How Effective Will Africa’s Continental Free Trade Area Be?

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Wednesday, April 25, 2018/03:49PM/Souhir Mzali* 

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 (CFTA) 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 CFTA 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 CFTA 
Opinions about how successful the CFTA 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.
 

After a period of sluggish growth, the country is only just emerging from a recession, with the economy expected to grow by 1.9% in 2018, according to the IMF, mainly thanks to an uptick in oil production. The country’s absence signals its desire to protect local manufacturers from threats that may emanate from the added external competition, especially
as Nigeria’s expanding domestic market and renewed momentum in the broader economy is proving to be an attractive draw for major manufacturers of fast-moving consumer goods. 

Trade prospects supported by broader growth across African economies in 2018
 
The expected economic recovery of Nigeria and South Africa, combined with rising external demand and an increase in commodity prices, should see Africa’s GDP grow by 3.5% in 2018, according to UN estimates. Sentiment among Africa’s business executives points to an even more positive outlook. In the Business Barometer: OBG in Africa CEO Survey – which interviewed some 1000 C-suite executives in nine African markets in 2017 – around 19% forecast GDP growth would reach 4-5%, and a further 18% expect it to exceed 6%. 

What’s more, 84% of respondents had positive or very positive expectations about local business conditions for 2018, and almost three-quarters of respondents said that their business was likely or very likely to make a significant capital investment within the next 12 months.
 

Nevertheless, there are challenges that stand in the way of the continent’s economic prosperity, which are common to those facing the CFTA. Perhaps one of the most pressing issues is the lack of infrastructure. According to the Africa Development Bank (AfDB), Africa’s needs in terms of infrastructure development hover between $130bn and $170bn.
 

While this is likely to be one of the hindrances brought into the spotlight by the CFTA, the deal can also be seen as a keen acknowledgment by the signatories of the need to tackle this issue head on, and in doing so attract much-needed capital to bridge the continent’s infrastructure gap.
 

Among the other potential threats to economic prosperity, CEOs viewed a rise in oil prices (34%) and increased instability in neighbouring countries (31%) as the top-two external events that could impact their markets in the short to medium term.
 

In the longer run, generating employment for the continent’s ever-growing youth population will be key to ensuring social and economic prosperity. Currently, 60% of Africa’s population is under the age of 24. Respondents in OBG’s CEO survey cited leadership (32%), engineering (16%), and research and development (16%) as the skills most in need, suggesting developing training and job opportunities in these areas would best help young people meet the labour market’s demands.
 

Things are certainly on the move in Africa, as most resource-dependent markets cautiously recover from the commodity price shock, while structural reforms and
prudent macroeconomic policies undertaken in countries like Egypt and Ghana begin to pay off. “Our heads are above water and Africa’s economies are moving forward strongly and confidently,” Akinwunmi Adesina, president of the AfDB, said at the 2018 Diplomatic Luncheon in Abidjan in February.
 

*Souhir Mzali is the Africa Regional Editor for Oxford Business Group
 

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