The recently signed African Continental Free Trade Area agreement (AfCFTA), which came into force on May 30, represents a unique opportunity to grow intra-Africa trade and diversify trade exports with the rest of the world.

The agreement establishing AfCTA is not only creating the biggest trade agreement since the World Trade Organisation was established in 1994, but is also the most significant step towards economic integration which has already been achieved in other regions in Africa.

The impact of AfCFTA can be seen in the context of the current very low levels of intra-Africa trade. Intra-regional trade represents an average of 15% of global trade across both imports and exports as of 2017.

According to the UN Conference on Trade and Development, regional intra-trade accounts for 59% of Asia’s exports and 69% in Europe.

With customs procedures eased under the AfCFTA, intra-Africa trade is expected to grow to at least 53% by the mid-2020s, thus effectively contributing in the region of $70bn to the continent’s GDP.

The growth in intra-Africa trade will ensure that an increasing proportion of Africa’s more than US$2-trillion economy is traded internally.

For the financial sector, there will be increased demand for trade financing to aid the anticipated overall growth in intra-Africa trade.

For example, to support the expected increase in intra-Africa trade of $119.6bn by 2022, it will require nearly $40bn in trade financing alone. To achieve growth to the value of $27.9bn in industrial goods by 2022, an estimated $9.3bn in trade financing will be required. On the other hand, to support the projected growth in agricultural goods of $5.7bn by 2022, as much as $1.9bn in trade financing will be required.

This is a big challenge for African banks in particular and will require flexibility in risk assessments and financing requirements as the African Development Bank already estimates that there is a trade-financing deficit of at least $90bn in Africa as of 2018.

African banks, especially to regional banks like the Absa Group, Standard Bank and Ecobank, will need to adopt new ways of assessing risk in trade in order to support corporates as they take advantage of new growth and trade opportunities in Africa. This is important, as strong regional banks have proved to be key in regional economic and trade development in other regions such as Europe, North America and Asia.

A country like SA, already the most industrialised and most diversified economy in Africa, stands to benefit even more as AfCFTA is expected to increase regional value chains as this agreement enhances opportunities for goods and services consumed in Africa to be produced and manufactured in Africa.

Given SA’s anaemic economic growth over the past few years, and the need for the country to achieve higher levels of economic growth in order to address the persistently high unemployment rate, the potential benefits for SA cannot be overstated. In addition to the fact that the AfCFTA raises hopes of broader and deeper regional economic integration, it also specifically opens up new markets for SA’s goods and services.

Because of its sophisticated economy and relatively more established industrial base, SA can grow and diversify its exports into the rest of Africa, as trade and tariff and non-tariff barriers are eventually relaxed or removed entirely. Statistics show that Africa is the second-largest destination for SA’s exports, accounting for 26.2% of the total in 2017, second only to Asia.

Additionally, SA’s exports to the region have recently shown the second-fastest growth after Asia. As for SA’s imports, Africa accounted for a much smaller share, just 9.9% in 2017.

Unsurprisingly, due to the fact that SA is the most industrialised African economy, a notable feature of the country’s exports to the rest of Africa is that they comprise mainly manufactured goods (84% in 2017). In contrast, 59% of SA’s exports to Asia in 2017 were minerals, notably iron ore exports to China.

As for SA’s imports from Africa in 2017, 51% was minerals, mainly crude from oil giants Nigeria and Angola. The removal of tariffs and other constraints will, all things remaining the same, result in the development of manufacturing capacity in other countries within the continent in line with an inherent competitive advantage across the countries, allowing SA to reduce its dependency on manufactured imports from Asia and Europe.

It is also expected that the AfCFTA will help diversify SA’s export destinations within the continent, given that more than 85% of SA’s exports to Africa are destined for the Southern African Development Community (Sadc) region, even though these are concentrated on a handful of countries.

Exports to the other two largest economies in sub-Saharan Africa (Angola and Nigeria) together accounted for just 4.3% of SA’s total exports to the rest of Africa in 2017. Additionally, and given the growing risks of global trade protectionism, SA will increasingly prioritise the development of its trade with the rest of Africa, a goal laid out in the 2018-19 industrial policy action plan and the national development plan.

As it is with any agreement that involves many countries, the key will be in implementation and the speed of execution. There is no doubt that some elements of the AfCFTA will erode member governments’ powers to design and implement national policies, in the process reducing the politicians’ powers to influence electoral results in their own countries.

There will have to be a willingness to lose in the short-term in order for the continent to benefit through increased intra-Africa trade and bigger markets in the medium and long term.

The continent will also have to make sure that the benefits do not only accrue to bigger economies such as SA, Nigeria, Egypt, Angola and Kenya if it wants to avoid its own “Brexit” from some of the countries as the agreement matures. This will require careful balancing between opening the markets and protecting smaller players in the markets. In the end, the AfCFTA’s success will boil down to political will, discipline in execution, and the active management of conflicts that arise as implementation continues.

Source: Business Day

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of TradeMark Africa.