Africa stands to benefit from harmonised tariffs

Full implementation of the AfCTA can generate billions of dollars in welfare gains and millions of jobs

Earlier this week, when asked how to make Africa’s minerals more beneficial to its people, Tanzania’s ambassador to the US, Elsie Sia Kanza, delivered a commercially sensible, economically pragmatic answer. 

To capture a greater share of benefits, she said, African countries need to work together. There are a significant number of resource-rich African countries — and it’s not economically feasible to build processing facilities in each one.

In fact, if using the IMF definition that countries are resource-rich if their natural resource revenue or exports equate to at least 20% of total fiscal revenue or exports, nearly two-thirds of sub-Saharan African countries qualify.

In this regard the African Continental Free Trade Area (AfCFTA) is a critical mechanism to enabling African countries to cost competitively aggregate resources and build the regional value chain. The full mine-to-market value chain can rarely be accomplished by a single country due to skills, infrastructure and capital constraints. This is where a regional approach can unlock national constraints. At present, 54 of 55 countries in the AU have signed the AfCFTA, but it’s easy to speak continentally and think nationally.

Countries may be hesitant to advance efforts on eliminating tariffs. Mining tariffs have been a core source of domestic revenues for decades. Some are long-standing, such as SA’s diamond export levy, and others are newer and were imposed during the AfCFTA negotiations, such as Zambia’s 15% export duty on gemstones and 5% import levy on copper and cobalt concentrates of 2019 (it has since repealed them). 

Perhaps counterintuitively, tariffs can undermine revenue collection by deterring and distorting investments. For example, in 2019, when Zambia committed to enforcing the tariffs, Vedanta shut its Nchanga smelter at KCM as the import duty undermined profitability. By 2020 Zambia had announced that it was suspending its 15% export duty (except for diamonds), after its efforts to raise revenue resulted in a decline in production. The mining minister admitted that “the industry was bleeding and production was falling”. 

To fully implement the AfCFTA the following must be done:

·        Elimination of tariffs on 90% of goods over a five-year period (10 years for least-developed countries, or LDCs);

·        Tariffs on an additional 7% of goods deemed “sensitive” to be eliminated over a 10-year period (13 years for LDCs); and

·        The remaining 3% of tariff lines can be excluded from liberalisation, but the value of these goods cannot exceed 10% of total intra-African imports. 

The lack of harmonised taxes and royalties creates competition over capital between neighbours — a harmonised tax system stops the race to the bottom in which countries lower their tax rates to become the most attractive for investments. It defies a collaborative regional approach and leads to substantial loss in tax revenue (ultimately, the tax rate falls to 0% if the race lasts long enough).

For example, though five West African countries — Mali, Ivory Coast, Burkina Faso, Sierra Leone and Guinea — have a harmonised tax code at 3%, exporters have chosen to export through Mali due to uneven implementation. In Mali the 3% is only applied to the first 50kg, and the remaining weight is exported tax-free. Guinea responded by slashing all export duties.

To address this, plans to implement or increase tariffs should be shelved across the continent, followed by a dismantling of all regional mining tariffs in the coming years.

Africa’s commercial attractiveness and bargaining position on beneficiation and value chain development will be significantly enhanced if the region can strengthen regional co-operation, rather than functioning as 54 countries with various tariff and regulatory structures. 

Modelling shows that full implementation of the AfCTA can generate billions of dollars in welfare gains and millions of jobs. Employment is forecast to grow in nearly every sector of the economy, with manufacturing experiencing the largest growth.

The AfCFTA gives the continent the chance to not only mine but produce inputs, process ores, manufacture products, construct roads, warehouses and processing plants and develop logistics all around the mining sector. And it also allows countries across the continent to raise revenue and create jobs. 

It's a topical matter given that African countries are increasingly leveraging raw mineral export bans. Ghana, Namibia and Zimbabwe have recently rolled them out. Enabling these resources to be processed within the region, rather than in China or Western countries, enables regional value addition while still allowing companies to process at scale.

There’s nothing to be gained from minerals xenophobia. Everyone’s better off if we co-operate.