$1trn investment framework to support the goals of the African Continental Free Trade Area (AfCFTA) by 2030

AfCFTA is a flagship project within Agenda 2063 of the African Union-AU- a 50-year master plan to transform Africa into the “powerhouse of the future”. All these intentions and projections are good for Africa but for true gains to accrue, businesses across Africa have to understand this important milestone and position themselves to take full advantage of its opportunities.

AfCFTA agreement is aimed at accelerating intra-African trade and boosting Africa’s trading position in the global market by strengthening Africa’s common voice and policy space in global trade negotiations. The African Development Bank (AfDB) projects the impact of the full implementation of AfCFTA to accelerate growth of businesses and countries through a competitive continental market.

The AfCFTA is set to be implemented in phases, and some of the future phases still under negotiation.

AfCFTA Implementation

At the Kigali summit, areas of agreement were found on trade protocols, dispute settlement procedures, customs cooperation, trade facilitation, and rules of origin. This was part of Phase I of the agreement, which covers goods and services liberalization. There was also agreement to reduce tariffs on 90% of all goods. Each nation is permitted to exclude 3% of goods from this agreement.

AfCFTA events timeline

At its launch on 7 July 2019, five operational instruments that will govern the AfCFTA were activated: “the rules of origin; the online negotiating forum; the monitoring and elimination of non-tariff barriers; a digital payment system; and the African Trade Observatory.”

Some Phase One issues that remain to be negotiated include the schedule of tariff concessions and other specific commitments.

Image: McKinsey & Company

The AfCFTA will be governed by five operational instruments, i.e. the Rules of Origin; the online negotiating forum; the monitoring and elimination of non-tariff barriers; a digital payments system and the African Trade Observatory. Each one was launched by different Heads of State and Government that included President Cyril Ramaphosa of South Africa, President Abdel Fattah El Sisi of Egypt who is current Chairperson of the AU; Mr. Moussa Faki Makamat, the Chairperson of the African Union Commission; and President Mahamadou Issoufou of Niger, who is the Champion of the AfCFTA.

 $1trn investment framework

“The launch of the trillion dollar investment framework is driven by the private sector,” said Albert Muchanga, Commissioner for Trade and Industry at the African Union Commission.

“With this initiative the private sector is sending a very clear signal that is willing and ready. I would like to challenge all of you to invest and I would like to challenge the African private sector to be in the Fortune 500 by 2030.”

AfroChampions Initiative presents $1trn AfCFTA investment framework

As a whole, Africa needs to take several steps to boost trade, such as fostering skills for entrepreneurship and providing more access to credit and capital. Business and political leaders will need to think creatively about continental joint ventures to build strong production and manufacturing networks across the continent.

Mixed views about the potential implications of the AfCFTA

As AfCFTA is consider and generally welcome, many experts are torn: While many see the agreement as a crucial move toward fostering regional economic integration and overall economic growth, others fear that African markets are ill preparedfor such heightened levels of competition.

Indeed, the continent remains plagued by a number of unpredictable tariff and non-tariff barriers, poor infrastructure, few supportive policies and legal framework, a lack of a transportation network, heavy layers of government bureaucracy, and still-high levels of corruption.

The reality on ground

1. Infrastructure logjams and bureaucracy

While infrastructure has improved, there is still a long way to go to make trade easier between countries. You can’t build a value chain across the continent when there are countless customs stamps, customs signatures and certificates to simply move a container from one country to another. Logjams and bureaucracy must be reduced.

2. Harmonizing regulations

Africa is in need of one-stop border posts and common rules and harmonious regulations to ensure that the flow of goods happens far more quickly and easily. Standardization of regulations extremely important.

3. Avoiding protectionism

As global trade rules are being eroded in other regions, with China and the United States spiralling into a trade war and protectionism tightening its grip in many countries, Africa has the opportunity to create a trade buffer for itself. With all countries united in one giant bargaining unit, it will hold far more sway than before.

Africa Continental Free Trade Area (AfCFTA), which will be the world’s largest free trade area by number of countries once it’s fully up and running. The goal is to establish a single market for goods and services across 54 countries, allow the free movement of business travellers and investments, and create a continental customs union to streamline trade and attract long-term investment. The agreement is seen critical for growth and job creation for Africa and its 1.27 billion people.

Recommendations for the AfCFTA to deliver on its promise

In order to be successful and deliver on the AfCFTA’s promises, a labyrinth of regulatory hurdles need to be addressed and a number of enabling intertwined actions need to be considered by all stakeholders. These include:

1. Keep African unity in mind through education and communication

The African continent is very diverse in every aspect of its societies, from political and economic systems and currencies to religion, race, culture, and language. As much as the idea of building an African single market is very popular on the continent, some countries remain very protectionist: For example, some small countries like Equatorial Guinea and Gabon are still reluctant to open their borders. In fact, Equatorial Guinea announced earlier this month that it intends to build a border wall to prevent Cameroonian and West African illegal immigration, citing security threats. There have even been some cases of xenophobia-inspired attacks in South Africa.

Therefore, before it become fully implemented, the African Union must bring awareness of the AfCFTA to the general public especially youth, women, and informal sector actors by educating them about what it entails and how it might affect them. Importantly, leaders should showcase the agreement’s success stories not just those of multinationals but also the achievements of small, medium, and large African firms. The goal will be to debunk the misperception that reducing borders will equate to jobs lost or mass immigration from lower income countries.

The African Union should declare an official “Africa Economic Community Day” to celebrate the creation of the AfCFTA, and appoint special envoys from among influencers such as African celebrities in the arts, media, business, and sports to engage in commercial diplomacy and to promote unity, tolerance, and a sense of common purpose. Their role will be to educate the general public on the importance of reducing barriers and building a common market. It will mitigate future losses and misperceptions of the AfCFTA in general, prevent xenophobia, and, more importantly, turn African ethnic, cultural, and religious diversity into an asset and not a cause of conflict.

2. Attract investments in power and infrastructure development

Perhaps one of the most pressing issues facing the region is the lack of supportive infrastructure. Without enhanced infrastructure, businesses cannot affordably transform products or move people, goods, and services in a cost-effective way. Unfortunately, according to the African Development Bank (AfDB), Africa’s infrastructure financing needs come down to an estimated $130 billion to $170 billion per year. The African Union (AU) must encourage international partners to invest in regional infrastructure projects as well as national infrastructure development, including through the Africa Investment Forum, the Afrochampions Initiative, and the Program for Infrastructure Development in Africa.

3. Establish a fair mechanism to level the playing fields among member countries

The AfCFTA is host to the greatest level of income disparity of any continental trade agreement. It is more than double the levels witnessed in ASEAN (Association of Southeast Asian Nations) and CARICOM (Caribbean Community) countries. These economic disparities could be addressed by putting in place special and differential treatment (SDT) provisions, especially for least developed countries, coupled with technical assistance programs allowing them to gradually fulfill their obligations under the AfCFTA, monitor progress, and establish safety nets.

4. Strengthen the role of the private sector

Despite the continent’s growth, economists still predict a shortfall of 68 million jobs by 2022, not including the tens of millions of currently underemployed. Even within the context of AfCFTA, the African Union should encourage member states and other institutions to strategically prioritize their private sectors, encouraging investment in infrastructure, technology and power development, and agribusiness. Perhaps more importantly, local and national governments should focus on creating an enabling environment for businesses to prosper and ensuring that the wealth they create is inclusive, sustained, and reinvested in African communities, in youth, and in women.

The informal sector merits special attention, given that it represents more than 66 percent of total employment in sub-Saharan Africa and 52 percent in North Africa. Reducing government bureaucracies and corruption, improving fiscal policies and accountability, and providing training, technology, and access to financial services, will empower start-ups to get out of the informal sector, access the gains of the continental market, and, as a result, increase government revenues.

To conclude, for the AfCFTA to be successful, it is essential that African leaders play their part, keep the bigger picture in mind, and put long-term economic growth and Africa’s betterment before their short-run political agendas.

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