion.

“We also need to change our mindset. And that is to look at tariffs not as a revenue-generating tool but as a tool for industrial development, to foster the development of the productive sectors, and, when necessary, to protect infant industries and prevent dumping.”

“So that’s the long-term strategy that we should be thinking of. In the short term, In February the Heads of State are expected to approve the adjustment facility so that countries can access it,” Mene saud.

SMES Growth in 2023

From all indications, AfCFTA presents a lot of opportunities African countries especially Nigeria for trade and investments, however, there is need to Nigeria Small Medium Scale Enterprises to tap into the opportunities available to scale their businesses to tap into the opportunities in the business.

The Nigerian government in July this year, revealed its plans to energise the sector with N125 billion, as part of its efforts to cushion the effects of the fuel subsidy removal.

Recently, the federal government said it recognises the importance of micro, small and medium-sized enterprises and the informal sector as drivers of growth. The government is committed to revitalising sector with N125 billion. Out of the sum, the government will spend N50 billion on Conditional Grant to 1 million nano businesses between now and March 2024. The target is to give N50,000 each to 1,300 nano business owners in each of the 774 local governments across the country.

Ultimately, the programme would further drive financial inclusion by onboarding beneficiaries into the formal banking system. In like manner, the federal government said it plans to fund 100,000 MSMEs and start-ups with N75 billion. Under this scheme, each enterprise promoter will be able to get between N500,000 to N1million at 9 percent interest per annum and a repayment period of 36 months.

The current administration recently announced that it intended to give N50,000 each to 1,300 nano business owners in each of the 774 local governments across the country.

The federal government said it will strengthen the manufacturing sector and increase its capacity to expand and create good paying jobs. They are going to spend N75 billion between July 2023 and March 2024.

“The objective was to fund 75 enterprises with great potential to kick-start sustainable economic growth, accelerate structural transformation and improve productivity. Each of the 75 manufacturing enterprises, will be able to access N1 billion credit at 9 per cent per annum with a maximum of 60 months repayment for long-term loans, and 12 months for working capital, “the government said.

Opportunities for SMEs

Meanwhile, a report by the Associate, Tax Services at PwC Tanzania, Goodluck Msuya, said 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. Meanwhile another report by the Economic Commission for Africa (ECA) said SMEs account for about 85 per cent of employment and contribute about 35 percent to GDP in Africa, “he said.

However, the World Bank in a related document estimates SMEs to represent about 90 per cent of businesses and more than 50 per cent of employment worldwide, where formal SMEs contribute up to 40 per cent of national income (GDP) in emerging economies. “Therefore, effective implementation of AfCFTA must have a positive impact on the growth of SMEs.”

The PWC report added: “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.

“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.”

“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.”

Benefits of AfCFTA

Recently, the Lagos State Employment Trust Fund in a report stated that the focus on value chain development in the manufacturing sector has been seen by experts as a critical factor that would ensure that trade under the AfCFTA translates into poverty and unemployment reduction, adding that as a result, MSMEs need to key into the AfCFTA by ensuring they possess adequate knowledge in their trade while embracing collaboration across the value chain.

The report expressed confidence that the federal government has set the ball rolling through stakeholder engagement and the review of the National Trade Policy