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EPAs with EU enters into effect – Implications

Five southern African countries – Botswana, Lesotho, Namibia, South Africa and Swaziland – and the European Union (EU) this week started a new chapter in their bilateral relations with the entry into effect of their Economic Partnership Agreement (EPA).

As of this week, the agreement will apply to trade between the EU and the five countries. Mozambique is in the process of ratifying the agreement and will join in as soon as the ratification procedure is completed.

Commissioner for Trade Cecilia Malmström said: "When I visited Botswana in June for the signing ceremony, I saw first-hand how important it is to build a stable trade partnership between Europe and Africa. Today we’re taking a crucial step towards making that a reality. The agreement that we’re putting in place will support sustainable economic growth and regional integration in southern Africa and is designed to help lift people out of poverty in the years to come.  Africa is the emerging continent and the Economic Partnership Agreements have been designed to maximise this dynamism."

The EPA takes into account the different levels of development of the partners. It gives Botswana, Lesotho, Mozambique, Namibia, and Swaziland duty-free, quota-free access to the European market.  South Africa will also benefit from enhanced market access, going beyond its existing bilateral arrangement with the EU.

The southern African markets will open only partially to EU exports, gradually over time, providing their industries with the intermediary goods they need to support growth.  It also provides for a number of protective measures in these countries, for instance for nascent, fragile industries or for food security reasons. Furthermore, the agreement increases the flexibility of southern African producers to put together products with components from various other countries, without the risk of losing their free access to the EU market.

BACKGROUND

The SADC EPA Group consists of six out of 15 members of the Southern African Development Community (Botswana, Lesotho, Mozambique, Namibia, Swaziland and South Africa).  Angola has observer status and may join the agreement in the future.

The EU is the largest trading partner of the SADC EPA group.  In 2015, the EU imported goods worth almost €32 billion from the region, mostly minerals and metals.  The EU exported goods of nearly the same value, consisting mostly of engineering, automotive and chemical products.  Total trade between the EU and the SADC EPA Group (including Angola) amounts to €63 billion.

In signing the agreement, participants commit to act towards sustainable development, including upholding social and environmental standards. Civil society will have a special role in monitoring the impact of the agreement. The Agreement is also of a new species in that it is the first trade deal that directly supports the economic integration of a specific region, favouring closer links within the six Southern African nations involved.

The EPA creates joint institutions to support dialogue, smooth handling of all trade issues, and monitoring of the impact of the trade deal. The EU will work with its SADC partners to ensure smooth implementation of the agreement, together with regional and national development cooperation bodies.

 

RIGHT CONDITIONS FOR TRADE AND INVESTMENT

Economic Partnership Agreements (EPAs) between the EU and African,

Caribbean and Pacific (ACP) countries are the main pillar of ACP-EU trade cooperation, and aim at creating the right conditions for trade and investment. In this context, the EPA between the EU and the SADC (Southern African Development Community) EPA Group establishes a long-term and stable trade relationship between both Parties, in compliance with international trade rules.

The current population of the SADC EPA countries combined is 89 million people. The two largest countries are South Africa and Mozambique, accounting for respectively 61% and 30% of the region's total population.

The average GDP per capita is roughly 3,700 EUR. In purchasing power parities (PPP), this value is much higher, at about 8,400 EUR.

Behind this average hides significant variation.

Per capita GDP in the region's richest country, Botswana is approximately

15,700 EUR, which is roughly 14 times as high as it is in the region's poorest country, Mozambique. The regional average GDP per capita is about 25% that of the EU. Real GDP grew by an annualised 3% over the last decade, a period in which the corresponding figure for the EU was 1%.

In total, the EU imported about 23.7 billion EUR worth of goods from the region whereas its goods exports were 27.2 billion EUR.

THE RATIONALE AND CONTENT OF THE SADC EPA

The EU's trade relations with the ACP countries were historically framed by a series of conventions, which granted unilateral preferences to the ACP countries on the EU market. By the end of the 1990s, it was found that these conventions did not promote trade competiveness, diversification and growth as intended. They were also found to be in breach of the World Trade Organisation's (WTO) principles, as they established unfair discrimination between developing countries. A change was therefore required. EPAs were the response defined jointly by the ACP countries and the EU in the Cotonou Agreement signed in 2000. EPAs build a new reciprocal partnership for trade and development, asymmetric in favour of ACP countries. In keeping with the objectives set out in the Cotonou Agreement, sustainable development is a key objective of the EPA, which is explicitly based on the "essential and fundamental" elements set out in the Cotonou Agreement (human rights, democratic principles, the rule of law, and good governance). The joint EPA institutions are tasked with the function of monitoring and assessing the impact of the implementation of EPAs on the sustainable development of the Parties, also carving out a clear role for civil society and members of parliament.

In view of these objectives, the EPA differs from most Free Trade Agreements (FTAs) currently in place or negotiated by the EU with other trading partners: while it remains a reciprocal agreement, it weighs in favour of southern

Africa through specific provisions:

·Asymmetric market access: The EU has committed to opening its market more than the SADC EPA countries have committee to do. The agreement fully takes into account the differences in the level of development between the two regions.

·Safeguards: Under the terms of the agreement, SADC EPA countries continue to be able to protect their sensitive products from European competition either by keeping tariffs in place or, if necessary, by imposing safeguard measures. To support local agricultural production, the EU has also agreed not to subsidise any of its agricultural exports.

·Flexible rules of origin: companies in the SADC EPA region also have more flexibility to use foreign components while still benefitting from free access to the EU market. In the SADC EPA, the rules defining the origin are formulated in a way to support development of new value chains in the region. The so-called

"cumulation of origin" enables canned fruit exporters to source fruit from neighbour countries, or textile producers to use imported fabric. This type of flexible rules of origin will benefit companies in agri-food, fishery and industrial sectors.

·Development: The EU complements the market opening effort of its partners with substantial development assistance. This will contribute to development, sustainable growth and reducing poverty.

ESTIMATED EFFECTS OF TARIFF REDUCTIONS

The economic impact of the EPA was assessed using a dynamic general equilibrium model, tailor-made for trade policy analysis and adjusted to the specific characteristics which apply to the southern African countries. In a conservative manner, only the impact of the tariff reductions was assessed, i.e. what is easily quantifiable from the agreement. Essential provisions of the EPA (rules of origin, trade facilitation, cooperation on norms, and development assistance) were not considered in the model even though they weigh in favour of SADC EPA countries. The results presented in this study are therefore expected to be exceeded over time. Based on the simulation results,

SADC EPA countries' GDP will be positively affected by the agreement, albeit to a small extent: Individual countries see their GDP grow by between 0.01% and

1.18%, whereas the weighted average GDP increase, which is strongly dominated by South Africa, is about 0.03% (Importantly, all results refer to the situation in 2035 compared to a situation without the EPA).

The variation between countries reflects the extent to which the EPA and the baseline differ: in countries such as Namibia, the EPA provides duty-free quota-free access while the country, in the absence of EPA, would not benefit from a preferential treatment (hence the higher impact).

In Botswana, the main export items (e.g. diamonds) would still benefit from low duties without the EPA (hence the lower impact). For a least-developed country like Mozambique, which would still benefit from duty-free quota-free in the absence of EPA, the main benefits to be expected rather come from the flexible rules of origin, regional integration as well as cooperation on norms and standards to boost its exports (all factors which could not be quantified and therefore were not included in the model).Total exports from the SADC EPA Group to the world are positively affected by the EPA as are total imports.

SADC EPA exports are expected to increase on average by 0.13% and imports by 0.14%. In particular, SADC EPA exports to the EU are expected to increase by 0.91%. The agreement has no measureable impact on the EU's overall trade with the world. Exports to the SADC EPA countries are anticipated to increase by 0.73% against a scenario where there would be no EPA. The sectors with the highest expected increases in exports from SADC EPA countries are red meat (15.3%) and sugar (13.7%). Other sectors where an increase in exports is expected are beverage and tobacco, dairy products, fisheries, motor vehicles, "other food", textile, utilities, vegetable oil, vegetables and fruit, and white meat.

While several of the increases are sizeable, decreases are usually below 0.1%, with the exception of wearing apparel (-1.2%), cattle (-0.8%) and electronics (-0.4%). The increase and decrease reflect the comparative treatment of each sector under the EPA by comparison to the baseline: in many sectors, EU customs duties are already low in the baseline scenario (especially when it comes to inputs into the production or primary products), while EU customs duties on finished goods and agricultural goods are much higher in the baseline than in the EPA, hence the higher positive impact in those sectors.

The remuneration of the factors of production is generally positively affected by the EPA even if only to a small extent. Remuneration of labour and land is generally expected to increase, while other factors such as capital and natural resources offer a more mixed picture.

The SADC EPA is expected to modestly reduce the poverty headcount in the two countries observed (South Africa and Namibia). As a result of tariff reduction, SADC EPA countries will collect less import duties, but the decrease is on average not higher than 0.59% of total import duty collection at the end of the liberalisation period. Revenue loss is therefore expected to be limited.

CONCLUSION

The EPA paves the way for a stable and long-term bi-regional trade relationship between southern Africa and the EU. The outcome of the negotiations is a WTO-compatible Agreement that offers asymmetry in market access. The duty-free access to the European market for the Botswana, Lesotho, Mozambique, Namibia and Swaziland (BLMNS) countries will no longer be at the discretion of the EU but will be anchored in a treaty between the Parties. South Africa has also negotiated better access than currently granted under the Trade, Development and Cooperation Agreement (TDCA) between South Africa and the EU.

OUTLOOK

The EPA, including through its development cooperation pillar, is expected to facilitate intra-regional trade as well as the region's trade with the world. The SADC EPA will also re-establish the common external tariff of the Southern African Customs Union (SACU) and thereby renew the proper functioning of the oldest existing customs union in the world. The EPA creates a joint Council and a joint Committee in charge of the implementation of the agreement. It will be the task of those institutions to ensure that the EPA is properly implemented, as well as to make proposals for the review of priorities set out in the agreement. For that purpose, constant monitoring of implementation is paramount.

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Botswana on high red alert as AML joins Covid-19 to plague mankind

21st September 2020
Botswana-on-high-alert-as-AML-joins-Covid-19-to-plague-mankind-

This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.

The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.

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Finance Committee cautions Gov’t against imprudent raising of debt levels

21st September 2020
Finance Committe Chairman: Thapelo Letsholo

Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.

He was speaking in  Parliament on Tuesday delivering  Parliament’s Finance Committee report after assessing a  motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.

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Gov’t Investment Account drying up fast!  

21st September 2020
Dr Matsheka

Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.

The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.

The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.

The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.

This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.

Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.

Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.

However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.

Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.

When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.

This  as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.

Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.

The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.

Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.

In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.

Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.

Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.

Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.

Acknowledging the need to draw down from GIA no more, current Minister of Finance   Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”

He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”

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