EU Sugar Reform Will Damage African Economies
The European Commission proposals to reform the EU sugar regime will affect sugar industries across Africa, threatening some with serious disruption and a large cut in income.
Since 1975, under the terms of the Sugar Protocol signed with the African, Caribbean and Pacific group (ACP) countries, the EU has guaranteed quotas and a minimum price for sugar exports from eleven African countries:
Democratic Republic of Congo, Ivory Coast, Kenya, Madagascar, Malawi, Mauritius, Mozambique, Swaziland, Tanzania, Zambia and Zimbabwe. The guaranteed prices were set at the level of those paid to European farmers under the EU sugar subsidy regime, ensuring sugar exports received well above world prices for their
commodity. Following a ruling from the WTO as well as internal pressures for reforms to the EU system of agricultural supports, the European Commission announced last month
a series of proposed reforms which would see sugar subsidies in effect ended, and with it the Sugar Protocol. Those African countries which are signatories to the Protocol will face a price cut of 39% from 2009 when the proposed reforms would
take effect, with the prospect that the sugar industry may collapse across large parts of Africa. Mauritius, for example, is the largest exporter of sugar to the EU, and exports 14 times more than Brazil, despite the latter possessing a
larger sugar sector.
African ACP countries
Signatory countries will face a decrease in their income
from sugar exports if the proposals come into effect as presently formulated. While they will be able to export sugar in the same quantities to the EU, the price paid for that sugar will fall considerably. The relative importance of sugar exports to the economy governs how extensive the impact will be:
Mauritius. Mauritius' sugar export quota to the EU is 491,000 tonnes (around 95% of its total sugar exports), which accounts for around 14% of its total exports.
Mauritius currently receives 629.29 dollars per tonne. By 2009/10 this is projected to fall by over 40% to 383.96 dollars per tonne. Swaziland. Sugar production in Swaziland, which has an EU quota of 117,845 tonnes (20% of total sugar production), represents 60% of GDP. As a result, prospective price reductions will have a serious, negative impact.
Mozambique. The government has invested heavily in expanding the sugar industry, relying on the Protocol's quotas and prices for funding. The price cut of 39% will lead to a massive contraction of the industry in Mozambique, which will
result in factories closing and increased unemployment. The reforms will also make securing financing for investments in the sugar industry more difficult, which will undermine efforts both to diversify sugar industries away from European export and to improve facilities.
Others
Malawi and Zimbabwe would be seriously affected, with Sugar Protocol exports representing 10% and 7% respectively of total output. For Tanzania, Kenya and the others it is slightly less.
The EU has sought to provide some measure of protection for countries facing potentially high economic costs of removing sugar subsidies. Under the Everything But Arms (EBA) initiative, African sugar exports will be given quota- and duty-free access to EU markets from 2009. It has also proposed a 48 million
dollar aid package to the ACP countries in 2006, which would be continued until 2014. However, these supports might not be enough - the United Kingdom's assessment in March suggested that that at least 600 million dollars per year
would be required to offset the expected losses of ACP countries.
African non-ACP countries. The impact of the reforms on non-Protocol African countries will be more varied:
Market distortions
Burkina Faso, Ethiopia and Sudan are permitted to export sugar under the EBA agreement. The fall in prices in the EU will have a negative impact on their export incomes. However, producers in these countries, and elsewhere in Africa, could benefit from freer access to EU markets and the
reduction of the distorting effect of EU policies on the world sugar market. If, as is intended, production levels fall in the EU, world prices might rise, which would benefit such producers.
However, under the current European Commission
proposals, these countries will not receive assistance to help them adjust to the new regime.
EU exports
The current sugar regime has led to significant dumping of
EU-produced sugar on the developing world. The EU is the world's second largest sugar exporter. In 2002, the distortions produced by EU sugar subsidies cost South Africa some 60 million dollars. In theory, the reduction of production in
the EU should allow African producers to fill some of the gaps in both the world and especially regional market. The sugar industry in South Africa has welcomed the proposed reforms, suggesting that while they will not directly affect its
access to EU markets, the country's producers will benefit from an expected rise in world price.
Expanding production?
Other non-Protocol African countries might benefit in a
similar manner, and sugar industries in those countries might expand. However, the ability of current producers to take advantage of the possible gap left by lowered EU production is not inevitable, and the Commission is overly optimistic
in its assessment. Many African countries lack the capacity to refine sugar, and poor transport infrastructure within countries and particularly within regions will hamper efforts to expand regional trade.
Outlook
In the long term, a more balanced market could emerge if sufficient supports are provided to both those African countries likely to face severe economic hardship as well as other poor countries in expanding their sugar industries. If African countries are able to re-orientate their trade, shift
into production of refined sugar, and diversify into areas such as ethanol, the sugar industry in the most affected areas of Africa should be able to survive.
Short- to medium-term contraction could lead to greater long-term stability. However, unless greater supports are provided, and possibly implementing the proposed cut in prices over a longer-period, the impact may be so great that the
African sugar industry finds it very difficult to recover.
The proposal to cut the sugar subsidy regime in the EU has not yet been agreed, and will face significant political pressure for modifications and amendments to key reforms. However, a radical reform of one kind or another is inevitable, with serious consequences for African economies. Without assistance
for the adjustment, the African sector will face upheaval and in some cases may be dealt a terminal blow.
Source: Oxford Anlytica
Since 1975, under the terms of the Sugar Protocol signed with the African, Caribbean and Pacific group (ACP) countries, the EU has guaranteed quotas and a minimum price for sugar exports from eleven African countries:
Democratic Republic of Congo, Ivory Coast, Kenya, Madagascar, Malawi, Mauritius, Mozambique, Swaziland, Tanzania, Zambia and Zimbabwe. The guaranteed prices were set at the level of those paid to European farmers under the EU sugar subsidy regime, ensuring sugar exports received well above world prices for their
commodity. Following a ruling from the WTO as well as internal pressures for reforms to the EU system of agricultural supports, the European Commission announced last month
a series of proposed reforms which would see sugar subsidies in effect ended, and with it the Sugar Protocol. Those African countries which are signatories to the Protocol will face a price cut of 39% from 2009 when the proposed reforms would
take effect, with the prospect that the sugar industry may collapse across large parts of Africa. Mauritius, for example, is the largest exporter of sugar to the EU, and exports 14 times more than Brazil, despite the latter possessing a
larger sugar sector.
African ACP countries
Signatory countries will face a decrease in their income
from sugar exports if the proposals come into effect as presently formulated. While they will be able to export sugar in the same quantities to the EU, the price paid for that sugar will fall considerably. The relative importance of sugar exports to the economy governs how extensive the impact will be:
Mauritius. Mauritius' sugar export quota to the EU is 491,000 tonnes (around 95% of its total sugar exports), which accounts for around 14% of its total exports.
Mauritius currently receives 629.29 dollars per tonne. By 2009/10 this is projected to fall by over 40% to 383.96 dollars per tonne. Swaziland. Sugar production in Swaziland, which has an EU quota of 117,845 tonnes (20% of total sugar production), represents 60% of GDP. As a result, prospective price reductions will have a serious, negative impact.
Mozambique. The government has invested heavily in expanding the sugar industry, relying on the Protocol's quotas and prices for funding. The price cut of 39% will lead to a massive contraction of the industry in Mozambique, which will
result in factories closing and increased unemployment. The reforms will also make securing financing for investments in the sugar industry more difficult, which will undermine efforts both to diversify sugar industries away from European export and to improve facilities.
Others
Malawi and Zimbabwe would be seriously affected, with Sugar Protocol exports representing 10% and 7% respectively of total output. For Tanzania, Kenya and the others it is slightly less.
The EU has sought to provide some measure of protection for countries facing potentially high economic costs of removing sugar subsidies. Under the Everything But Arms (EBA) initiative, African sugar exports will be given quota- and duty-free access to EU markets from 2009. It has also proposed a 48 million
dollar aid package to the ACP countries in 2006, which would be continued until 2014. However, these supports might not be enough - the United Kingdom's assessment in March suggested that that at least 600 million dollars per year
would be required to offset the expected losses of ACP countries.
African non-ACP countries. The impact of the reforms on non-Protocol African countries will be more varied:
Market distortions
Burkina Faso, Ethiopia and Sudan are permitted to export sugar under the EBA agreement. The fall in prices in the EU will have a negative impact on their export incomes. However, producers in these countries, and elsewhere in Africa, could benefit from freer access to EU markets and the
reduction of the distorting effect of EU policies on the world sugar market. If, as is intended, production levels fall in the EU, world prices might rise, which would benefit such producers.
However, under the current European Commission
proposals, these countries will not receive assistance to help them adjust to the new regime.
EU exports
The current sugar regime has led to significant dumping of
EU-produced sugar on the developing world. The EU is the world's second largest sugar exporter. In 2002, the distortions produced by EU sugar subsidies cost South Africa some 60 million dollars. In theory, the reduction of production in
the EU should allow African producers to fill some of the gaps in both the world and especially regional market. The sugar industry in South Africa has welcomed the proposed reforms, suggesting that while they will not directly affect its
access to EU markets, the country's producers will benefit from an expected rise in world price.
Expanding production?
Other non-Protocol African countries might benefit in a
similar manner, and sugar industries in those countries might expand. However, the ability of current producers to take advantage of the possible gap left by lowered EU production is not inevitable, and the Commission is overly optimistic
in its assessment. Many African countries lack the capacity to refine sugar, and poor transport infrastructure within countries and particularly within regions will hamper efforts to expand regional trade.
Outlook
In the long term, a more balanced market could emerge if sufficient supports are provided to both those African countries likely to face severe economic hardship as well as other poor countries in expanding their sugar industries. If African countries are able to re-orientate their trade, shift
into production of refined sugar, and diversify into areas such as ethanol, the sugar industry in the most affected areas of Africa should be able to survive.
Short- to medium-term contraction could lead to greater long-term stability. However, unless greater supports are provided, and possibly implementing the proposed cut in prices over a longer-period, the impact may be so great that the
African sugar industry finds it very difficult to recover.
The proposal to cut the sugar subsidy regime in the EU has not yet been agreed, and will face significant political pressure for modifications and amendments to key reforms. However, a radical reform of one kind or another is inevitable, with serious consequences for African economies. Without assistance
for the adjustment, the African sector will face upheaval and in some cases may be dealt a terminal blow.
Source: Oxford Anlytica
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