African Market Integration – African Continental Free-Trade Area Agreement (AfCFTA)
The African Continental Free Trade Area agreement (AfCFTA) is set to be operational by July 2020. The agreement will create a single continent-wide market for goods and services, promoting the movement of capital and natural persons. With 54 out of the 55 states of the African Union signed as members (excluding Eritrea), the free-trade zone will unite more than 1.2 billion people, with a combined GDP of US$ 3.4 trillion. Africa accounts for less than three percent of world trade (intra-African trade accounting for only 15 percent of the continent’s total trade). AfCFTA will help drive Africa’s economic potential forward by boosting intra-regional trade, strengthening supply chains, spreading expertise, reducing costs, and promoting inclusive development across Africa. This new wave of industrialisation will help integrate the continent into the global economy.
AfCFTA will liberalize trade and expand existing markets. It contains provisions for countries to reduce tariffs by 90%, which will increase trade in the region by 15-25% in the medium term. A digital payment system is also to be developed to facilitate intra-regional payments, aimed at reducing transaction costs. This system could save the continent more than US$5 billion per annum. But, exists many challenges that still need to be addressed, before the agreement becomes operational. Inefficient bureaucracy and poor infrastructure are among the challenges that need to be addressed. Standardizing regulations and minimizing documentation required will ensure an easier and faster flow of goods. Most African countries are behind the global average in terms of their current utility infrastructure, with available supplies of water and electricity below the global average as well. Landlocked nations need solutions to make their markets more accessible.
Africa’s economies vary in size, industries and markets are different across countries, and levels of development differ. Nigeria, Egypt and South Africa account for over 50% of Africa’s cumulative GDP. The least developed countries (LDCs) face challenges to create jobs, develop their industrial sectors and diversify their production capacity. Africa’s largest trade bank, Afreximbank, unveiled a US$ 1 billion financing facility to support LDCs in adjusting to tariff revenue losses (an important source of their government revenue). A big obstacle that will be difficult to overcome is the divergent interests across countries. As an example, Nigeria has an undiversified but relatively developed economy (reliant on oil exports) and will have less to gain from the agreement than others. South Africa, contrastingly, have among the most developed manufacturers. The agreement poses massive potential to expand outside their usual export markets.
AfCFTA has a responsibility to ensure that all member states can share in the prosperity created by this opportunity, by creating supportive policies, eliminating monopolies, incentivizing industrial diversification and encouraging strategic partnerships. With the rise of trade wars and protectionism, the nature of global trade is shifting. The African Continental Free Trade Area agreement will unify the continent, allowing for Africa to be one giant market with immense bargaining potential. Local expertise and market insight will be key for investors, in order to make informed, practical smart decisions. This is a new era of growth for the African continent.