Trade Negotiations Insights • Volume 7 • Number 4 • May 2008
Building an EPA services deal: an important tool for services development in the Comoros
On average, between 2004 and 2006, annual exports of Comorian cash crops decreased by about 27%.3 Industrial fishing activities are conducted mainly by EU vessels under the fisheries partnership agreement signed between the EU and Comoros in late 2005. Being an island located in the Indian Ocean, at the northern mouth of the Mozambique Channel, about two-thirds of the way between northern Madagascar and northern Mozambique, Comoros has unique natural landscapes and ecosystems where tourism can flourish. The development of tourism - but also trade in goods, and small, micro and medium sized enterprises (SMMEs) - in Comoros depends partly, and significantly, on the regular availability, affordability and quality of intermediary services like energy and telecoms.
Today, a small and medium sized enterprise in Comoros is faced with enormous constraints to conduct its business operations. On average, it loses three working days per week due to power outages; it pays about US$52 to be a mobile network subscriber. In addition, at the Indian Ocean level, the same economic agent faces both the highest international call rates per minute and bank charges on international transactions.
The fact that services have a potential to thrive in Comoros suggests that the diversification of economic activities should be oriented towards trade in this area. Such a move would imply that the country needs to establish a longterm services development strategy where the appropriate sequencing and financial needs could be defined. Moreover, and not less important, an EPA deal on services could possibly be used as a complementary policy tool for domestic policies. Complementary, because nationally-owned policies should determine the future of services in Comoros, and should not be solely designed to respond to ESA regional policy stances or those emanating from its agreements with third parties. In turn, this will depend significantly on national political leadership and on long-term development issues including services development.
Since gaining independence in July 1975, Comoros has experienced a complex political history with various coups d’états and attempts to take power through force both at the Union and Island levels. The recent example is the political squabble between the Government of the Union and that of the Anjouan Island, which has required the intervention of the African Union force, backed by Sudan, Libya and Tanzania. The implication of such conflicts for decision-makers is (i) the loss of valuable time and effort that could be wisely used on the conception of prodevelopment policies including the guidance of national experts on services development strategies or policies, and (ii) the transmission of a very weak signal to potential foreign investors.
Diversification through services
The share of services sectors in Comoros is growing faster than those of agriculture and manufacturing. Currently, services account for almost 53% of GDP whereas agriculture and manufacturing sectors represent about 43% and 4%, respectively.4 Possible reasons for the smaller share of agriculture include, among other factors, (i) the falling international prices of Comorian cash crops (vanilla, ylangylang and cloves), (ii) massive emigration movements that are depriving the economy of its labour force, (iii) the shortage of wood for the distillation of ylang-ylang and (iv) the fixing of the Comorian Franc to the Euro since 1999.5 The Euro has experienced a real appreciation relative to the greenback over the past five years, and in turn, this has negatively affected exports of Comorian cash crops. Given the very small share of the international market that Comorian cash crops enjoy, the country can hardly exert an influence or control over the factor of demand. However, it can actively influence the supply-side factors through policies and strategies aimed at regaining the competitiveness of Comorian cash crops in the medium to long-term — something that will most likely take a couple of years. Under these circumstances, it would be plausible that the diversification of the Comorian economy be made on trade in services. The question is how domestic policy measures and international trade negotiations (including the EPAs) could be used to foster the development of services.
Finding the appropriate sequencing
The short-term priority for Comoros should be given to intermediary services sectors such as telecommunications, electricity and construction because they tend to be labour-intensive, which is a relatively abundant factor in Comoros. The liberalisation and development of these sectors has the potential to create higher economy-wide and growth-enhancing linkages than liberalisation in the provision of either final services or goods. This is because the main beneficiaries of such liberalisation are not only the users of liberalised intermediate services themselves, but most importantly, other sectors such as tourism and the manufacturing industry. This means that the most adequate liberalisation strategy should focus first on intermediary services. However, the fact that labour is an abundant factor will not necessarily guarantee a successful outcome of liberalisation per se. Quality of labour will certainly be crucial. Technical assistance or training activities in identified sectors, which can be provided by institutions like the UNCTAD, the WTO and ICSTD, will have to be carried out, while assuring that trained people will be posted in their relevant areas of expertise in order to maximise the benefits of training programmes.
Towards a long-term services development strategy
There are isolated sectoral initiatives to develop services such as electricity and telecoms. Some suggest that the State wants to promote their development through liberalisation, by allowing private foreign investors to come in and provide them. However, a national long-term services development plan is yet to be established. The potential advantages of such a strategy could be three-fold. Firstly, it would define the sectors to be liberalised, their pace and modalities, and the required regulatory and administrative reforms. Secondly, it could form a basis for the definition of offensive and defensive negotiating positions of trade in services within the framework of a full and comprehensive ESA-EU Economic Partnership Agreement. Despite the fact that the ESA protocol of trade in services is yet to be finalised, the biggest challenge for Comoros will be to obtain market access and national treatment commitments without national sectoral regulatory frameworks, which would leave little room for policy space in the future. Alternatively, Comoros will either have to accede to the ESA services protocol at a later stage or be a signatory of the protocol while ensuring that further training activities, the development of specific sectoral regulatory frameworks and appropriate institutions over a transitional period, are assured and agreed. In this regard, the principle of variable geometry - which acknowledges the differences of services within the ESA region, and therefore allows commitments, requests and offers to be undertaken on an individual country basis while the services framework remains common to all ESA states - is a valuable tool to address specific needs of Comoros. Thirdly, it could possibly assist policymakers to define, a priori, areas where the country’s future market access commitments will most likely be made during the WTO accession process.7
Financing a services development plan
At the national level, private domestic savings, export and government revenues are not yet able to finance the demand for funds for investment purposes. The attraction of Foreign Direct Investment (FDI) seems to be a viable alternative that can be used to finance services development in the long-term. By late 2005, FDI accounted for less than 5% of GDP. However, further actions to attract FDI are needed. Overall, both the 2007 Investment Code of Comoros and the Code of Commerce of 1984 do not restrict foreigners to invest in Comoros. But there is a lot more to be done in terms of specific regulatory framework and appropriate and well-equipped institutions, especially in sectors such as energy, telecommunications and maritime transport. Equally important, is the need for an aggressive international marketing strategy of the country’s potential business opportunities. This can be done by using the already existing diplomatic missions overseas in countries such as Tanzania, South Africa, Senegal, Belgium, France and Switzerland to establish joint business ventures and partnerships, as well as to exchange experiences.
Another possible option is to ensure that the EPA Development Cooperation chapter is translated into tangible benefits. This depends on both the ESA states as well as on the EU. Article 64 of the Interim Agreement establishes an EPA committee (made up of representatives from both signatories) that is responsible for the administration of all matters - including the provisions on development cooperation. This is likely to be maintained upon the signature of the full EPA. Hence, ESA representatives in the Committee will have to ensure an adequate prioritisation of development cooperation provisions, along the lines of long-term services development aspirations of states such as Comoros.
What does the future hold?
A national plan of services trade development needs to be a long-term government priority with or without an ESA-EU EPA services agreement and WTO Doha Round developments on trade in services. This does not necessarily mean that regional or multilateral dynamics are not important. In fact, they can be used as a complementary tool to domestic policy measures. The establishment of that plan, and eventually of market access and national treatment commitments, should be preceded and driven by a consultative national stakeholder process through the use of the National Trade Policy and Development Forum, the structure and activities of which are currently being revitalised. This will have the advantage of raising the credibility and inclusiveness of major national policy stances.
1 Samuel Zita is a Trade Policy Analyst of the Commonwealth Secretariat’s Hubs and Spokes Project, attached to the Ministry of Economy and Trade of Comoros Union.
2 According to Comorian Customs Data (2007), about 70% of cash crops are exported to France.
3 Estimates based on the data from the Central Bank of Comoros, Annual Report 2006.
4 Central Bank of Comoros, Annual reports 2005 and 2006.
5 1 Euro = 491.97 Comorian Francs.
6 See Hodge (2002). Liberalising trade in services in developing countries, In: World Bank. Development, Trade, and the WTO. A Handbook. Washington D.C. USA.
7 Comoros has formally requested WTO-membership in February 2007, and in October 2007 it was given observer status.