Insight & Analysis

Africa banks on free trade to boost regional economy

Published: Sep 2021

While Africa appears to be closer than ever to realising its untapped economic potential, some barriers remain to unlocking what has been described as multi-trillion dollar free trade opportunity.

City view of Dar es Salaam, Africa

According to the United Nations Development Programme (UNDP), African states need to increase internal continental trade through greater export diversification, reduced non-tariff barriers to trade, and faster adoption of the African Continental Free Trade Area or AfCFTA.

The UNDP says this should not only result in increased trade between countries, but also a shift towards export diversification and higher value-added goods and services.

Africa only accounts for around 3% of total world trade and intra-Africa trade currently accounts for less than 20% of import and export activity on the continent. Research conducted by law firm Baker McKenzie and Oxford Economics suggests full implementation of the AfCFTA (the world's largest free trade area by number of countries) could increase economic activity across Africa by as much as US$3trn.

A trade and customs expert at the United Nations Conference on Trade and Development (UNCTAD) was recently quoted as saying that there was still some disagreement between AfCFTA member governments over rules of origin for products in a number of sectors.

Bohani Hlungwane, Group Head of Sales, Trade and Working Capital at Absa, acknowledges that there are still obstacles to overcome, not least of which is the requirement for each member state to declare their full schedule of zero-tariff goods and services.

“Smaller and less advanced states also have justifiable concerns about whether immature industries should be protected from strong country or industry players, while financing and political risks remain,” he says.

However, he also points out that the majority of the 54 countries covered by the agreement have submitted a schedule of tariffs. “Rules of origin (which specify whether a product can be categorised as ‘Africa made’ and therefore eligible for tariff concessions) have been agreed for more than 4,000 product lines,” adds Hlungwane.

Regional integration has been pursued before in the shape of the continent’s eight regional economic communities. But while African nations may trade within their respective communities under preferential terms, trade beyond these regional agreements has generally been subject to most-favoured nation tariffs, which have acted as a disincentive to trade integration.

“There are still important issues to clarify regarding AfCFTA, including broad agreement around intellectual property and how this will impact the value of components added as part of the value chain,” says Hlungwane.

There is also an acceptance that Africa has an enormous infrastructure deficit and will require at least US$1trn of investment over the next ten years to get it to an acceptable level.

“Although this is a daunting sum, Africa is likely going to bridge the infrastructure gap because of the gains inherent in the creation of a single interconnected market,” suggests Hlungwane. “Furthermore, global corporates see the opportunity presented by a single market in Africa and the potential evident in factors such as labour competitiveness that make the continent primed for manufacturing and large scale industrial development.”

As for the role the AfCFTA may play in reducing the trade finance gap in Africa, Hlungwane says there have been discussions in various countries around utilising SMEs as part of the supply chain feeding into the large corporates that will benefit the most from the agreement.

“This will help small businesses access sources of funding such as supplier finance – what is referred to as enterprise supplier development finance in South Africa, for example,” he says.

The implementation of the AfCFTA is also a reminder to forward-thinking corporates of the opportunities the continent presents.

“While setting up corporate treasury hubs in Africa would have been unthinkable a few years ago, increased corporate activity will lead to a rise in cross-border growth and investment – which will only further benefit the continent,” concludes Hlungwane.

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