The African Continental Free Trade Area (AfCFTA), which came into effect on 1 January, needs to strengthen informal cross-border trade to maximise its potential, argues continental trade financier Afreximbank.
Informal trade is a large part of most African markets.
In Eastern Africa, informal cross-border trade (ICBT) could be worth as much as 80% of the value of formal trade, according to the Afreximbank Africa Trade Report 2020 published in December. ICBT includes commodities such as grains, petroleum, coffee and edible oils.
And it is a lucrative trade too.
Afreximbank points to research showing that informal traders can make between four and 10 times local minimum wages.
For most countries, the economic contribution made by ICBT is unknown, as it is not counted in balance of payments and national accounts statistics. Including such data in national accounts, the report says, would more accurately represent the economic contribution made by women, especially in West Africa.
The report suggests that the Uganda Bureau of Statistics methodology for ICBT data collection should be used as a starting point for a continental framework.
- Afreximbank chief economist Hippolyte Fofack writes in the report that there is a “stickiness of colonial norms of trade”, where some regions still trade more with Europe than with each other. That’s especially the case in Central Africa, he writes.
- Maximising ICBT, the report argues, is the way to end those norms. Informal trade sustains ties between communities that share languages and cultures but which were separated by borders imposed by colonialism, it says.
Policy recommendations
The report explodes the idea that informal traders don’t pay anything into state coffers. In fact, they make a significant contribution to tax revenue in both importing and exporting countries. Up to 37% of traders made duty payments to importing countries during the ten-day survey period in the Afreximbank report.
The study makes a series of recommendations that can be used to strengthen informal trade:
- Authorities should adopt a working definition and a legal framework that recognise the legitimacy of informal trade. That may help traders to take a more “benign” view of regulatory processes.
- Governments should make a clear distinction between smuggling and informal trade. The latter sometimes is not just an attempt to avoid controls, but may show a lack of the knowledge and money needed to comply with border requirements.
- Procedures should be as streamlined as possible and keep the costs of compliance to traders to a minimum – or eliminate them entirely.
- Traders without bank accounts are often locked out of formal processes. Electronic payment systems for cross-border payments can cut the security risks for informal traders and also represent an opportunity to formalise trade.
- Better services for cross-border traders are needed. Traders often work in conditions lacking water, electricity and internet access.
- Investment in infrastructure would tackle the logistical bottlenecks faced by informal traders – especially women.
- National governments should rely on advice from local government and border officials as to how to manage the trade. Cross-border traders’ associations and public-private dialogue platforms need to be strengthened or set up.
Bottom line
Africa needs to build upon existing informal trade to maximise the potential of its new free-trade agreement.
