This ‘Time for Africa’: Opportunities Galore

4 min read

Recent Kenya visit of first ‘Kenyan-American President’ Barak Obama shows the significance of Kenya in the African continent. The country is performing well economically and is expected to grow more. The Obama visit also marked the ten years extension of AGOA (African Growth and Opportunity Act’s), which was supposed to expire on 30 September 2015.  AGOA – a perfect epitome of US ‘trade hypocrisy’ (US is supposed to be propagator of free and non-preferential trade at WTO), has benefitted African nations to expand their trade and economy.  AGOA incentivize African nations to open up their markets, work towards protecting intellectual property, combating corruption, poverty, promoting healthcare, education and human rights. AGOA enabled poor economies like Nigeria, Chad, Kenya and Lesotho to reap the benefits of economic growth. It is also in the interest of US to promote AGOA which shall benefit predominantly US not only in improving commercial relations with African nations but also control the growing trade imbalance with Asian nations like China, India and Japan.

AGOA_Aggregate_Trade

AGOA provides tangible benefits to African nations in terms of duty free access to American markets for 7,000 product lines and other investment opportunities. Trade under AGOA reached a peak of 100 billion USD in 2008 from 28 billion USD in 2000; however it subsequently declined to 50 billion USD in 2014. There are two main factors responsible for the fall:

  • The financial crisis of 2009 has dampened US imports as the economy went into recession for a brief period of time
  • Most importantly, majority of the African countries like Nigeria, Algeria, Angola, Libya and Egypt focused on exporting petroleum and coal products to US. In fact petroleum export formed more than 50 % of the trade under AGOA. With the US shale revolution, the countries exporting oil to US suffered huge setback which was coupled with falling oil price. The chart below shows that post 2008, Africa’s total oil export to US has drop significantly. The over emphasis on oil export and lesser diversification to other commodities increased the vulnerability of several African nations like Angola, Nigeria and Libya.

Aficas_Crude_Oil_Export_to_USA

agoa_product_profile

However, not all countries suffered. Countries like Kenya and Ethiopia which focused on exporting apparel and agricultural products gained momentum and enjoyed the economic benefits of AGOA.

It is important that African countries focus less on petroleum & coal export with emphasis more on export of agricultural, apparel and garment industry as these industries have high employment generation potential. If we look into quota utilization for export of apparel, the picture is dismal. As of 2014, AGOA nations has quota of exporting around 1800 million square meter equivalents (SME) to US; however the utilization rate is as low as 12 % which  indicates the potential of expansion of this industry.

Quota Utilisation

 

Kenya has mainly benefitted from the export of textiles, leather, spices, coffee, tea, fruits and nuts. It created ‘Export Processing Zones’ specially targeting garment and textile industry where majority of the employment growth has taken place. Further, the Kenyan government has plans to build planned textile city where big brands like Hilfiger, Timberland, Wrangler, Lee and Calvin Klein are investing. The city aims to draw 100 investment firms and generate more than 200,000 direct textile jobs by 2016. The investors will also be given 10 years of corporate and withholding tax holidays. Rising wages in China and Bangladesh are forcing big textile giants to shift their bases to Kenya where there is abundant cheap labor. This expansion of textile industry in Kenya will not only help to create jobs and promote exports but will also provide impetus to agriculture by boosting its cotton production. Apart from cotton, Kenya is also focusing on leather industry and is also building a leather city in Athi River a town near capital city of Nairobi. Abundance of skins and hides locally would enable Kenyan enterprises to manufacture leather shoes and bags for the US market and thereby expanding product offering beyond textiles under the AGOA.

Although the nation faces many bottle necks in terms of infrastructure and energy; there are reasons to be optimistic as government has taken aggressive steps to address these problems. There are plans to set up additional 5000 MW of power supply by 2017. With the discovery of oil in Turkana County, the country is unlikely to face energy bottlenecks in the near future. Also, government is promoting investments through PPP route in renewable energy sector like solar and biomass. To tackle the logistic and infrastructural bottlenecks, the government is expanding its railway network and modernizing Kilindini Harbour and Lamu Port at Mombasa. There are plans to link these ports with the industrial cities via High Speed Highways to reduce transportation costs.

Apart from Kenya, Ethiopia is also making efforts to reap the benefits of AGOA by expanding its manufacturing sector. Ethiopia is pushing for reauthorization of AGOA using diplomatic ties and has hosted 12th AGOA Ministerial Meeting in 2013. National AGOA Response Strategy launched by Ethiopian government has given special emphasis to labor intensive sectors (with greater potential for job creation) like strategy picked garment and textile, hand woven textile products, leather and leather products, horticulture and agro-processing. In order to boost connectivity, government is modernizing Tajourah and Djibouti port and connecting them via railway lines in order to reduce transportation cost. The nation is also aiming to improve air connectivity with US in order to boost business. Energy projects like Grand Ethiopian Renaissance Dam will further reduce the energy cost and demand supply gap in the nation. In order to remove the bottle neck caused by lack of human resources, government has started training programs in textile engineering in 31 Ethiopian Universities.

Despite all these efforts, problems relating to infrastructure gap, marine transport and logistics, hefty costs of branding of exports and absence of direct air transport connection continue to plague Ethiopian exports. Stringent US market stipulations in sanitary and phytosanitary requirements and rules of origin had also their own share in the underutilization of AGOA.

Removal of US sanctions from Iran and discovery of offshore oil fields Mexico will increase supply of oil in already oversupplied global market and thereby exerting more downward pressure on oil prices. Thus, oil exporting nations like Angola and Nigeria should focus more on improving manufacturing base and diversifying export portfolio in order to minimize risk from plunging oil prices and thereby maintaining sustainable growth. With the renewal of AGOA, these nations have perfect opportunity to broaden export base and increase their trade.

Following sectors are expected to gain impetus from renewal of AGOA:

  • Agriculture: Apart from insured US markets under AGOA, nearby Gulf nations are also excellent exporting destination for agricultural products.
  • Apparel and Garments: This industry not only generate employment, but will also boost cotton production. Given cheap supply of labor in African nations, the industry is expected to gain momentum under AGOA. Genetic engineered seeds and application of biotechnology can increase production of cotton by many folds. West African nations and Sub-Saharan nations are perfect places for growing cotton.
  • Leather Industry: Large availability of herd animals in African nations give it a perfect platform to boost leather industry. This industry will also provide impetus to allied industries like meat and animal farming.
  • Metal and Mining: Expansion of defense industries in US will raise demand for metals. Given extension of AGOA, metals and mining industries are expected to expand in coming years.

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Mordor Intelligence

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