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BusinessDay www.businessday.co.za Wednesday 30 June 2021
INSIGHTS
AfCFTA
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AfCFTA: a ‘new dawn of opportunity’
• Agreement aims to grow intra-African trade by more than 50% while promoting industrialisation and reducing unemployment, writes Lynette Dicey
T
he African Continental Free Trade Area (AfCFTA) agreement, due to come into effect in July 2020 but delayed as a result of the Covid-19 pandemic, came into effect on January 1 2021, creating a new dawn of opportunity for trade on the African continent. Intra-African trade has historically been fairly limited at less than 18% compared to intra-regional trade of more than 50% with Europe and Asia. AfCFTA aims to address this by creating the largest free trade area globally based on the number of participating countries. It plans to connect 1.2-billion people in 55 countries with a combined gross domestic product of about $4trillion and remove some of the main obstacles to intra-African trade including weak productive capacities and limited economic diversification as well as remove — or at least significantly reduce — tariffs related to intra-African trade.
It is estimated AfCFTA could grow intra-African trade by more than 50% once it is properly operational, in turn promoting industrialisation, economic growth and reducing unemployment. However, for the agreement to reach its full potential depends to a large extent on each participating member country’s political will to implement policy reforms and trade facilitation measures, explains head of transactional products and services for Standard Bank South Africa, Thandiwe Legwaila. “There are fragmented trade policies across the continent which need to be harmonised for AfCFTA to reach full potential.”
A SOPHISTICATED LEGAL AND REGULATORY FRAMEWORK THAT ENABLES DIGITAL TRANSACTIONS IS VITAL
Virusha Subban … impetus. There is no doubt implementation will be a challenge. A key element of AfCFTA is the removal of crossborder tariffs on 90% of goods by 2030. Many African countries, however, are reliant on the income from import tariffs and may be unwilling to give these up. Legwaila says it’s important that during the implementation phase, in particular, member countries
understand the benefits and the extent to which AfCFTA will benefit their economies and that they invest time and resources into putting the necessary conditions in place to enable free trade. According to a research study compiled by Baker McKenzie and Oxford Economics called AfCFTA’s $3-trillion Opportunity, the challenges AfCFTA needs to address relate not only to lowering tariff barriers but also to addressing nontariff barriers to intra-regional trade. Virusha Subban, a partner specialising in customs and trade at Baker McKenzie Johannesburg, points out that some of the more significant obstacles to AfCFTA are inadequate infrastructure, poor trade logistics, onerous regulatory requirements, volatile financial markets, regional conflict and complex and corrupt customs procedures. “These can be even more detrimental to trade expansion than tariff measures,”
she says. “There is a consensus that the vast infrastructure gap in Africa, including transport and utilities infrastructure, must be urgently addressed so as not to restrict increased trade integration,” she says, adding that developing infrastructure is also key to addressing the devastating economic impact of Covid-19. “According to our AfCFTA report, reliable transport infrastructure is vital for businesses to be able to scale up production for regional export and to develop manufacturing bases. The continent also needs to redouble its efforts to ensure an adequate supply of water and electricity is available so that free trade across borders is successful.” Investment in utility infrastructure, she adds, will incentivise foreign companies to set up production facilities on the continent as, post Covid-19, investors will be looking at countries where it is easy to do business and transport goods to other African markets.
Thandiwe Legwaila … digitisation. Attracting foreign direct investment will be critical, agrees Legwaila. “We need to capitalise on renewed interest in Africa from the European Union, the US and China, and mobilise funds to realise infrastructure solutions.” Subban says it is hoped the impact of Covid-19 will provide
further impetus for African governments to overhaul regulation relating to tariffs, bilateral trade and cross-border initiatives as well as capital flows. Domestic policies will also play a crucial role in alleviating some of the current trade barriers unrelated to tariffs such as corruption, infrastructure development and security threats. Trade in Africa continues to rely on physical documentation. The extensive and lengthy paperwork required at border posts is what makes land-based trade so expensive, points out Legwaila. “A digitised system which connects revenue services and allows traders to declare goods in advance will alleviate some of the border delays which will be hugely positive as will regulatory amendments that allow for digital signatures, digital certificates of origin and other digital documentation.
“More than that, however, we need a digital platform where buyers and traders can connect, along with financial institutions, to make the movement of goods and services easier.” Standard Bank is involved in various trade digitisation projects, along initiatives to reduce trade friction, including cloud-based projects aimed at linking sellers with buyers. The increased focus on the already essential role of digitisation means the development and harmonisation of a regulatory framework to integrate Africa’s digital economies is now essential, agrees Subban. “A sophisticated legal and regulatory framework that enables digital transactions is vital for full participation in global digital trade, which is expected to play a leading role in a post Covid-19 trade environment,” she says.
African nations must produce what’s needed African nations don’t trade more with each other because of a misalignment between what various African countries need and want and what is produced on the continent, says Virusha Subban, a partner specialising in customs and trade at Baker McKenzie Johannesburg. “This misalignment signals missed opportunities to reduce foreign imports from outside Africa and increase trade flows within the continent,” she says, adding that for AfCFTA to succeed, more countries need to diversify their production of goods to better match the import needs of their continental neighbours. Baker McKenzie’s research, compiled in conjunction with Oxford Economics, looked at African imports outside the continent and revealed that manufacturing products, industrial machinery and transport equipment constituted more than 50% of Africa’s combined needs. Currently, Africa’s most important external suppliers of manufactured goods are Europe (35%), China (16%) and the rest of Asia including India (14%).
By contrast, imports from other parts of Africa account for 16% of total merchandise imports. The report revealed more than 75% of African exports to the rest of the world were heavily focused on natural resources and primarily raw materials. The report also compared Africa’s 20 largest economies in terms of the share of exports destined for other economies on the continent. Some economies, such as Uganda and Zimbabwe, bucked the overall trend, trading more with their neighbours than other African nations do. Yet, says Subban, their economies are small in contrast to those of Egypt, Nigeria and SA, which together represent more than half of the continent’s GDP. “Egypt and Nigeria, for instance, have limited trade relationships with their African peers. As major fuel exporters, they are focused on exports outside the continent.” Manufacturing GDP represents on average only 10% of GDP in Africa. This means limited production capabilities within Africa are currently
being compensated for through foreign imports. Says Subban: “However, this manufacturing capacity could eventually be satisfied within the continent and enabled by AfCFTA. Manufactured products exported to African countries by their peers, primarily industrial machinery and motor vehicles, represent a third of the total trade flow in Africa. But a significant share of these intraregional exports of manufactured goods are reexports of imported manufactured products from the rest of the world.” As a result of its existing strong connections across the continent and its already wellestablished manufacturing base, SA stands to benefit from AfCFTA with regards to future growth and trade expansion, says Subban. Smaller economies such as Ghana and Ivory Coast also stand to benefit due to existing favourable conditions such as open economies, good infrastructure and supportive business environments, and they could also quickly ramp up their intracontinental exports.
More should be done to address continent’s trade finance gap Africa’s trade finance gap is estimated to be in the region of $120bn which is a potential impediment to the success of AfCFTA given that companies need access to financing if they are to boost intra-African trade. According to the African Finance Survey Report, a study conducted by the African Export-Import Bank, the UN Economic Commission for Africa and the African Development Bank, a growing number of international banks are becoming even more reluctant to take on payment risks in countries where the economic conditions are deteriorating. The resulting capital outflows strained African banks, exacerbated their liquidity constraints and undermined their capacity to finance African trade. Thandiwe Legwaila, head of transactional products and services for Standard Bank South Africa, says it is imperative that private sector investment is stimulated and
that banks, development finance institutions and other stakeholders put measures in place to address the availability of finance and foreign exchange shortages. Initiatives such as the PanAfrican Payment and Settlement System (PAPSS) — the first digital payment system to facilitate trade on the continent which has been driven by the African Export-Import Bank — need to be accelerated.
CONNECTING SMEs
In addition to accelerating payments, providing savings on payment transactions and making it possible for companies to clear and settle intra-African trade transactions in their local currencies and increase liquidity, PAPSS aims to connect small and medium enterprises (SMEs) to larger markets. In addition, a panAfrican trade finance guarantee programme for SMEs, with appropriate risk mitigations, needs to be put in place.
“The growth of the continent won’t be propelled by blue chip companies but rather by SMEs providing their goods and services throughout the value chain,” says Legwaila. For its part Standard Bank is in negotiations with the AfCFTA secretariat and the African Union to create a funding mechanism aimed specifically at SMEs. “It has traditionally been difficult for SMEs to access funding which is why we are participating in the Intra-Africa Trade Finance Guarantee programme which seeks to facilitate trade financing that will stimulate domestic activity and exports as well as provide technological tools to trace accounts and track their products and services.” Leqwaila says she believes banks and other financial institutions have a role to play in ensuring that AfCFTA succeeds. “We hope the creation of this fund encourages other financial institutions to also step up and play their part.”