Ethiopia: Capacity of African Policy Makers in Macroeconomics Has Strengthened – Zuzana Schwidrowski

The African Continental Free Trade Area (AfCFTA) is one of the flagship projects of the African Union (AU) Agenda 2063. It mainly aims to enable free trade among the 55 countries of the continent there by creating a favorable condition for the rapid growth of their economy.

Trade in general and free trade areas in particular have direct links with the macroeconomic policies of countries. Africa Union has 55 member states of which 54 have ratified the agreement establishing the AfCFTA. Majority of them have also finalized preparation of their AfCFTA implementation strategies.

But as 54 sovereign countries, each has its own macroeconomic policy. Hence, harmonizing the macroeconomic policy with the provisions of the AfCFTA becomes a topic. In addition other major issues like currency fluctuations also need to be dealt with along with the implementation of AfCFTA.

The Ethiopian Herald has recently discussed with Zuzana Schwidrowski, the Director of Macroeconomic, Finance and Governance Division of the United Nations Economic Commission for Africa (UNECA). Enjoy reading!

Could you tell me about the current efforts to implement the AfCFTA and especially its relation or implication with macroeconomic policies of African countries?

AfCFTA is the largest development project that Africa had so far. It is also bringing a lot of opportunities or benefits. Since trade and growth are closely related, the AfCFTA has the potential to increase growth and increase GDP. The AfCFTA implementation also has some structural implication on job relocation. Some sectors will benefit. There may be also some implications for some sectors will not be productive or competitive and experience some job losses and need for restructuring. Overall, however, over longer term, there should be significant efficiency gains. For the importing countries by diversifying the available products it can also have positive impact on reducing inflation. Therefore, there are significant expectations about what AfCFTA can bring and especially that it can be a part of the Africa’s growth recovery. So while Africa is experiencing post-Covid growth recovery, it’s a very gradual one. Today, the growth is still far below Africa’s potential and levels needed to reach the Sustainable Development Goals (SDGs) and meaningfully advance sustainable development. For that, African countries need to grow between 7 to 10% a year, while this year the real GDP growth is expected to be 3.8% and in 2025 4.1%. Then if we consider the population growth, then of course, in terms of GDP per capita, the growth is not as high.

Africa has 55 countries out of which 54 have subscribed to AfCFTA. But the continent is fragmented. Sovereign countries have their own economic policies. Do you think this fragmentation of policies have an impact on the implementation of AfCFTA? Or after the implementation, what kind of impact could they have and how do they have to approach it?

The African Continental Free Trade Agreement and the single market is basically first step in the integration process and the final stage of this integration is creating African Monetary Union. Again, from experiences of other regions, we know that there needs to be a synchronization of macroeconomic policies. If the monetary union project proceeds the continent we will need an African Central Bank. And that would mean that countries would lose their independent monetary policies. Therefore, it will be important that the shocks the countries will be experiencing are synchronized. If an individual country had different growth and different inflation than the rest of the continent, then the continental monetary policy would not be necessary suitable for that particular economy. And ultimately, creation of the monetary union is not only an economic decision, it is also and mostly a political one. The political decision has already been made and it is contained in the Agenda 2063 – Africa we want.

So, within regional economic communities (Recs) there are currencies already criteria related to debt to GDP, inflation, budget deficits …etc. that are guiding integration and harmonization of objectives. . At the same time, the large number of currencies prevailing in African raises transaction costs and makes trade integration more challenging. .

Currently, there are at least 42 currencies operating in Africa. So their conversion in the context of implementing AfCFTA is could be very costly for Africa?

Fortunately, before African countries establish Monetary Union, they can utilize PAPS (Pan African Payment System), which allows instant or near-instant cross-border transfers of funds between seller and buyer in different African countries, with both operating in local currency. So far, however, the uptake is low, and many countries are not using the system. We want to look into this and maybe understand better how to entice more central banks to use this system.

Therefore, the sellers issue the payment order in their currency. Then the buyer pays in the local currency.

Creation of even a single market will take time. So again, if we talk about monetary union, it is beyond economic decision, it is a political decision. That political decision has been already made because it is stated objective of the African Union to eventually have monetary Union. And of course, it will reduce transaction cost of cross-border trade. But again, some preconditions have to be met. Beyond the convergence of macro what is also important is to reduce barriers to movement. the business environments need to be more flexible o when opportunities arise due to changing trade patterns; labor can relocate, firms can relocate. To achieve that we need flexibility n of both the product and labor market. We much more flexible movement of labor because the labor can adjust effectively across countries and take advantage of the new opportunities.

AfCFTA requires countries to remove tariffs and open their borders to allow free trade. Ethiopia’s economy was closed for many years. It has been protecting sectors like banking and merchandise trade. Recently it opened up as part of its macroeconomic reform. How does it affect its implementation of AfCFTA and what’s should as African countries do?

One of the findings of the report was that to implement the African Continental Free Trade Agreement effectively, and with the intention to industrialize and promote manufacturing, and structural transformation it is important if it is accompanied by effective industrialized policy that is well targeted support for strategic sectors. So there needs to be a balance. If this goes on for too long, the sectors will not be competitive and may lose competitiveness.

But for some time, this is actually viewed as essential for success of these more and more complex sectors. Now opening up should lead to increased intra-African investment and often the trade and foreign direct investment are linked.

Africa’s population is 1.5 billion which is equal to the population of China and India though the purchasing power is not as strong as they are. Given the GDP of Africa, like USD 3 trillion, it is going to become one of the largest single markets. But when trading with the global economic giants like China, India, Japan, Turkey, Europe and USA can we say it is in a better position to compete us. What can Africa do to maintain its competent position?

What will help Africa is not to approach trade with countries and regions outside Africa on a country by country basis, but rather forming an African approach. China seems to have a well-developed strategy towards Africa. Africa’s strategy towards China is not yet fully developed, but utilizing the AfCFTA would be beneficial.