With tariffs gone, the work begins for African trade. By Dr. George Elombi, Executive Vice President (Governance, Legal & Corporate Services), Afreximbank, in the Financial Times, 14 March 2020.

Categories: Insights

Removal of tariff barriers by the AfCFTA is a starting point, not a destination.

When the African Continental Free Trade Area (AfCFTA) came into force in May last year, it set a course for radical increases in prosperity across the continent. The agreement strips away tariffs on 90 per cent of goods and opens up the world’s largest free trade area — a market of over $2.5tn.

However, removing tariffs is a starting point, not a destination. With a population to rival India or China and a growing urban middle class, the winds are blowing in Africa’s favour. But it must still overcome several challenges hindering its progress.

For a start, Africans need to start trading more with themselves. Take the EU as an example: 61 per cent of its trade is internal among member nations. For Nafta, the figure is 40 per cent. For Asean, 23 per cent.

Africa is behind all of these with just 16 per cent of trade flows coming from deals between African businesses. This is a problem for growth, as large amounts of wealth end up flowing out of the continent. It also means African businesses often pay more than necessary for finished materials and products, forced to rely on expensive imports from outside the continent rather than taking advantage of cheaper suppliers producing goods of the same quality closer to home.

AfCFTA goes a long way to unlocking intra-African trade. However, to take advantage of this trade area, companies rely on infrastructure. African nations comprise at least half of the top 15 most-affected countries in the World Bank’s evaluation of infrastructure disruption. Moreover, financing for African infrastructure is currently $68bn to $108bn behind the levels required by the continent. With firms in low and middle-income countries facing costs of $300bn per year just from outages of water and electricity, states, financial institutions and investors that are able to tackle this infrastructure deficit will reap rewards from a considerable step up and inflow of business activity.

The need for infrastructure investment extends beyond hard and physical projects such as transport, energy and public amenities, and into the digital realm. Sub-Saharan Africa enjoys the world’s fastest-growing mobile economy and, with increasing use of mobile technology, fintech firms are stepping in to provide the banking services needed for day-to-day business.

At the same time, African businesses continue to spend more than $5bn per year on intraregional transaction costs, burdened by conversions between local currencies. Tearing down this barrier will require continent-wide solutions, translating the co-operation seen on tariffs into a broader effort to unleash trade.

Some solutions are already being deployed. The Pan African Payment and Settlement System, for example, has become the first continent-wide digital payment system, not only saving payment transaction costs but formalising a significant portion of informal cross-border trade.

Digital infrastructure is needed not only for the transfer of money across the continent, but also to release the flow of information beyond the constraints of national borders. At present, a dearth of market information means businesses in one region of the continent often have little idea about opportunities for trade with another region.

Furthermore, a lack of detailed information about the governance and performance of individual companies can prove a barrier for potential investors to conduct due diligence. This leads to a situation where finance is withheld or withdrawn from well-governed companies, not on the basis of performance, but owing to low information disclosure and excessive caution towards certain sectors or countries.

The multiplicity of standards is another of the challenges impeding intra-African trade, with businesses having to contend with 55 national standards, 55 tests certificates and 55 national inspections. Harmonisation of trade standards would remove non-tariff barriers and form a key part of implementing AfCFTA.

In 2019 Afreximbank, the Physikalisch-Technische Bundesanstalt (PTB), the German national meteorology institution, ARSO, and the African Union in consultation with Africa’s Regional Economic Communities and Member States, developed the Draft Pan-African Quality Policy. This policy will support the development of African Quality Assurance Centres across the continent, including regional reference laboratories run in collaboration with the African Union Commission.

Releasing the potential of intra-African trade is a priority for the African economy. To ease the expected impact of AfCFTA implementation on African nations, Afreximbank has agreed with the African Union to put in place a $3bn AfCFTA Adjustment Facility. At the same time, AfCFTA members must also work to diversify the nature of goods crossing the continent.

Currently, natural resources provide essential revenues for economic development in many states. However, an over-reliance on these primary products can leave their economies susceptible to global market shocks. Supporting nascent industries that diversify national economies will not only have a stabilising effect locally but support the resilience of industries across the continent.

Shifting away from a model where trade activities by a handful of countries is dominated by one sector would reduce exposure to unexpected shocks such as a drought or low commodity prices, allowing other countries to step in when the main participants face difficulties.

With a $2.5tn opportunity, the spotlight is firmly on African leaders. This year, the continent should make significant strides to realising the potential of the free trade area, creating the infrastructure needed to unlock intra-African trade and embedding the roots of a more diversified and resilient economy.

AfCFTA has charted a transformative course for African trade — it is up to African states, businesses and banks to navigate the way ahead.

Dr. George Elombi, Afreximbank Executive Vice President (Governance, Legal & Corporate Services)

 

This article was originally published in the Financial Times.