Friday, June 5, 2009

COMESA Customs Union Opportunity for Resuscitating Economy

04 June 2009 BY PAUL NYAKAZEYA

LEADERS of Africa’s largest regional trade bloc, the Common Market for Eastern and Southern Africa (Comesa), have been meeting at Victoria Falls since May 28, to prepare for the launch of a Customs Union (CU). Comesa, which has 19 member states, has been working on having a CU as a follow-up to a Free Trade Area (FTA) launched in 2000.

A total of 14 countries have been participating in the FTA, which, according to the bloc, has seen intra-regional trade levels growing from US$3 million at the time of the launch, to over US$9 million as at December 2008.

This trade is mainly in goods produced in FTA participating countries and doesn’t attract duty among members who are signed up.

FTA involves elimination of trade barriers between member states only and is suitable for complementary structures.

The other stage of economic integration will be a common market which aims to facilitate the movement of factors of production such as capital, labour, goods and services between the members.

Questions have however been raised in Zimbabwe on whether the local industry was ready for a free trade area? How will the country’s economic performance affect the CU and FTA? Will the country’s economy improve under the new developments? What problems is the Customs Union likely to face? Is the bloc ready for a single currency?

Economic analyst Eric Bloch said how Zimbabwe benefits would depend on how the CU constitutive legislation was drafted.

“Will it become effective immediately, or on a future date and, if the latter, when? Will it be introduced on a phased basis, or applicable to all goods from inception? What will be the formulae for determining country of origin?” said Bloch.

However, pending greater detail of the CU becoming available, Bloch said: “In principle, provided that the CU is effectively and realistically structured, it will be beneficial for the member states of Comesa, and will progressively diminish the economic disparities between some of the countries.

“Zimbabwe’s industry will benefit from the CU to a very considerable degree, and very rapidly, subject to it being able to access adequate recapitalisation, and government timeously procuring the rehabilitation of parastatals infrastructures.”

ZB Financial Holdings economist Andrew Chirewo said the bloc appeared not ready for a FTA given that the DRC, Ethiopia, Seychelles, Swaziland and Uganda still needed to confirm membership as they have not been participating in the FTA.

“Moreover, intra-Comesa trade has generally been very low, averaging just 5% of that in 2007. However, FTAs and Customs Unions are very much workable when there is economic stability within member countries, an example being the Southern African Customs Union (Sacu) agreement between South Africa, Botswana, Lesotho, Namibia and Swaziland,” Chirewo said.

“As such, the successful implementation of the Global Political Agreement in Zimbabwe, coupled with a return to stability in the DRC and Madagascar, should add some impetus for the sustainability of a Customs Union within Comesa,” he added.

Chirewo said the Customs Union could offer an opportunity for the resuscitation and recapitalisation of some companies via relatively cheaper access to raw materials and capital goods.

“In fact, local industries can, to some extent, benefit from the Comesa FTA/CU through elimination of uneven competition especially those local companies with low capacity utilisation levels,” said Chirewo.

“In addition, some benefits may be derived from joint agriculture, mining and manufacturing ventures, given the bloc’s intention to uplift value addition within member states, whilst other benefits could be derived from the establishment of a regional payments system as well as enhanced investment guarantees through bloc trade pacts,” Chirewo said.

However, much of Zimbabwe’s trade is conducted with South Africa, which is not a Comesa member.
“An FTA/CU within the Sadc, where most trade is conducted, would be more advantageous to the local industry than in the Comesa,” said Chirewo.

Coronation Financial Services financial analyst Lance Mambondiani said intra-regional trade would be an essential vehicle for the promotion of diversification and establishment of linkages between production units in Zimbabwe and different African countries.

He said the establishment of a free trade zone in Zimbabwe may mean the country will not be subjected to half-backed and ill-thought out economic policies such as price controls. Economist Brains Muchemwa said there was never a right time when every member country would be prepared but that some countries needed fast reforms for the common good.

“After years of strangulation, the local industry is not in the best shape to compete, but will gain more largely from cross-border financing opportunities and fairer exposure to markets with higher spending power as Zimbabwe has the lowest GDP per capita in the bloc at less than $380 per capita,” said Muchemwa.

On the need for a single currency, Muchemwa said: “Some countries such as Zimbabwe still lack fiscal discipline by a huge margin, whilst civil wars and poor governance stalk 40% of the member states. The cocktail of these issues work hard against smooth implementation of a single currency,” he said.

Bloch said in the long-term, a common currency would probably be functional, but can only be introduced when intra-member economic disparities have been minimised.

“Zimbabwe can benefit from Comesa by virtue of considerable enhancement of exports. These include access to certain primary products required by the manufacturing sector and collaboration on energy generation, water procurement among other things,” Bloch said.

Economist David Mupamhadzi told the Zimbabwe Independent on Tuesday that the issue of timing for the Customs Union was critical but that given the economic differences of member countries there would never be a right time when everyone would be ready.

“The (economic) disparities cannot delay the launch of a Customs Union. As long as there is commitment from the member countries to work towards clearing the outstanding hurdles, then some of some of these hurdles can be cleared after the launch,” said Mupamhadzi.

Mupamhadzi said local industry was “clearly not yet ready for a free trade zone”.

“In fact given the magnitude of problems that our industry is facing, there are no immediate gains that the country will benefit from this process. The economy is still fragile and cannot compete with the region,” he said.

Mupamhadzi said hyperinflation had virtually destroyed the Zimbabwe economy, and its competitiveness.
“For Zimbabwe this could be another lost opportunity, as the country does not have much to bring to the table. However, for other regional economies they will definitely capitalise on this and try to maximise on the various opportunities that they can get from Zimbabwe,” Mupamhadzi said.

Mupamhadzi said given the sorry state of the economy, Zimbabwe might want to seek temporary exemptions from the full application of specified provisions of the treaty.

“However, the country should be given tight deadlines to put its house in order,” he said.