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AfCFTA – What does this mean for businesses?

AfCFTA – What does this mean for businesses?

Africa has, for long, been recognized by many as a continent with the most growth potential. With the coming into effect of the African Continental Free Trade Agreement (AfCFTA), another milestone has been reached in the quest for better trading practices among its countries.
The agreement came into force on January 1 2021. According to World Bank experts, if accompanied by substantial and weighty policy reforms and procedures, the agreement can lift 30 million people out of poverty by 2035 and increase the continent’s income by $450 million. Still, according to the World Bank, AfCFTA, when in full force, will create the most extensive trade area in the world as it will represent an economic bloc of over 55 countries with an estimated population of 1.3 billion people and a combined GDP of $3.5 trillion¹.

Before the formation of the AfCFTA agreement, Africa had eight regional area agreements in place, namely:
1. The Southern African Development Community (SADC), composed of sixteen countries
2. The Eastern African Community (EAC), composed of five countries
3. Common Market East and South Africa (COMESA), composed of twenty-one countries
4. The Economic Community of West African States (ECOWAS), composed of fifteen countries
5. The Economic Community of Central African States (ECCAS), composed of eleven countries
6. The Intergovernmental Authority on Development (IGAD), composed of seven countries
7. The Arab Maghreb Union (AMU), composed of five countries
8. Community of Sahel-Saharan States (CENSAD), composed of six countries.

Some countries belonged to one or more groups. Intra-regional trading occurs among these groups, albeit not at a high level and with even fewer benefits than envisaged. The South African Customs Union and EAC have had better success with intra-Africa trade.
The AfCFTA agreement will pave the way for countries to enjoy free trade, low or no tariffs on about 90% of African goods while reducing obstacles and barriers that have hindered investment and cross-border movement of goods and services between member states. The agreement will improve regional integration and subsequent intra-African trade. Other benefits that will accrue from the trade agreement include:

1.  An enlarged regional market with a unified voice will attract more Foreign Direct Investment. This takes care of the long-standing problem of the fragmentation of markets.

2.  Lower prices of raw materials and imports arising from tariff reductions, leading to an increase in the purchasing power of consumers.
3.  AU countries will all share in the material gains, more jobs for skilled and unskilled workers, especially in the agricultural sector. Women form a high percentage of unskilled workers in the farming sector. The trade agreement will help to boost the numbers of female and youth workers in this sector.

4. Sustained growth and a diversified export portfolio for the AU member states. Cheaper imports will enable SMEs to diversify easily and become competitive but an integral part of value-added chains.

5.  Increased industrialization, industrial capacity utilization, technological development and better access to external markets.

Although Africa is endowed with many resources and goods, intra-Africa trade has always been low. According to the United Nations Conference on Trade and Development (UNCTAD), intra-African exports were 16.6% of total exports in 2017, compared with 68% in Europe and 59% in Asia. Between 2015 and 2017, intra-African trade (the average of imports and exports) accounted for only 2%. Compare this with America, which had an average of 47% for its intra-America trade volume, Asia had 61%, and for Europe, it was 67%². High tariffs and colonial-era infrastructure make it easier for some African countries to export to Europe or the United States than to each other. Manufactured goods – such as machinery and mechanical appliances, vehicles, electrical equipment and plastics – remain vital components of intra-African trade, accounting for around 20% of total goods trade. South Africa continues to be the largest intra-African trading nation and the most significant nation in promoting cross-border trade, accounting for 23.1% of the total in 2019. The Democratic Republic of Congo, which accounted for 7.7% last year, emerged as the second-largest intra-African trading nation, overtaking Nigeria.³
However, some experts have argued that the low figures for intra -African trade are not necessarily accurate. They argued that some larger countries with a substantial extra-regional commodity exports-dependence, for example, Nigeria and Angola (Oil exporter), Egypt and South Africa, end up skewing the data away from the actual higher volumes of intra-regional trade. A closer look at some subsets within the trading regions shows that landlocked countries have a higher dependence on intra-African trade.4
Another reason the low figures may not be so accurate because informal cross-border trading is not being correctly captured and accounted for in the trade balance sheets. While precise data is difficult to come by, Afrexim Bank (African Export-Import Bank) reports suggest that Informal Cross Border Trading (ICBT) plays a more significant role in intra-African trade than is noted.
It is believed that Intra-African trade is under-reported by anything between 11%, according to the World Economic Forum, and 40%, according to economic surveys5 . This is because ICBT tends to go unrecorded and therefore remains invisible. Women form a big part of the workforce involved in ICBT. In West and Central Africa, informal cross-border trade among women represents more than 60% and generates about 40 to 60% of the Gross Domestic Product (GDP) of the countries concerned.6 AfCFTA promises to be inclusive, and it is crucial to empower women by implementing gender-sensitive policies.