The AfCFTA Will Accelerate Development in the Service Sector

Introduction 

The service sector is an important lever for economic growth in Cameroon. It contributes 50% of GDP and employs a significant portion of the working age group, both formally and informally. Over the last decade, Cameroon’s tech sector has grown in full swing, creating a larger market for the fintech, software, and communications sector to name a few. In 2024, CEPI completed its first flagship report on free trade, and we found that the African Continental Free Trade Area (AfCFTA) and the Economic Partnership Agreement (EPA) will boost Cameroon’s service sector, boosting both investments and exports. In this article, we outline how this could happen, while proposing reforms that will accelerate the development of the service sector.

What is the service sector?

Cameroon signed the AfCFTA in 2018, allowing local producers to sell products to 53 other African countries without paying expensive import duties. This has the potential to transform the agro-processing sector in Cameroon and across the region. This article shows how the agro-processing sector in Cameroon and the sub-region can benefit from the African Continental Free Trade Area (AfCFTA). 

1. Cameroon’s Growing Tech Sector Will benefit from a larger Market

The World Bank finds that the AfCFTA will create a market estimated at 1.2 billion consumers for businesses and start-ups across the continent. For Cameroonian start-ups like Kiro’o games, Waspito HQ, EJARA that are present in over five countries, they are proof that start-ups will benefit from the AfCFTA. Furthermore, as of 2023, around 40% of Africa’s population is 15 years old or younger, which is higher than the global average of 25%. This creates a market for transport, software, and art companies that can access and sell to a larger market under a set of continent-wide rules. Our report finds that domestic demand increases under the EPAs (0.01% for agricultural products, 0.59% for industrial products, and 0.03% for services). Meanwhile, the AfCFTA negatively affects domestic demand (-11.03% for agricultural products and -17.98% for industrial commodities). However, demand for services will increase by 49.84%, setting the foundations of businesses operating in the service sector abroad.

1. The AfCFTA Protocol on Services and Intellectual Property

The service protocol creates an open and integrated single market of services while harmonizing regulation at the regional level. This will ensure that stat-ups can operate across value chains on the African continent. If countries accelerate the implementation of this protocol, it will allow Cameroon’s many businesses in the service sector such as travel agents, transport companies, and airlines, to effectively leverage the AfCFTA. Finally, the fintech sector will likely gain traction as it will be easier to operate. Our report finds that under the AfCFTA, its exports toward Africa (US$14.01 million for agriculture, US$63.43 million for industry, and US$1.01 million for services. Imports will increase, pushing down import prices and benefiting consumers.

ii. The AfCFTA will boost Investment and Firms’ Profit

When firms are able to access larger markets, it has the potential to increase their revenues significantly. For example, when Amazon expanded from the U.S. to other markets, its revenues rose from $4 million to $37 billion. The AfCFTA will make it easier for Africans to invest across borders, and our analysis finds that under the AfCFTA in 2020 and 2030, investment increases by 2.90% and 1.60% in agriculture, 4.30% and 2.14% in industry, and 2.57% and 1.30% in services, respectively.

Meanwhile, profits increase by US$62.42 million and US$31.63 million in agriculture, US$361.74 million and US$183.07 million in industry, US$1220.54 million and US$617.82 million in services, respectively. Once more, these results show that EPAs mitigate gains from AfCFTA. Innovative companies like Agi-Ai that provide farmers with real-time advice and information on the weather and cop diseases will be accessible across other markets, allowing innovation to spread from companies to informal sector workers such as farmers.

The IMF finds that the private sector in Africa does not create as many jobs as the private sector in other countries. This is due to difficult labor laws and cumbersome regulation as well as high taxes. However, as profits grow, firms will likely hire more people, creating opportunities for millions of Africans across a range of sectors.

iii. Opportunities to Leapfrog

In the past, African businesses did not have access to innovative services for free, but access to open-source software and other AI-related services that will boost productivity and allow innovation to spread across telecommunications, transport, banking, and business services. African countries still rank very low in innovation rankings; the World Intellectual Property Organization (WIPO) Global Innovative Index (GII) has some African countries, which rank low when compared to their peers in Asia and Europe. Mauritius, ranked 57th, is the highest-ranked African economy, followed by South Africa (59th), Morocco (70Th), Tunisia (79th), Botswana (85th), Egypt (86th), Cape Verde (91st), Senegal (93rd), Namibia (96th), and Ghana (99th). Angola, ranked 132, is the lowest-ranked country for innovative performance in 2023.

The AfCFTA will incentivize innovation as more firms will be able to buy and sell from African countries more easily. This will encourage more firms to innovate as they try to fend off competition. As a result, the AfCFTA provides an opportunity for firms to leapfrog and find more innovative methods that cut costs and provide consumers with better services.

Three Firms that are Operating Across the African Continent

1. Paystack: Based in Nigeria, Paystack is a fintech company that simplifies payment processing for businesses across Africa. It provides an easy-to-integrate platform for online payments, enabling merchants to accept various payment methods. Acquired by Stripe in 2020, Paystack has significantly boosted e-commerce in Nigeria and beyond.
2. Flutterwave: Flutterwave, also headquartered in Nigeria, offers a robust payment infrastructure that facilitates transactions across Africa. It enables businesses to process payments seamlessly through its platform, supporting multiple currencies and payment methods. Flutterwave has raised substantial funding and is valued at $3 billion, making it a leader in the African fintech space.
3. M-Kopa Solar: M-Kopa Solar operates primarily in Kenya and other African countries, providing affordable solar power solutions to off-grid communities. Its innovative pay-as-you-go model allows households to access clean energy without high upfront costs. M-Kopa has played a crucial role in increasing energy access and promoting sustainable practices in rural areas.

iv. Some reforms are necessary to ensure that start-ups and businesses can fully leverage the AfCFTA.

• Building Capacity: To effectively negotiate and implement a services agreement, African countries need to develop institutional, human, and regulatory capacities. However, coding boot camps and workshops to ensure that firms are equipped with the skills and knowledge to expand and trade under the AfCFTA are needed. This will play a role in improving professional standards and technological capabilities.
• Infrastructure Development: Upgrading telecommunications and physical infrastructure is essential to facilitate cross-border services and enhance competitiveness in the services sector. We recommend grading at least 1500 km of primary roads and 750 km of secondary roads in Cameroon every year.
• Regulatory Frameworks: Establishing coherent regulatory frameworks for both goods and services will help eliminate monopolies, promote competition, and ensure fair practices. We recommend suspending taxes for new firms and businesses for a period of 3-5 years to support their expansion.  
• Trade Facilitation Measures: Implementing measures to reduce red tape and simplify customs procedures can significantly boost trade in services, leading to substantial economic gain.

Conclusion

The African Continental Free Trade Area (AfCFTA) provides a unique opportunity for businesses in the service sector. Given that the sector now contributes 50% of GDP, policymakers should accelerate efforts to ensure that Cameroonians’ tech, fintech, and other service companies become competitive in the African market. It is important to ratify the AfCFTA protocols, join the Pan-African Payment and Settlement Systems (PAPSS), and support trade finance. Finally, adopting Starlink will reduce internet costs and force local communication firms to become competitive.

Authors:

Dr. Egbe Fride – Research Fellow

Henri Kouam – Founder & Executive Director