By Chris Devonshire-Ellis, Dezan Shira & Associates
The 2022 Chogm currently being held in Rwanda is an ideal opportunity for Commonwealth member nations to learn about one of the worlds’ largest Free Trade Agreements – The African Continental Free Trade Agreement (AfCFTA) which came into effect on January 1st last year. That timing, in the middle of covid, has had the effect of minimising the media coverage of the trade deal, which means it has flown somewhat under the radar despite it being in value terms, according to the World Bank, an estimated US$560 billion per annum in terms of increased African manufacturing export capabilities.
In this article I explain why AfCFTA is important and how other Commonwealth nations entrepreneurs, traders and manufacturers may use the agreement to their advantage, by investing in Africa to take advantage of lower wage levels, increased sourcing capabilities and generous tax incentives on offer in Africa’s numerous free trade zones.
What Is AfCFTA?
Comprising 55 countries with a population of 1.3 billion and combined GDP of about US$3.4 trillion, the AfCFTA is the largest free trade area in the world, both by area and by the number of countries. Currently, 54 of the 55 African countries have signed the agreement (Eritrea is the odd man out yet intends to join once conflicts are resolved), and 41 countries have ratified it. This deeper African economic and trade integration is set to boost incomes, create jobs, catalyze investments, and facilitate the development of regional supply chains. Intra-African trade remains small compared with the continent’s external trade. In 2020 just 18% of exports were to other African countries, lower than the equivalent shares in North America (30%), Asia (58%) or Europe (68%).
The World Bank estimates that, if implemented properly, by 2035 the AfCFTA is set to lift 30 million Africans out of extreme poverty and 68 million from moderate poverty. The same study finds that the AfCFTA has the potential to increase intra-African trade by 81% and boost wages by 10% by 2035.
Importantly, intra-African trade comprises a smaller share of commodities, and a higher share of manufactured goods, than Africa’s trade with the rest of the world. More specifically, primary commodities account for over 70% of inter-African exports; however, the share of manufactured goods in intra-African exports is about 45% with primary commodities accounting for a third. Therefore, intra-Africa trade is less exposed to the volatility of global commodity prices and optimized to effect structural transformation. Accordingly, African policymakers have more agency in shaping a recovery that shifts away from commodity dependency and towards regional integration.
Although the AfCFTA has been operational since January 2021, in practice only small volumes of trade has occurred under its terms due to pandemic-related delays. However, early this year, signatories agreed to rules of origin for 87.7 % of the tariff lines (the goals to liberalize 90% of tariff lines). This agreement on tariffs should enable trading to begin once the governments have enacted domestic changes to the respective tariffs.
According to the Mo Ibrahim Foundation, https://mo.ibrahim.foundation/news/2019/african-continental-free-trade-area-afcfta-whats-africas-youth if successfully implemented, AfCFTA should generate a combined consumer and business spending of US$6.7 trillion by 2030. Furthermore, markets and economies across the region will be reshaped, leading to the creation of new industries and the expansion of key sectors. Significantly, it would make African countries more competitive – and desirable business partners globally. For example, Africa has 42 of 63 elements for the fourth industrial revolution (4IR), including coltan, cobalt, copper, nickel, and graphite, for which global demand will increase by 1,000% by the year 2050.
How Is AfCFTA Being Implemented & Supported?
Certain aspects of AfCFTA still require attention, such as completing negotiations on rules of origin. In addition to this, other supporting pillars are also under development:
- A Trade Finance Facility to support SMEs, especially those managed by women and young people. The timing for bringing this initiative to fruition however requires the involvement of commercial banks, who need to be sold on the opportunities and risk minimisation.
- The African Trade Gateway is a one-stop digital platform with information on rules that apply to thousands of products, customs procedures, market information and trends, and payment transfers. This will be rolled out by 2023.
- The AfCFTA Adjustment Facility, which is expected to cushion the fiscal effects of tariff loss in certain countries. This facility is not intended to address budgetary shortfalls; instead, it will be to support specific value chains in specific productive sectors of the economy, for example, textiles and agro-processing. Details of this are still being worked on. The AfCFTA Secretariat and Afreximbank have raised US$1 billion for the Adjustment Facility, although the startup liquidity estimate is between US$7 billion and US$10 billion.
- The Pan-African Payment and Settlement System (PAPSS) is a platform that facilitates cross-border payments in local African currencies and is expected to save African traders about US$5 billion annually in currency convertibility – there are 42 main currencies in Africa. The PAPSS was officially launched on 13 January 2022 while a continent-wide rollout and awareness-raising campaign among traders is expected to be ramped up over the course of the year and into 2023.
- The final pillar is ensuring that Africa’s Special Economic Zones (SEZs) are compatible with AfCFTA. Countries that establish SEZs subject such zones to special trade laws, such as tax breaks, to attract investments and boost employment. The UN Conference on Trade and Development (UNCTAD), a champion of AfCFTA’s success and SEZs, reports that there are 237 SEZs—and counting— in 38 African countries. This last point is of profound importance to foreign investors in Africa as I explain below.