Free trade has started flowing across Africa thanks to the African continental free trade area, but implementation challenges remain.
Thanks mainly to the Covid-19 pandemic, the last year has seen a slowdown in global trade and put the brakes on the free movement of goods and services. Factories and ports were closed for some of that time and, when businesses and borders reopened, they did so cautiously. The UK’s withdrawal from the European Union (EU) at the end of 2020 only added to the sense of a global economy in retreat.
But one region is swimming against the tide. In what the World Economic Forum (WEF) calls a ‘game changer’ for the continent, the African Continental Free Trade Area (AfCFTA) was officially launched on 1 January 2021 and promises to revolutionise cross-border commerce in the region. Wamkele Mene, secretary general of the AfCFTA Secretariat, said the agreement represented ‘our hope for Africa to be lifted up from poverty’.
AfCFTA certainly looks like an impressive achievement. The agreement has created the largest free trade area in the world measured by the number of countries participating, connecting 1.3 billion people across 55 nations with a combined gross domestic product (GDP) valued at USD 3.4 trillion. Its ambitious aim is to lift 30 million people out of extreme poverty. That is not a pipe dream. According to World Bank figures, full implementation of AfCFTA would boost Africa’s income by USD 450 billion by 2035 and increase the continent’s exports by USD 560 billion. It would see wages grow by around 10% for both skilled and unskilled workers.
PROMOTING CROSS-BORDER BUSINESS
If these hopes are fulfilled, AfCFTA could be the economic pact Africa desperately needs. Currently, the continent accounts for just 2% of global trade. Only 17% of African exports are intra-continental, compared with 59% for Asia and 68% for Europe. AfCFTA will smooth the path of cross-border business by eliminating 90% of tariffs and drastically reducing non-tariff barriers by cutting red tape and simplifying customs procedures. It will create a free market for goods and services. And according to the WEF, changes brought about by the agreement could reshape economies across the region, ‘leading to the creation of new industries and the expansion of key sectors’. African countries would trade more easily with each other and become more globally competitive. It is hoped that the agreement will reduce the incidence of illegitimate and fraudulent transactions, bolstering government revenues.
It is also hoped that AfCFTA will cushion Africa from the worst effects of the pandemic slump and allow local economies to ‘build back better’. As Ghanaian president Nana Akufo-Addo recently said “The destruction of global supply chains has reinforced the necessity for closer integration amongst us so that we can boost our mutual self-sufficiency, strengthen our economies and reduce our dependence on external sources.”
In other words, AfCFTA is a big deal, and UHY member firms on the continent are optimistic that it will create new cross-border opportunities for their clients. Mwai Mbuthia, founding partner at UHY Kenya, says reduced or eliminated tariffs will drive new intra-African trade.
“From a Kenyan perspective, the introduction of AfCFTA means 66% of tariff lines have immediately become duty free,” he says. “On top of that, 24% of tariff lines will be gradually reduced over the next five years. That will help drive trade and mean Kenyan exporters will be much keener to do business with customers in other African states.”
Lawrence Etukakpan, head of business development at Nigerian member firm UHY Maaji & Co, agrees. “The agreement is expected to create new opportunities and boost the African economy. Presently, Nigeria has an unemployment rate of 33% and we hope the AfCFTA agreement will help reduce the rate of unemployment as a result of intra-regional trade, especially in manufactured goods and services including banking, entertainment and information technology.”
Lawrence sees particular opportunity in the export of professional services like insurance, banking, accounting, construction and real estate development to less advanced African neighbours, with benefits for all parties. And he also believes AfCFTA will create stronger flows of Foreign Direct Investment (FDI).
“There are several factors that have affected the inflow of FDI capital to Nigeria,” he adds. “These include limited economies of scale, weak purchasing power and poor infrastructural development. But with AfCFTA in place, an investor can set up manufacturing hubs in the country and from here export goods to member nations, especially in West and Central Africa. Nigeria is located in the geographical centre of this subregion.”
FURTHER INVESTMENT REQUIRED
So the promise of AfCFTA is great, both for the continent more widely and individual nations within it. But nobody is expecting a quick fix. The agreement may officially have come into force in January, but many of its benefits will take years to materialise. In many cases, large investments are still needed to create the conditions on the ground that allow free trade to flourish. Wamkele Mene made the same point in a recent interview with the Financial Times:
“If you don’t have the roads, if you don’t have the right equipment for customs authorities at the border to facilitate the fast and efficient transit of goods… if you don’t have the infrastructure, both hard and soft, it reduces the meaningfulness of this agreement,” he said.
Lawrence believes the situation in Nigeria echoes that point. “High transportation costs coupled with poor road and rail infrastructures are some of the major obstacles,” he says. “The cost of transporting goods across borders is extremely high and traders encounter bureaucratic bottlenecks that could frustrate trading.”
Sam Thakkar, CEO of UHY Thakkar & Associates, Uganda, agrees that for his country, AfCFTA presents a mix of opportunities and challenges. Uganda is a young nation – over 60% of the population is below the age of 30 – and has recently started to exploit its oil and gas reserves. The country has had experience of managing regional economic integration as part of the East African Community (EAC). “Therefore, opening our doors to a wider audience in Africa will no doubt lead to accelerated development of the nation,” he says.
Despite that, Sam admits to a ‘mixed bag of emotions’ over the agreement.
“We have ongoing issues just within our regional EAC community so adding more states under the African Economic Community band will have to be slowly and carefully applied,” he says. “Regional economic communities work differently to the policies laid out by AfCFTA. In East Africa we have our own customs union as well as our own free trade zones. These tariffs may conflict with the tariffs and schedules under AfCFTA and cause confusion when it comes to the application of various policies.”
This is a crucial point. AfCFTA is not the first attempt by African nations to create free trade zones. Instead, it aims to supersede piecemeal regional agreements that exist in various parts of the country. These agreements may be limited in scope and sometimes dysfunctional, but layering AfCFTA over the top is likely to cause administrative confusion, at least in the short term.
DRIVING CROSS-BORDER AMBITIONS
Still, the general consensus is that AfCFTA is necessary and, with the pandemic undermining already fragile economies, timely. “Uganda can benefit enormously from its participation in AfCFTA but must also ensure that infrastructure development, immigration, logistics and energy and IT are improved to make the cost of doing business efficient,” says Sam. His words would find an echo in many of the 36 countries that have so far ratified the agreement and that can now trade with each other under its regulations.
With the promise of lower costs and reduced bureaucracy, AfCFTA is likely to make cross-border expansion a more attractive proposition for many of the UHY network’s African clients. Lawrence adds that his firm’s membership of a transcontinental and indeed global network will make the process of establishing international operations even more efficient for ambitious client businesses. “We will be helping companies who want to establish their businesses across national borders by working with our fellow member firms outside Nigeria. By working together, we can help clients take full advantage of this agreement. We will be further solidifying partnerships with other firms in the region for this purpose,” he says.
There will undoubtedly be bumps in the road, but AfCFTA has gained wide acceptance in Africa in a short space of time. Only one African nation – Eritrea – is yet to sign the agreement, and ratifications continue at an impressive pace. Meanwhile, negotiations on various details of protocol are ongoing, with agreements expected this summer. AfCFTA will take time, investment and commitment to be truly effective, but most experts believe the effort will be rewarded. The world’s largest free trade area is likely to prove a large step forward for African economic integration, and ultimately for African prosperity.