AFRICAN UNION UNION AFRICAINE UNIÃO AFRICANA The Impact of the CFTA on Tariffs, Trade Tax and Fiscal Revenue: challenges and solutions. Financial Support by EU
Impact of the CFTA ▪ The Continental Free Trade Area (CFTA) will bring together 54 African countries with a combined market of $3.4 billion and over one billion people. ▪ Estimates suggest that the CFTA will result in welfare gains of up to $7bn and increases in the share of intra African trade in total trade by 5% to 10%. ▪ With the implementation of the CFTA there will, however, be adjustment costs. ▪ For governments these adjustment costs relate to lower fiscal revenue from lower trade taxes, and higher expenditure on social safety nets etc. ▪ For the private sector they relate to unemployment, lower wages and obsolescence of skills and machinery. ▪ There are also concerns that premature liberalisation could contribute to de- industrialisation. 3/29/2019 No 2
Managing Adjustment ▪ There are a range well-established trade policy instruments and support measures to deal with such concerns. - For example, harmful surges in imports can be managed through the temporary application of safeguard measures (which restrict imports) - and unfair competition can be addressed through anti-dumping duties. ▪ The challenge of effectively dealing with the fiscal loss is the most pressing at this point in CFTA negotiations, given that several Member States rely on trade taxes for a large part of their tax revenues. 3/29/2019 No 3
Focusing in on Fiscal Loss ▪ Estimates of fiscal loss in the CFTA ▪ At the level of Regional Economic suggest that the initial impact is limited Communities (RECs), tariff revenue by the current low levels of intra (not total taxes) could decline by: African trade (13.6%) and the - 11.5% for ECCAS, exemptions on liberalisation that the - 9.6% for ECOWAS Member States are likely to maintain. - and 7.8% for COMESA. ▪ Moving past the initial impact, it is ▪ At country level, the effect is likely to expected that total taxes will fall by be strongest on Zimbabwe, Angola, roughly 0.2%- 0.3% of GDP, on DRC, Nigeria, Kenya, Tanzania, average, because of the CFTA. Ghana, Ethiopia and Mozambique. ▪ For Sub-Saharan Africa, excluding Nigeria, South Africa and Angola, it is expected that tax losses would be between $1.1bn - $1.7bn, on the basis of 2015 figures, and $1.15bn - $2.3bn, on the basis of 2016 figures. 3/29/2019 No 4
Options for Fiscal Adjustment While the majority of countries recover lost tax revenue within 5 to 10 years of tariff reductions, the burden in the short run can still be substantial for certain regions and countries. To address the burden Option 1: a Financial Option 2: Regional Option 3: affected Adjustment Support Development Funds are countries impose re- Mechanism (FASM). generally more focused on impose tariffs on intra- regional infrastructure. regional trade for a ➢ To finance compensation strictly limited period. For example, the AfDB’s through a CFTA community levy. Development Fund (ADF) ➢ Strictly time bound, supports power generation accommodating the and regional transport immediate impact of tariff initiatives. liberalisation on The Fondo para la government revenue Convergencia Estructural del ➢ They do not target specific MERCOSUR (FOCEM) also activities or beneficiaries. finances regional projects in energy and transport. 3/29/2019 No 5 .
Option 1: FASM ▪ FASMs generally rely on 2015 2016 a community levy on Potential requirement for tariff $1.1 - $1.5 - imports from third losses $1.7bn $2.3bn countries, varying from SSA exc. Nigeria, South Africa 0.4% to 1%. and Angola ▪ A CFTA Community Levy of 0.4% on imports from Imports (all CFTA members) with $444bn $406bn 3 rd parties would be the Rest of World sufficient to finance a Finance raised by a 0.2% $0.89bn $0.81bn FASM to cover the tax Community Levy losses . Finance raised by a 0.4% $1.78bn $1.62bn Community Levy 3/29/2019 No 6
Option 1: FLCM Time Frame for the Levy and Loss Recovery Management Structure of an FASM ▪ The ▪ In the context of operationalising a FASM CFTA community would have to impose this levy for approximately 5-10 for the CFTA, its narrow focus and limited years, the period for tax revenues to duration would point to a dedicated, stand recover alone, facility which could be relatively easy to manage and staff. ▪ ECOWAS and UEMOA FLCM were ▪ This facility would likely be dependent on operational for between 4 to 6 years (and covered up to 9.5 years of fiscal losses). the decisions about how the CFTA institutions will raise and channel finance. ▪ Concerns over the impact of tariff reduction on society: Cage & Gadenne (2014) find that for the LICs struggling to recover lost taxes, fiscal expenditure on human development objectives recovers within 3 years because of donor assistance. 3/29/2019 No 7
Option 1: FLCM Allocation Criteria for Compensation WTO Compatibility of a levy ▪ It is calculated on the basis of either: ▪ A Community Levy on imports from intraregional trade shares or incurred non-CFTA trade partners would be revenue losses. The latter is more open to challenge at the WTO because transparent as the loss can be it risks violating the rules that govern calculated on the basis of readily the formation of a preferential trade available information (MFN tariffs and agreement. import data). ▪ Ultimately, CFTA members will need to ▪ Compensation is restricted to the least decide whether to risk the challenge, developed or most disadvantaged in and whether the purported gains are the FTA. worth it. 3/29/2019 No 8
Option 2: A/RDF A/RDF usually supplies support for the Financing structure loss of tax and tariff revenues support A/RDFs mostly rely on a combination of through comprehensive programmes core funding from Donors and other that address government revenue and institutions such as development banks. expenditure management. ▪ Member States payments have often ▪ Support to adjustment, including been a challenge, sometimes because implementation, is provided through of political crisis (UEMOA/ECOWAS) such programmes as SADC’s Trade and sometimes because of concerns Related Facility (TRF). over the potential effectiveness of the mechanism they are being called on to support. ▪ Different approaches have been taken to try and secure regular payment. For example, ECCAS has placed Central banks in charge of ensuring Member State’s contributions. 3/29/2019 No 9
Option 2: A/RDF Management Structure of an A/RDF Allocation Criteria for Compensation - There are a range of allocation criteria ▪ Subpar management of adjustment and and approaches, guided by the scope regional funds has in some cases and principles established for the facility. contributed to poor resource collection and ineffective implementation. - They are generally focused on the least developed countries and aim at ensuring - This challenge prompted the reform of that the benefits of regional integration the ECOWAS fund to include a strong are shared – either through increasing financial institution capable of mobilizing competitiveness or supporting social resources for financing investment cohesion. (ERIB) and development (ERDF). - There is also a strong element of - Similarly, UEMOA set up the Regional reducing the burden of implementing Integration Support Fund (RISF) to better regional agreements. manage and finance development projects. 3/29/2019 No 10
Option 3: Affected Countries Re-impose Tariffs on Intra-regional Trade ▪ This option emerges from CARICOM and involves the re-imposition of tariffs on intra-regional trade, when an LDC is suffering fiscal loss. This is subject to the endorsement of Member States and is for a strictly limited period. ▪ The approach has several practical advantages. - It does not require a new institution or financing mechanism and can be easily applied and monitored. - It would also avoid the risks of a Community Levy (on third parties) in terms of WTO compatibility. ▪ However, it is the least attractive from an economics perspective because businesses operate with less uncertainty – they cannot be guaranteed access to markets under the CFTA as Government may re-impose tariffs. ▪ Increased access to markets and collective bargaining is one of the main objectives of the CFTA and thus an option that undermines it should be avoided if possible. 3/29/2019 No 11
Recommendation ▪ Option 1, a FASM, is our recommended solution to the CFTA’s fiscal adjustment challenges. - It equitably divides the financing of compensation for the lost trade tax and tariff revenue among Member States. - Its sole mandate to compensate the selected countries for loss of tax and tariff revenue makes it the most streamlined and timeous tool to deal with the challenges of fiscal loss. - It has been tried and tested in the African context. With successful results in ECOWAS and UEMOA. - It prioritises the least developed and most disadvantaged in the CFTA - The risk of a challenge through the WTO is low given that many preferential trade agreements have used community levies in the past that have gone unchallenged. - Its successful organization and implementation is likely to have positive spillover effects in terms of building the CFTA’s organizational and institutional capacity. 3/29/2019 No 12
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