The Economy-wide Effects of the African Continental Free Trade Area (AfCFTA): Evidence from Ethiopia

Abstract

Economic integration, which has been an important feature in the international economy, is an integral part of the economic policy issue of global, continental, and regional economies. However, empirical evidence on the potential economy-wide effects of economic integration in Ethiopia is inconclusive and hence unable to provide policy guidance. The main aim of this study is to identify aspects of the sectoral, trade, revenue, and welfare effects of the African Continental Free Trade Area (AfCFTA) on Ethiopia’s economy. This study employed a recursive dynamic computable general equilibrium (CGE) model based on the 2015/16 social accounting matrix (SAM) dataset. The result shows that AfCFTA is likely to improve sectoral productivity, trade flows, and welfare. However, government revenue has decreased due to tariff reductions. Given that revenue from foreign trade is the main source of government income, four interventions could cushion the adverse effects of AfCFTA on government revenue. First, there is a need to broaden the tax base through identifying new taxes. Second, improve the efficiency of tax administration and collection through automation. Third, expand the scope of the tax net through the formalization of the informal sector by addressing the challenges of licensing, registration, and tax payment. Finally, it is necessary to retain tariff lines for strategic commodities over a short-to-medium term.