Striving to open up a continent rich with trade opportunities, the 7th annual conference on Effective Finance and Treasury in Africa will be held on the 3rd of March 2020 in Canary Wharf, London. Attended by prominent finance and treasury executives from around the world, the EuroFinance Africa conference will look at the most innovative financial technologies yet developed, to enhance efficiency and support business growth. This year, we’ll be leading panel discussions on the trade possibilities that stand to be presented by the African Continental Free Trade Agreement.
Why the AfCFTA is the key to unlocking the Africa-Europe corridor
The AfCFTA is the biggest step we’ve seen towards integration between African economies and global trade liberalisation across the continent in the last decade. But what actually is the AfCFTA and what does it mean for Europe? Bohani Hlungwane, Regional Head of Trade & Working Capital at Absa Group, demystifies the Africa Free Trade Agreement and how Europe-based multinational corporations (MNCs) can navigate the opportunities and challenges it creates.
What is the AfCFTA?
In 2018, member countries of the African Union took a major step to boost regional trade and economic integration by establishing the African Continental Free Trade Area (AfCFTA). The regional trade agreement that came into effect on 30 May 2019 has the potential to be a game changer for the continent and multinational corporations (MNCs) looking to do business in Africa, with a consumer market of 1.2 billion people and a combined GDP of US$2.5 trillion.
Not only does the AfCFTA present a unique opportunity to significantly grow intra-Africa trade and diversify trade exports on the continent, but also for European firms to capitalise on the new business and growth opportunities that it will create.
How does the AfCFTA benefit African economies, and what investment opportunities does this create for European MNCs?
The AfCFTA is the most significant step we’ve seen towards expanding intra-Africa trade across regional economic communities, enhancing competitiveness between African economies and making Africa a more attractive location for global financial institutions, asset managers and private equity investment.
Take intra-Africa trade, for example. A measure of how integrated African economies are, intra-Africa trade has remained in the low teens for much of the past decade but has inched up to about 17% currently. A key focus of Phase 1 (trade of goods and services) of the AfCFTA will be on the application of zero tariffs on 90% of goods and services traded as well as on reduction of non-tariff barriers. The successful implementation of Phase 1 is expected to grow intra-Africa trade by around 50% by the mid-2020s. This growth in intra-Africa trade will ensure that an increasing proportion of Africa’s more than USD2 trillion economy is traded within Africa, creating opportunities for growth in industries and building of new factories to meet the demand.
With a GDP that is currently at USD2.2 trillion or USD6.3 trillion in purchasing power parity terms, a successful implementation of the AfCFTA will also generate an opportunity for MNCs to both grow and diversify Africa’s export base. Of the 17% intra-Africa trade, South Africa accounts for 34% of the intra-Africa trade exports, with Nigeria (9%), Egypt (6%), Ivory Coast (4%) and Zimbabwe (4%) being the other notable economies that contribute relatively significant export numbers to Africa’s intra-regional exports. South Africa also accounts for 20% of the intra-Africa trade imports.
In addition to trade finance, the AfCFTA is set to be a catalyst for structural transformation across the continent. The reduction of non-tariff barriers, application of zero tariffs and increased integration will lead to more factories built across the continent as industries develop. This growth will require more international investment in power generation, transport and communications infrastructure.
What implementation challenges does the AfCFTA face across the continent, and how can European MNCs prepare?
Despite its clear benefits, over the next few months, a few key steps will have to be taken in order to successfully implement the AfCFTA by the set “Go-Live” date of 01 July 2020.
Firstly, whilst 54 of the 55 African countries have already signed the agreement, only 28 countries (by recent count) have ratified the agreement through their parliaments. The practical implementation of AfCFTA however does not immediately become possible on ratification; the tariff schedules and service sector commitments (which will form part of the Protocols on Trade in Goods and Trade in Services respectively) are still being negotiated.
Secondly, to achieve diversification and the spread of the economic benefit across African countries, the removal of non-tariff barriers will be critical. The successful implementation of zero tariffs for 90% of goods and services traded intra-Africa, and (specifically) the removal of non-tariff barriers, should diversify the economic benefits to African economies which may naturally have lower labour costs, compared to the likes of South Africa and other more developed African economies.
Whilst the elimination of tariffs could, over time, substantially increase intra-African trade, the benefits of freer trade will not materialise unless accompanied by procedures and rules to remove Africa’s numerous Non-Tariff Barriers (NTBs). These include a wide range of restrictive practices that make trade difficult, inefficient and costly e.g. customs clearance delays, restrictive licensing processes, certification challenges, uncoordinated transport related regulations and corruption.
However, whilst the countries still have to agree on the schedule of goods and services for zero tariffs, what is encouraging is that many of the African countries already trade under free-trade areas in their respective economic regional communities such as SADC, ECOWAS, and EAC. Here, partnering with the right African bank to navigate local challenges created by the AfCFTA across regional markets cannot be understated. And whilst there are still lots of dependencies, we’re certainly seeing more positives than negatives on the journey to 01 July 2020.
What does the AfCFTA mean for Europe-Africa relations?
Ultimately, the anticipated overall growth in intra-Africa trade as a result of the AfCFTA will generate significant opportunity for MNCs looking to operate in and strengthen Europe-Africa trade, infrastructure and investment ties.
The formation of AfCFTA is a bold vote of confidence in the value of international economic integration at a time when trade conflicts around the world are rife, trade barriers are rising and the future of the World Trade Organisation (WTO) is under threat. It is all the more striking because African countries have often remained on the periphery of global trade liberalisation initiatives in the past. But with the level of strong commitment that the AU member states have shown, now is the time for European firms to step into the most vibrant continent on earth as we potentially stand on the eve of Africa stepping into her own economic greatness by realising together is the best way to enhance prosperity.