How effective will Africa’s Continental Free Trade Area be?
Last month, 44 African nations gathered in Kigali to sign an agreement establishing a framework for the world’s largest free trade area (FTA) since the creation of the World Trade Organisation in 1995 – but how ready is Africa for such a deal? And to what extent will the Continental FTA (AfCFTA) be able to enhance intra-regional trade?
The deal aims to establish a single continental market for goods and services, allowing the free movement of businesspeople and investments across Africa. According to the UN Economic Commission for Africa, the AfCFTA has the potential to see trade volumes rise by 50% over the next five years.
Its primary purpose is to promote intra-African trade and accelerate regional integration, but potential spillover effects include better market access, aligned trade regimes, job creation and increased investment. Importantly, the deal could lead the way for economic diversification and structural transformation as markets shift trade away from traditional commodities and move towards developing a robust and modern industrial base, boosting value added and creating new avenues for wealth generation.
Making this a reality, however, will not be an easy task, and the full benefits will take time to manifest.
Mixed views about the potential implications of the AfCFTA
Opinions about how successful the AfCFTA will be have mostly diverged between those who see it as a crucial move to fostering regional economic integration, and those who deem African markets unprepared for heightened levels of competition.
The deal certainly comes at an interesting time, as some of the world’s largest and most developed economies look to disengage from similar blocs and adopt a more protectionist stance.
But unlike those economies, Africa lacks many of the fundamentals that led to the expansion of those markets in the first place. The continent remains plagued by a number of tariff and non-tariff barriers, from poor infrastructure and transportation networks, to heavy bureaucracy and corruption.
As a result, trade within Africa has so far been a missed opportunity. Recent data from the African Union revealed intra-African trade accounted for a mere 16% of the continent’s total trade volumes, falling behind that of Asia and Latin America, where regional trade accounts for 51% and 19%, respectively.
It’s worth noting that this does not mean Africa has performed poorly. The continent has experienced significant economic expansion since the turn of the century, with sub-Saharan Africa’s economy growing from $300bn in 2000 to $1.6trn in 2017, according to the International Finance Corporation (IFC), driven primarily by the burgeoning tertiary sector.
As the continent’s middle- and high-income groups continue to expand, services are poised to develop further. Household spending is expected to rise in a range of areas, particularly in ICT, transportation, education and housing. Consequently, the IFC expects the region’s economy to exceed $2trn by 2020, paving the way for new trade opportunities.
However, some doubt the success of the deal, because as it currently stands, one the region’s largest economies is notably absent. While the deal was initially intended to comprise all of the continent’s nations – representing 1.2bn people and a combined GDP of over $3.5trn – Nigeria has opted to stay out of it for now.
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© Oxford Business Group. Souhir Mzali is Africa Regional Editor at Oxford Business Group. This blog post was first published on the OBR website. Read the full article here.