The promise of free African trade

CBW – Africa asked Joseph Atta-Mensah how relevant the African Union (AU) theme of the year is to the implementation of the African Continental Free Trade Area (AfCFTA).

The 2023 theme ‘Acceleration of AfCFTA implementation’ is particularly significant because of AfCFTA’s potential benefit to the continent. The initiative seeks conditions for an increasingly free and unencumbered flow of trade among state parties to the agreement. Its eight strategic objectives are:

#Create a single market for goods and services

#Liberalise tariffs in goods and services markets

#Support the movement of capital and people while facilitating investments that build on state party and regional economic community (REC) initiatives

#Lay the foundation for a continental customs union

#Promote sustainable and inclusive socio-economic development considering gender equality and structural transformation

#Increase the competitiveness of state parties both intra-continentally and globally

#Promote industrialisation and diversification, regional value chain development, agricultural development and food security

#Resolve the challenges of multiple and overlapping memberships of countries in RECs and expedite regional and continental integration.

If fully implemented, the AfCFTA agreement would attract cross-border investments by eliminating tariff- and non-tariff barriers. An investor in one ratifying country would have access to a continent of 1.3 billion people with a combined gross domestic product of US$3.4 trillion – a figure expected to grow exponentially in the years ahead. A World Bank and AfCFTA secretariat study suggests that AfCFTA would raise incomes in Africa by 9% by 2035 and lift 50 million people out of extreme poverty.

Foreign direct investments to Africa would increase by between 111% and 159% and wages would rise by 11.2% for women and 9.8% for men. Africa’s exports to the rest of the world would grow by 32% and intra-African exports by 109%, led by manufactured goods. Overall, the agreement would make Africa very attractive for investment, expand trade, provide better jobs, reduce poverty and increase shared prosperity for all citizens. It would advance both Agenda 2063 and Sustainable Development Goals.

AfCFTA’s success hinges on the active involvement of the private sector. It is, therefore, important for African countries to support private-sector access to the preferential treatment provided by the agreement. When that happens, the business sector will reap the benefits of not only a larger export market but also cost savings and associated competitive advantages in that market.

What progress has the AU made to date?

Achievement, in this case, is dependent on the AU’s vision of ‘an integrated, prosperous and peaceful Africa, driven by its own citizens, representing a dynamic force in the international arena.’ To realise this vision, leaders marked the 50th anniversary of the AU’s predecessor, the Organisation of African Unity, with Agenda 2063. This is the blueprint for transforming Africa into a global powerhouse. With AfCFTA being a flagship project, I believe entry into force of the AfCFTA agreement is a major achievement.

Infrastructure development is pivotal for sustainable development and regional integration. The AU must be commended for its Programme for Infrastructure Development in Africa (PIDA). PIDA’s priority action plan has achieved an additional 16 066 km of roads, 4 077 km of railways and 3 506 km of power transmission lines. It has also provided 17 member states with regional fibre optic cables. In addition, 112 900 jobs were created directly and 49 400 indirectly.

The Single African Air Transport Market is significant, as it aims to liberalise air transport services. The Protocol on Free Movement of Persons in Africa is another milestone. It will facilitate intra-regional trade and regional integration. It requires 15 ratifications, but to date only four of the 32 signatories have ratified. The protocol emphasises the right of Africans to live and establish a business or economic activity in another country using a common travel document (a common African passport).

What is the biggest challenge to the AfCFTA dream?

For continental development, AfCFTA must become a reality. Government and business have to:

#Create an enabling environment for the production of agricultural and industrial products and services, of the right quality and quantity, at competitive prices, for trading under the agreement. Governments need to scale up investments in industrialisation, education, research and development and associated skills.

#Implement PIDA, which brings together regional and continental infrastructures under the leadership of the African Development Bank. PIDA will provide the right infrastructure and logistics – including roads and trucks, railway lines and rolling stock, seaports and seafaring vessels, airports and aircraft – to move meaningful product quantities. Similarly, without digital connectivity networks, the enormous promise of digital trade will not materialise.

#In addition to affordable infrastructure and services, trade facilitation measures must be enhanced, including the removal of illegal roadblocks, checkpoints and fees and other rent-seeking practices along trade and transit corridors and border crossings. The AfCFTA agreement has a separate instrument dedicated to trade facilitation.

#Ensure finance, without which many good and potentially viable business ideas and start-ups are unrealised. Cross-border trade is inherently riskier than domestic trade. The parties reside in different jurisdictions, are subject to different laws, transact in different currencies, speak different languages and practise different cultural traditions, all of which add risks and transaction costs.

#Trade finance instruments are needed to mitigate such risks and to expedite business across borders. Unfortunately, trade finance is in its infancy in Africa, with governments needing to create an enabling environment continentally, regionally, nationally and locally for the promotion and development of financing instruments and facilities. That said, the African Export-Import Bank (Afreximbank) has programmes such as structured trade finance, note purchase and asset-backed lending that support trading countries.

#Consider a monetary union or common African currency. The continent has about 42 currencies, with trade between two countries with different currencies requiring a third country’s legal tender, often the euro or the US dollar, which raises transaction costs. Africa is estimated to lose up to US$5 billion a year on currency conversion alone.

With Afreximbank support, Africa has launched the pan-African payment and settlement system. This connects African banks, payment service providers and other financial market intermediaries to enable instant and secure payments between African countries trading under AfCFTA.

Will AfCFTA balance the free movement of goods with that of people?

The AU has a protocol on the movement of people and the right of establishment separate from the agreement. Full AfCFTA realisation depends on the freedom of movement – of goods, services and people – and the establishment of multimodal transport infrastructure. Although the AfCFTA agreement and protocol were launched in 2018, as mentioned earlier, only four countries out of the 55 AU member states have ratified the protocol. Ratification must be accelerated.

In February 2017, the Peace and Security Council noted that the benefits of free movement of persons, goods and services outweighed any real or perceived security risks and economic challenges. Benefits include increased intra-African trade and investment, improved education and training, better access to healthcare, labour mobility and enhanced use of human and material resources, and increased tourism, continental integration and pan-Africanism.

However, certain countries have noted potential and real threats of organised crime – including human, arms and drug trafficking, terrorism and violent extremism. These must be addressed, not by preventing movement, but by improving civil registries, enhancing identity document integrity, border management and law enforcement, and strengthening bilateral and international relations, particularly for information exchange.

Other African countries could learn from Rwanda. It strengthened its national security, border management and law enforcement capacities and used innovation and information technology before allowing visas on arrival for all Africans. This ensured the integrity and credibility of its borders, immigration protocols, policies and mechanisms.

Given the apprehension of some member states about free markets, what short- to medium-term safeguards exist?

AfCFTA will allow countries to operate in areas where they have a comparative advantage, enabling them to diversify and industrialise. Trade creation and diversion will create winners and losers in the short term. Gains and losses also rest on the difference in national economies. Africa has high-income disparity and every economy is different. Diversified economies may see earlier benefits from tariff liberalisation.

Over the longer term, industrialisation is beneficial, particularly among more-resource-dependent countries. So, while there is heterogeneity, AfCFTA holds something for all. The United Nations Economic Commission for Africa estimates that with full liberalisation of tariffs, by 2040, exports to Africa will be 23% higher for more-developed and 21% for least-developed countries. The key is for AfCFTA state parties to develop implementation strategies that focus on their comparative advantages for sustainable development.

On the other hand, revenue losses from the removal of tariffs under AfCFTA can be mitigated with a compensation fund. The AfCFTA secretariat and Afreximbank must be applauded for signing an agreement on the management of the AfCFTA Adjustment Fund.

The two parties were mandated to establish the structure by the AU Summit of Heads of State and Government and AfCFTA Council of Ministers. The fund supports AfCFTA states and the private sector to adjust to the new liberalised and integrated trading environment. Comprising base, general and credit funds, it is expected to address revenue losses as tariffs are progressively eliminated. It will also help countries to implement provisions of the AfCFTA agreement, its protocols and annexes.

It will be built on state parties’ contributions, grants and technical assistance funds. The resources required over the next five to 10 years are estimated at US$10 billion. Afreximbank has already committed US$1 billion.

How can Africa make sure the AfCFTA dream does not become a mirage?

AfCFTA’s success rests on its implementation by state parties. Because they need technical capacities, they have drawn up implementation strategies covering national interests and specifying interventions to benefit from the agreement. It is important that the private sector – manufacturers and farmers, bankers and telecoms operators, importers and exporters – understands, appreciates, embraces and champions AfCFTA implementation in its country.