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Africa Needs Progress on Free Trade Agreement to Accelerate

  • AfCFTA aims to create a single market size of 1.3bn people with a combined annual GDP of $3.4trn

  • Some progress has been made on the AfCFTA, with a pilot phase underway

  • There is a greater need to accelerate efforts towards implementation strategies with clear action plans

Edmond Muzinda
Edmond Muzinda

Financial Market Analyst

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ETM Analytics
5 September 2022
Published byETM Analytics

An update of the African Continental Free Trade Agreement

This report aims to assess how much progress has been made on the African Continental Free Trade Agreement (AfCFTA) since its inception in January 2021. The AfCFTA is a highly ambitious trade agreement which aims to bring all fifty-five member states of the African Union within a comprehensive scope that includes critical areas of Africa’s economy, such as digital trade and investment protection. By eliminating barriers to trade in Africa, the AfCFTA aims to significantly boost intra-Africa trade, particularly in value-added production and trade across all services sectors of Africa’s economy. The free trade agreement is a game-changer for Africa, with the potential to create the world’s largest free trade area.

AfCFTA aims to create a single market size of 1.3bn people with a combined annual GDP of $3.4trn. Studies conducted by the United Nations Economic Commission for Africa reviewed that this agreement can potentially increase intra-Africa trade by 26% by 2045 compared with around 15% in 2021. The World Bank added that, if properly implemented, free trade is expected to lift 30mn Africans out of extreme poverty by 2035, as deeper integration would boost incomes, catalyse investments, create jobs, and help the development of regional supply chains.

Key takeaways

  • Some progress has been made on the AfCFTA, with a pilot phase underway

  • There is a greater need to accelerate efforts towards implementation strategies with clear action plans

  • Changing mentality is crucial to eliminate distrust and hostility towards other Africans

  • Rigorous communication through outreach, mobilisation, engagement, publicity and targeted education is key

Notwithstanding the sheer size of the African continent, recent data has shown that African countries trade the least amongst themselves compared to other regions in the world. This can be largely attributed to the tariff barriers that are in place, eroding the competitiveness of goods and services and inhibiting exports. The charts below show intra-African trade compared with that of other regions and the regional improvement integration will bring to Africa’s trade dynamics.

 

While the AfCFTA has, in theory, been operational since the beginning of last year, no trade has occurred under its terms due to pandemic-related delays. However, the AfCTA secretariat selected eight countries in July to start trading under the free trade agreement framework in a pilot phase. The chosen countries include Cameroon, Egypt, Ghana, Kenya, Mauritius, Rwanda, Tunisia and Tanzania. These countries will participate in the AfCFTA Initiative on Guided Trade. The pilot phase seeks to test the environmental, legal and trade policy basis for intra-African trade. 

Below provides a summary of the progress thus far, what needs to be done, and some of the drawbacks hindering the progress.

What has been done

Drawbacks hindering AfCFTA progress

  • Forty-two countries have ratified the AfCFTA and deposited their instrument of ratification with the African Union Commission. Therefore, they have full rights and obligations as State parties. Countries that have not ratified the free trade agreement include Botswana, Mozambique, Madagascar, Burundi, Somalia, South Sudan, Sudan, Eritrea, Libya, Benin, Liberia and Guinea-Bissau.

  • AfCFTA has achieved 88% agreement on tariff lines on the so-called rules of origin (just 2% shy of reaching the five-year target of tariff lines). These determine the nationality and local content requirements of goods. This agreement covers more than 4500 products.

  • AfCFTA received 44 tariff offers representing 80% of AU membership, which have been technically verified, and 46 countries have submitted their Schedules of specific commitments, which have also been technically verified.

  • AfCFTA’s secretariat has also set in place the Protocol on Dispute Settlement, which focuses on amicable, transparent and swift resolution of disputes between State Parties.

  • The secretariat and Afreximbank set up an AfCFTA Adjustment Facility Fund to support African countries and the private sector to effectively participate in the new foreign trade environment created by the agreement. The fund is structured in three pots comprised of the base fund, general and credit available either in concessional or commercial terms for businesses and governments. Afreximbank has already committed $1bn towards the fund of the $10bn required over the next 5-10yrs.

  • AfCFTA’s secretariat launched the AfCFTA support programme, which is aimed at helping facilitate the implementation of the AfCFTA through supporting national implementation committees and regional communities. The UK has already pledged GBP35mn to the programme.

  • The secretariat launched the Pan-African Payments and Settlement System (PAPSS) to facilitate cross-border payment in local African currencies. The system is expected to save the continent an estimated $5bn annually in costs regarding currency convertibility.

  • The secretariat launched AfCFTA Hub, an interconnected clearing house or link for national government, intergovernmental, private and public digital and partnership platforms to link together in ways that simplify and ease the way for SMEs and startups to drive the success of the free trade agreement

  • The secretariat launched an AfCFTA private sector engagement plan to develop and strengthen regional value chains. The initiative focuses on four initial priority sectors or value chains: automotive, pharmaceuticals, agro-processing and transport and logistics.

  • AfCFTA formed the new African Tripartite Business Council (ATBC), which includes East African Business Council, the Common Market for Eastern and Southern Africa and the Southern African Development Community (SADC). It aims to spearhead the inclusion of private sector policy proposals into the negotiations of the AfCFTA agreement and the African Tripartite Free Trade Area (TFTA)

 What still needs to be done/Underway

  • Outstanding matters on the rule of origin are being discussed. Negotiations are still ongoing for textiles, sugar and automobiles. These goods are sensitive to most countries because of the nature of job creation and the capacity to absorb millions.

  • The secretariat and Afreximbank are targeting the final work on the AfCFTA Adjustment Facility and an AfCFTA SME Financing Facility to catalyse access to finance for SME business activity

  • AfCFTA has begun phase 2 of the free trade agreement, with the aim of concluding the talks this year. Phase 2 negotiations include covering protocols on women and Youth in Trade, intellectual property rights, investment, digital trade and competition policy.

  • Phase 3 negotiations on e-commerce, which will only commence once phase 2 is completed

Drawbacks hindering AfCFTA progress

  • Given the magnitude and size of this free trade agreement, the successful implementation of the AfCFTA is going to be a long and uphill path. Africa still faces several challenges that could hinder the continent's integration progress. The infrastructure gap is a key challenge that could delay the process of integrating Africa's trade. Africa has always lagged behind the rest of the world regarding infrastructure developments. The inadequate infrastructure and connectivity issues pose a serious obstacle to driving intra-African trade growth. The African Development Bank (AfDB) estimates that the continent's infrastructure needs amount to $130bn-$170bn a year. Furthermore, the United Nations Economic Commission for Africa noted that the region needs a $411bn investment in transport infrastructure and equipment to reap the full benefits of a continent-wide free-trade bloc.

  • Funding is another big problem for African countries, especially in this current environment where we are seeing the increased cost of international borrowing coupled with fiscal imbalances in many African countries. This suggests that accessing credit to fund these infrastructure investments will be challenging. For those that can, it will come at a hefty price. 

  • The lack of infrastructural capacity to combat smuggling and other illicit practices is another problem that will likely undermine the agreement. Many African countries lack the institutional ability to monitor and control their land borders. The more countries trade with each other, the more the problem will become acute if not addressed soon.

  • Political buy-in forms part of the complexities of the continent's integration. Some state parties are baulking from fully committing to the free trade agreement due to pressure from domestic interest groups to protect their local industries and low-skill sectors. Recently, Botswana and Malawi blocked a number of SA agricultural commodities from entering their borders, countering the aim of the free-trade bloc.

  • Fears of losing out to more competitive neighbours have resulted in interest groups in some State Parties pushing back against free trade.

  • Fears of significant tariff revenue loss is also a concern for African countries, especially those that rely on tariff collection for their budgets. Sudden and sharp falls in tariff revenue pressure government finances, adversely affecting the government's capacity to invest in infrastructure and social programs, which are essential for attaining sustainable development and equality.

  • Some countries are concerned that they are unlikely to reap benefits from the free trade agreements, given the different stages of production. Countries involved in value addition for years are expected to benefit more while those at the lower stages struggle. Zambia has already requested an extension before committing to the AfCFTA. We could see more countries also take a similar stance, further delaying the integration of African markets. 

  • Uneven distribution of costs and benefits for regional integration to occur. African countries need to reallocate resources within and between sectors, which will likely bring with it costs of adjustments in the short run. Since transition periods vary between countries, the adjustment costs will be higher for some countries than others. The higher the adjustment cost, the more it reduces the long-run benefits and the less appealing AfCFTA is to countries incurring these high costs.

  • Differences in productive capacities of member states - Some countries favour a low local content, using products with high levels of imported content from outside the continent and with minimal local assembly needs, while others prefer higher local content.

 Conclusion

With the recovery from the COVID-19 pandemic jeopardised by the ripple effects of the Ukrainian war, and the multilateral trading system taking strain, there is a need for Africa to accelerate the implementation of the AfCFTA to drive long-term growth. To make significant headway, all African countries must look beyond the immediate priorities and focus on the possibilities of an integrated market that the agreement offers. That being said, there is an urgent need to adopt a cohesive policy that benefits all state parties. Several suggestions below could help fast-track the African trade integration. These include,

  • Establishing and upscaling technology and innovation, industrialisation, financing, and leadership forums

  • Implementing policies that also focus on removing most non-tariff barriers. The IMF noted that the full benefits of the AfCFTA would not be realised unless non-tariff barriers to trade are also addressed. The removal of non-tariff barriers could be up to four times more effective in boosting trade than tariff reductions, according to the fund.

  • Another way to help drive implementation is through public-private collaborations. The private sector can be a crucial factor in promoting regional integration and cooperation as it has a strong understanding of the constraints facing businesses. It also possesses the expertise to act on opportunities created by this pact and can contribute through infrastructure investments.

  • Prioritising the alignment of financial sector incentives with growth and structural transformation objectives. Doing so will help address the financial repression and credit rationing that have constrained private investment and growth, especially in SMEs.

  • Strict enforcement of the rules of origin to avoid trade deflection. Trade deflection means allowing third parties to reroute their exports to the member nation with the lowest external trade barriers to gain access to the broader market. This is possible under the AfCFTA, which will undermine the process of industrialisation within the region.

  • Initiating more public awareness. Signatory states need to publicise regional and national AfCFTA strategies on social and traditional platforms to raise awareness about the free trade agreement among all stakeholders. Recent studies have shown that many African businesses do not clearly understand the AfCFTA mechanisms of operations and market opportunities at the continental level. Continuously educating the public about the long-term benefits of the free-trade agreement will enable State Parties to convince domestic interest groups to adopt the pan-African project without much resistance.

  • Simplifying administrative procedures, for example, through the installation of One-Stop Border Posts for ease of doing business from and across Africa.