Africa - multiple priorities, time for rewards

Prepared by Peter Matlare: Deputy Group CEO and CEO: Absa Regional Operations

Just weeks before the 28th World Economic Forum on Africa, and after two decades of negotiations, the operational phase of the Africa Continental Free Trade Area was formally launched at the 12th Extra-Ordinary Summit of the African Union recently held in Niamey, Niger.

For the older generation, the deal is the culmination of decades of dreams for a more integrated continent. For the younger generation, the agreement holds the promise of improvements in transportation, communications and other vital sectors of modern African economies.

The Africa Continental Free Trade Agreement (AfCFTA), a leading project of the African Union (AU), is expected to bring together its member states with a total population of over a billion people and a combined GDP of $3.4 trillion. The AfCFTA has its origins in the Non-Aligned Movement (NAM) – the intergovernmental campaign against colonialism, founded by some of Africa’s most exceptional leaders, including Kwame Nkrumah. NAM laid the foundation for the Organisation of African Unity (OAU) established in 1963, and its 1980 Lagos Plan which called for an African customs union. The OAU was replaced by the AU in 2002 and by 2012, the AU Heads of State and Government adopted a decision to establish the AfCFTA.

According to Professor Landry Signé of the Brookings Institute, the AfCFTA is the world’s largest free trade area since the establishment of the World Trade Organisation (WTO) in 1994. It is estimated that under a successfully implemented AfCFTA, Africa will have a combined consumer and business spending of $6.7 trillion by 2030. The agreement will have a significant impact on manufacturing, industrial development, tourism, intra-African cooperation and economic transformation.

The United Nations Economic Commission for Africa (UNECA) has predicted an increase in intra-African trade by 2040 of up to 25% (from the current 17%), compared to an Africa without the AfCFTA. The International Monetary Fund (IMF) estimates that under the AfCFTA, Africa’s expanded and more efficient goods and labour markets will significantly increase the continent’s overall ranking on the Global Competitiveness Indexes.

Challenges to the successful implementation of the agreement

Trade agreements, even one as promising as the AfCFTA, are not mythical instruments that will, upon ratification, charm away the structural problems in Africa’s economies. These mechanisms take hard work to implement and long-term commitment to sustain the benefits. Although it is now in force, many of the rules are still under negotiation. Negotiating rules of origin, tariff schedules and service sector concessions in Phase I of the agreement will be long and cumbersome, and Phase II issues that include intellectual property, investment and competition protocols are yet to be tackled. These issues remain critically important for doing business across the continent.

Although the AfCFTA is expected to remove tariff barriers on up to 90% of goods traded between African countries, the agreement contains caveats for sensitive products, priority products, exclusion lists, and so on. Giving up sovereignty and government revenues through tariff liberalisation are obstacles to the success of the AfCFTA. Moreover, commentators have raised concerns that the African economies with more sophisticated markets and infrastructure (e.g. South Africa, Nigeria, Kenya and Egypt) will continue to reap the benefits of greater integration.

Already, Africa comprises the greatest level of income disparity of any continent. Regional economic communities (RECs) can help the AU to monitor these issues and assist in directing technical assistance funding from international cooperating partners to ensure that smaller, marginalised economies also see AfCFTA benefits. For instance, UNECA has committed to supporting AU member states in ensuring successful implementation of the AfCFTA. UNECA is assisting member states to develop national AfCFTA strategies, to safeguard benefits from the reforms. There is a strong focus on education and skills development to create an adequate workforce, especially in industrial sectors, to transform trade opportunities into reality.

Apart from sovereignty concerns and possible amplified inequalities across economies, AfCFTA implementation may be hindered by institutional, capacity and infrastructure deficits. National governments are the main drivers of infrastructure development, while private participation in infrastructure financing and delivery can lead to efficiencies. An ongoing weakness in African infrastructure remains the lack of precisely defined and planned infrastructure programmes. High-quality infrastructure built through innovative and affordable financing models should be the goal for all African infrastructure assets, including those of regional significance.

Apart from transportation infrastructure for trade (border posts, road, rail, air- and seaports), there are also security blockades, customs clearances, excessive border bureaucracy and petty corruption that have held back growth and integration. Improvements with the launch of the AfCFTA are expected through closer collaboration between, and incentives for, border authorities. Logistics costs for moving goods between African countries, currently estimated to be five times higher than many advanced economies, are expected to see enhancements in the customs clearance systems and training of customs officials that should improve border crossing times for traders. According to the United Nations Conference on Trade and Development (UNCTAD), if improvements in trade facilitation are realised through AfCFTA, a further $85 billion could be added to intra-African trade.

Africa needs structural transformation

Agenda 2063 is the AU’s blueprint for transforming Africa into a powerhouse of the future to contend with the current superpowers, such as the USA and China. Through Agenda 2063, African countries are prioritising structural transformation in national and continental development programmes to promote sustainable development, aiming for a “structurally transformed” economy. In the context of both the AfCFTA and Boosting Intra African Trade Initiative (BIAT), national governments should plan and design appropriate interventions to enable the private sector to stimulate economic transformation and growth in industry and the economy.

Businesses and investors make a vital contribution to the African economy in allowing returns to be channelled towards productive enterprises that create jobs and greater household purchasing power. Within the context of the AfCFTA and the BIAT, African businesses should be part of the economic integration narrative, and benefit from understanding the provisions of these agreements. Beneficiation of primary production, greater value addition through processing (or manufacturing) value chains with free movement of business, people and financing are meant to be the foundation of this agreement. This means creating a larger market through productive collaboration and understanding the comparative advantage of our neighbouring states – production of components through regional value chains.

Currently, African countries export raw goods en masse from the continent, only to re-import their associated value-added products at far greater cost to us. To reverse this trend, business and government leaders need to step up and make the hard decisions to upgrade skills and business processes, to change production systems, and to put money into new models and technologies.

Cooperation, inclusive growth and belief in our shared futures could bring rewards

Brexit, as well as the Trump administration’s recent disdain for the WTO, may denote a growing disillusionment with the multilateral trading system. Detractors may point out that forging the AfCFTA right now will set the integration initiative up to fail. Nonetheless, this free trade agreement is not only about trade; it is also about deeper economic integration, agricultural development, food security, industrialisation and structural transformation of African economies. Many of these priorities resonate with the inclusive growth goals of the UN’s Sustainable Development Goals (SDGs) that African countries are striving towards.

Africa is not geared to remain a poor continent: Africans face poverty for the same reasons other nations were once poor. This means that our poverty problems can be eliminated through solutions that other economies used to move from poverty and underdevelopment.

But Africa has some catching up to do: its 2017 intra-regional trade accounts for just 17% of exports, against 59% in Asia and 69% in Europe. Coupled with this, Africa has missed out on the economic booms that other trade blocs have experienced in recent decades.

To turn around our economic challenges in Africa, appropriate and bold economic policies and practices are required. National governments must actively work with their regional counterparts and with their private sectors to improve national and regional political economies. Transparency, collaboration and a belief in our shared future may be what leads the AfCFTA to bring forth the benefits of integration, where these benefits seem so obscure elsewhere - especially at the moment.