Unlocking growth through Africa Free Trade

It is hoped that the Africa Continental Free Trade Area Agreement (AfCFTA) will significantly increase trade between African countries. Image credit: Leon Louw for WhyAfrica

Unlocking growth through Africa Free Trade

Maximising the potential of the Africa Continental Free Trade Area Agreement (AfCFTA) to raise Africa’s intra-continental trade from its low levels will rest on the ability to match demand for goods with manufacturing capacity on the continent.

By Shaahien Mottiar

According to Brookings data, intraregional trade as a percentage of trade amounts to 67% in Europe, 60% in Asia and 46% in the Americas, while only 15% in Africa.

The expectation is that we will start to see growth in intra-Africa trade as the African Continental Free Trade Area (AfCFTA) gains traction, especially in the continent’s biggest economies.

Having come into effect on 1 January 2021, the AfCFTA now provides the regulatory platform to reduce trade barriers between its signatories and the populations they represent.

The agreement seeks to create an African market for goods and services, facilitated by the potential free movement of people. The aim is to deepen the economic integration of countries on the African continent and build on strength of scale on a continental level.

Furthermore, a continental market for goods and services can be achieved through refining existing policy, contributing to the ease of movement of capital to facilitate investments.

However, a free trade agreement is not a panacea, and the continent’s structural challenges must be addressed. The AfCFTA and growing the continental economy is a long-term journey and will require the participation of multiple market players, including sovereigns themselves.

Pragmatic policy adjustments

Attaining sustainable socio-economic development goals will not be achieved immediately and will require targeted development and trade finance whilst working on the removal of existing trade frictions through pragmatic policy adjustments.

For instance, growing intra-Africa trade in a less taxed environment may seem like a heavy loss of current income streams. This, as the share of a nation’s imports and exports shifts from traditional sources that incur standard tariffs to those within the free trade area.

While countries may have what they consider to be safety nets in localisation or protectionist policies, these may very well impede progress towards a continental free trade zone, and ultimately may very well constrain their local economies.

Some smaller countries rely on customs and duties to remain afloat. So, it isn’t just a matter of providing additional pools of trade financing, but development funding that leads to structural shifts within these economies. This will require active participation of sovereigns and other non-banking financial institutions in underwriting some of the additional and non-traditional risks that may arise.

Markets will need to begin expanding their services sectors also, especially in key industries such as health, technology, and finance. Where new industries emerge, credit risk appetite for untested entities will become necessary to foster growth.

Recent events in global scale supply chain disruptions are leading organisations to move beyond just-in-time models towards a ‘just-in-case’ model, where inventories of key components are likely to be greater than previously held. This means banks will have to adjust their financing assessments to accommodate increased inventories and lengthened working capital cycles.

Lowering trade barriers to facilitate access to inputs

Through a holistic development view that doesn’t compromise credit principles, the lowering of trade barriers should facilitate access to vital inputs between countries, supporting industrial advancement, and creating further incentive to invest into transport infrastructure, technology, and financial systems to facilitate trade.

Despite apparent revenue reductions in the short-term, governments need to continuously remind themselves that the ability of African economies to diversify, grow and become more sophisticated, will rest on the commitment to continuous engagement on the opportunities, challenges and complex regulatory systems that need to be aligned to grow intra-Africa trade.

Through knowledge sharing, enhanced logistical efficiencies and integrated trading platforms, Africa can develop strong regional economies, where goods aren’t just delivered to an end destination, but enhanced through value add at each leg of their journey.

Shaahien Mottiar is the Executive Head: Trade and Working Capital Portfolio Management at Standard Bank.

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