Tackling informal cross-border trade in Southern Africa
Cross-border trade below the radar of government oversight is both a boon and a curse for many African economies. COMESA, the Eastern and Southern African trade bloc, has recently established simplified border procedures aimed preventing the loss of government revenue through incentives that make legitimate trade more palatable to those currently outside the system.
Informal cross-border trade is very important to Africa in general and the Common Market for Eastern and Southern Africa (COMESA) in particular. It contributes to economic growth, job creation and food security for the majority of the region's population. Some 43 percent of Africans are involved in this form of commercial activity, with women representing the lion's share - around 75 percent - of the sector.
What is ICBT?
COMESA defines informal cross-border trade (ICBT) as a form of trade that this unrecorded in official statistics, and is carried out by small businesses in the region. ICBT characteristically involves bypassing border posts, concealment of goods, under-reporting, false classification, under-invoicing and other similar tricks. In addition to seeking to evade taxes or fees imposed by governments, traders also try to avoid administrative formalities in areas such as health, agriculture, security and immigration, which are perceived as costly, complex and time consuming.
Informal cross-border trade deprives authorities of much needed statistics, as well as revenues. It has also been argued that the practice gives an unfair competitive advantage to informal sector traders over formal businesses as the former do not fulfil their regulatory obligations or pay taxes and other fees. This affects the state's ability to provide public goods such as roads and investments in capacity-building for small businesses.
In order to come to grips with this wide-spread phenomenon, COMESA is currently implementing a "simplified trade regime" initiative, which aims to bring ICBT within the formal trading system, as well as extending the benefits of the free trade area to small traders.
The simplified trade regime
Despite the difficulties and risks, small businesses continue to engage in informal cross-border trade. This is dominated by agricultural and manufactured products, which are bulky by nature, translating into high handling and transportation costs. Aside from these costs, traders have complained of heavy taxation by border and market authorities due to lack of proper certification.
COMESA's simplified trade regime (STR) is intended to reduce this phenomenon. According to 2012 study by the regional body, the initiative has proved useful to informal sector traders. More than 75 percent of those who had tried it cited quick clearance among the main benefits, more than 70 percent said it offered an attractive tax regime and 60 percent thought the system protected traders. The top ten frequently traded products covered by STR include maize and maize products, beans, peanuts, millet, fruit, vegetable, fish, cooking oil, new clothes and cosmetics. Traders have called for this list to be expanded to more manufactured products, as well as some Chinese goods.
The COMESA study highlights a number of issues that should be addressed in order to better understand the phenomenon and find appropriate solutions:
Food Security: Informal cross-border trade is an economic activity of great importance, and contributes to food security in the region. While more than 30 percent of the traders surveyed made a profit from food trade, many complained about the complex processes they must go through to obtain certification for sanitary and phytosanitary measures and other export/import-related permits. Administrative hurdles like these make small traders resort to informal cross-border trade, where they can avoid the red tape and costs of certification.
Women in informal cross-border trade: Women account for 70 percent of ICBT in the Southern Africa region. This reinforces the need for governments and regional economic communities to implement policies to support women traders. The 2012 COMESA study showed that the majority of informal women traders interviewed had already used official border crossings, including the simplified trade regime. Nevertheless, more than 60 percent complained of significant corruption by officials seeking to extort bribes and kickbacks. In addition, thirty-four percent said they had been physically or otherwise harassed by border officials.
High tax rates and other border procedures: Taxes remain the main factor that drives small businesses to informal trade. Although the free trade area has helped ease border taxes in the COMESA region, many member states continue to apply other forms of taxes and charges considered too high for small traders. A COMESA study involving 167 traders in various border areas found that nearly 38.5 percent were concerned about taxes, while 37 percent singled out the demand for bribes as another critical factor contributing to the high cost of doing business. A significant number of respondents also cited delays in processing documents, as well as harassment, among driving factors.
The common list of simplified trade regime is limited: Although the simplified trade regime has helped lower the criteria for duty-free market access for small businesses, its impact is limited due to the relatively small number of products it covers. Traders would like the list to be expanded to industrial products obtained mainly from outside the region.
Lack of policy framework: Despite the economic significance of ICBT, no COMESA member has a specific policy framework for addressing issues affecting small informal traders. The activities currently being undertaken by governments are not guided by a structured framework that can be easily monitored for progress. Infrastructure constraints, such as poor road networks, communications, storage and trading places, lead to smaller profit margins and thriving informal activity.
Finance: Access to financial resources for doing business is a chronic problem. Nearly 80 percent of traders get their capital from informal sources. About half of them use their own savings. Donations and support from family and friends are particularly important sources of finance for women (66.7 and 67.9 percent respectively). However, one-fifth of traders have access to bank loans; 61.8 percent of them are men, mostly in Ugandan border towns.
Recommendations for action
- Reduce border taxes and fees, possibly even removing some so as to promote formal trade and increase government revenue;
- Implement a policy and institutional framework for informal cross-border trade;
- Simplify trade and customs procedures, and reduce the costs of licenses and certificates;
- Strengthen communication and information on trade, customs or policies in order to improve understanding of ICBT-related issues;
- Promote policies that support women involved in informal cross-border trade with access to finance, training and information;
- Develop financial instruments specifically designed to enhance small businesses' access to capital;
- Improve infrastructure in the most critical areas (for example, strategic storage facilities; accommodation and sanitation) through public-private partnerships; and
- Remove the value threshold for small-scale trade facilitation for all products originating from the region.
Economist at the Cross Border Trade Unit of the COMESA Secretariat
Given the fact that China is not part of the COMESA free trade agreement it would still be a challenge to justify the inclusion of Chinese products in the STR list. However, options under the newly launched COMESA Customs Union offer traders an opportunity to access these products at competitive prices and avoid the double taxation normally experienced when the Chinese products are obtained from another member country rather than directly from source. Parallel efforts under COMESA in developing investment areas will encourage foreign companies, such as those in China, to invest in the region and use local inputs to produce goods.