AfCFTA: A watershed moment for SSA?

On 1 January, African countries opened their markets under the first phase of the African Continental Free Trade Agreement (AfCFTA), consenting to lower tariffs on 90% of products over the next five to ten years.  As such, SSA countries are expected to benefit from a reduction of trading restrictions, likely boosting merchandise exports and improving regional value chains. Moreover, the deal should accelerate regional economic growth and productivity, lifting employment, while it should also boost business sentiment and attract investment.  However, many countries are yet to ratify the deal, and several aspects are still being hammered out, including protocols on competition policy and intellectual property rights. Moreover, poor infrastructure, bureaucratic barriers, security issues and social unrest represent key risks to implementation.

  • What is the AfCFTA?

The AfCFTA is a multi-phased agreement between 54 African Union member states (all states with the exception of Eritrea), seeking to create a single continental market for goods and services. In the longer term, the deal could pave the way for a customs union and the free movement of capital and people— although for now this scenario appears fairly remote.

 

 

Following over four years of negotiations and a setback in the implementation due to the Covid-19 pandemic, phase 1 of the agreement, which covers trade of goods and services, went into force on 1 January this year. At present, 36 countries have ratified the agreement, consenting to eliminate tariffs on 90% of products over the next five to ten years. Another 7% of tariff lines in sensitive sectors will be liberalized over a longer period, while 3% will be placed on an exclusion list. That said, some countries have yet to finalize their tariff reduction schedules. Moreover, negotiations over rules of origin—which guarantee that products traded within the market actually originate from within the continent and are therefore subject to preferential tariffs—remain ongoing and are reportedly expected to be completed by July this year.

Meanwhile, negotiations regarding phases 2 and 3 of the agreement, which cover the development of protocols on investment, competition policy, intellectual property rights and e-commerce, are currently ongoing and are expected to be concluded by the end of the year.

  • How will the trade deal affect economies in the region?

In the short term, the economic impact is likely to be limited to an uptick in investor sentiment and improved optimism regarding business relations in the region. That said, over the long term if the agreement is fully implemented, it will bring a gradual benefit to members and to the region as a whole, with the biggest gains stemming from reductions in non-tariff barriers and trade facilitation at borders.

The agreement should provide a notable boost to trade, limiting the region’s dependence on external partners, while also building up resilience to future shocks such as the one presented by the Covid-19 pandemic. If the deal is fully implemented, the World Bank estimated that the volume of total exports could increase by nearly a third by 2035 relative to a scenario with no trade agreement. In particular, the AfCFTA would bolster intra-regional trade, which is low compared to the rest of the world due to specialization in primary commodities and substantial trade barriers between African countries. Under the AfCFTA, intra-continental manufacturing exports are estimated to post the largest gains. In contrast, the projected gains for services are more modest.

Regarding employment, full implementation of the deal could increase job creation and boost wages for both skilled and unskilled workers, with the region seeing a net increase in the share of workers in the energy-intensive manufacturing sector.

When estimating the potential effect of the AfCFTA on regional gross domestic product, various studies have found that the expected gains depend hugely on the degree of implementation. The projected gains are relatively small with tariff liberalization alone, ranging from 0.1% to 1.0% of GDP. Meanwhile, combining the removal of tariffs with the reduction of non-tariff barriers lifts the gains to around 1.3%–2.2% of GDP. The largest impact would materialize from full implementation—namely the removal of tariffs, reductions in non-tariff barriers and trade facilitation at  borders—with gains estimated to reach around 4.0% of GDP under this scenario. Commenting on the potential effects of the trade deal, Annabel Bishop, chief economist at Investec, reflected:

If it is successfully implemented in all areas it has the potential to substantially increase economic inclusion, reduce poverty and boost employment significantly, especially within the labour-intensive manufacturing sector. Free trade amongst all African countries should stimulate manufacturing and trade in multifaceted services and goods as well, and it is hoped it will stimulate improvements in infrastructure. […] Measures to reduce red tape and simplify customs procedures should improve accessibility for businesses to become part of the global supply chain. It should reduce external dependance as more local competencies are developed and productivity is increased.”

However, analysts at Fitch Ratings were more cautious:

“The impact of trade liberalisation should be positive for the region’s economic potential, but the scale of the impact is likely to be small. […] Increased trade integration could support manufacturing investment and productivity gains, but we would expect this impact to materialise only in the long term.”

  • What are the key sticking points?

Obstacles remain which could hamper the effectiveness of the deal. Weak infrastructure, such as poorly developed roads, as well as a shortage of reliable power supplies, represent key risks to successful implementation. Moreover, communication and bureaucratic barriers, impediments to funding access, security issues and social unrest amid political tensions, governance deficits and socioeconomic challenges in various countries could all hinder trade across the regionHighlighting risks to implementation, analysts at Fitch Ratings noted:

“It is not yet clear how effectively the terms of AfCFTA will be implemented or enforced. Governments may be unwilling to accept limitations on their ability to enact policy, particularly if trade liberalisation requires politically unpopular decisions or interferes with domestic subsidies and exchange controls. […] We believe the removal of non-tariff barriers to trade under AfCFTA is likely to lag behind the agreement’s ambitions, which may blunt its effect. The impact of the East African Community customs union, for example, has been limited by a lack of integration and removal of non-tariff barriers, despite its 15-year history.”

 

 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.

Author: Hanna Andersson, Economist

Date: May 3, 2021

Twitter @FocusEconomics

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