The AfCFTA Commences January 2021

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Thursday, December 24, 2020 / 7:53 PM / by FDC Ltd / Header Image Credit: Ghana Business News

 

The African continental Free Trade Agreement (AfCFTA) was established in 2018 with the sole aim of creating a single market for goods and services in Africa. The agreement has been ratified by 32 AU countries. It was recently ratified by Nigeria. The agreement has a huge potential as it would create the world's largest single market of about 1.2bn consumers and workers thereby increasing opportunities for African manufacturers and businesses especially those constrained by the size of their domestic markets. The AfCFTA, if properly implemented and executed across the continent could boost Africa's economy to $29 trillion by 2050 from the current size of $2.6trn.

 

The agreement will also be facilitated by movement of persons to expand economic integration of the continent, under the Pan African Vision of "An integrated, prosperous and peaceful Africa". Integrating Africa into one trade area provides significant opportunities for entrepreneurs, businesses and consumers across the continent. It could also rapidly support sustainable development in the world's least developed region.

 

Benefits for Africa

  • Improve intra-African trade and export structure. Intra-African trade could increase by over 50% as it currently accounts for less than 20% of exports in Africa, compared with about 60% in Asia and 70% in Europe
  • Create a sound global economic impact
  • Avenue for developing better policy frameworks
  • Foster specialization and boost industrialization. An enlarged regional market could lead to an increase in FDI inflows for several countries
  • Strengthen regional and inter-state cooperation 
  • Increase employment and investment opportunities, as well as technological development. Real wages for both skilled and unskilled workers could increase especially manufacturing and agricul-tural sectors
  • Provide the opportunity to harness Africa's young demography
  • Export diversification and structural transformation

 

2021 Regional Outlook - SSA

Africa seems to have escaped the brutal effect of covid-19 in terms of casualties. This has been attributed to a number of factors including the young demography, weather and in some cases herd immunity. The region has been plagued by a number of ailments from HIV/AIDS, Malaria, Ebola and Lassa fever. Even though, the number of casualties is extremely low compared to other regions like Europe and the United States, the pandemic did a great deal to further worsen the dire state of several African countries, particularly in SSA. Several SSA countries would limp through 2021/22 as the full impact becomes evident in the coming years.

 

The EIU has come up with its report for the last quarter of 2020 and projections for 2021. Here are a few of the highlights:

  • Policy makers in SSA will intensify efforts to limit the health, social and economic effect of Covid-19 which will spill over into 2021/22.
  • Vaccines will be rolled out slowly for most countries due to the financial and logistic constraints pervading the region
  • Unemployment and poverty levels will remain high. The World Bank estimates that between 88mn and 155mn people would be pushed back into extreme poverty in 2020. In addition, insecurity in certain countries would also continue to douse hopes for a quick recovery
  • Fiscal positions of several countries which had improved on higher tax revenue have declined and will limit the capacity of governments to boost living standard of citizens
  • Some rich countries with the region will have more room to maneuver and will continue to intro-duce a number of economic mitigation measures like temporary income support, deferral of loan payments, extended tax deadlines of credit to households and businesses.
  • The IMF's swift response to the pandemic by providing the emergency funding through its main facilities like the Rapid Credit Facility (RCF) and Rapid Financing Instrument (RFI) will continue to serve as a vital safety valve for countries in SSA 
  • The AfCFTA will serve as a major boost to intra-regional trade which currently accounts for less than 20% of exports in Africa
  • SSA's GDP is expected to contract by 4.5% in 2020 and recover modestly to 2.2% and 3.5% in 2021 and 2022 respectively. Recovery in the region will be supported by global developments
  • A strong rebound in China (SSA's largest trade partner and source of bilateral funding) will also spur a significant recovery in exports and investment flows
  • The overall performance of the region would be heavily influenced by trends in the dominant economies (Nigeria & South Africa). Both countries account for one-third of SSA's aggregate GDP. South Africa and Nigeria are set for a slow and gradual recovery in 2021/22 after a sharp contraction in 2020
  • Major oil exporting countries (Nigeria, Angola, Chad and Equatorial Guinea) will significantly gain from the upward trend in oil prices
  • Countries like Seychelles, Botswana, Mauritius, Namibia, Kenya and South Africa that depend on tourism would still be affected by the general reluctance to travel, especially now that there is new strain of the virus. Tourism is expected to recover from 2022.
  • External debt stock is projected to continue rising from $612.8bn in 2019 to $652.4bn in 2020. By 2021, debt stock would have climbed by 6.2% to $693bn and debt service to GDP ratio will also edge higher. This would be driven by an uptick in multilateral lending to the region to avert the impact of covid-19 and support balance of payments

 

Key Economic Indicators - SSA

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2021 Outlook for Leading African Economies

 

Nigeria

The Nigerian economy will still be plagued by slow growth, rising inflation, unemployment and poverty levels. Standard of living is expected to keep deteriorating as living costs stay high. With the widening infra-structure deficit, high inflation, instability in crucial agricultural regions and high unemployment, we expect a GDP growth of just 1.2% in 2021. Only when the exchange rate and inflation stabilize will there be a more meaningful recovery but that is unlikely in the near term. The short-age of forex would keep undermining the value of the naira and could lead to another devaluation in 2021. Inflation will stay high in 2021 as the possible devaluation of the naira, PMS price deregulation, cost reflective electricity tariff hike, insecurity in agricultural growing areas, monetary loosening and forex restrictions for staple imports feed into consumer prices. We expect the fiscal deficit to remain above the target (3%).

 

South Africa

With the new variant of Covid-19 present in the country, the number of infections could continue the upward trend in South Africa. The new lockdown restrictions could remain a huge limitation to economic recovery. Despite the challenging environment, the country will remain a major hub for international companies courtesy of strong institutions. Both fiscal and monetary authorities will focus on alleviating the economy from recession and checkmate the rising Covid cases. There would be a slight rebound in GDP growth by 2021 (1.8%) after an estimated contraction of 7.2% in 2020. Inflation will increase to 3.7% and this will be driven by the rise in global oil prices, electricity costs and currency depreciation. The rand is expected to strengthen by 2021 after depreciating as a result of the pandemic. As global trade activities pick up, South Africa will continue to benefit from its preferential access to the US un-der the African Growth and Opportunity Act. However, with the recent flight restrictions by Germany and Switzerland, trade activities could slow. To finance deficits, the country will still rely heavily on foreign in-vestment inflows.

 

Ghana

The government will continue to prioritize trade and investment ties with the international community. GDP growth is projected at 1.8% (2021) after an estimated contraction of 1.3% in 2020. Gold production will re-main high and the country would also benefit from the current rally in oil prices as vaccinations continue in 2021. Inflation will ease to 8.1% from 10.2% in 2020 on lesser supply chain disruptions and gradual recovery in domestic demand. The Ghanaian cedi could still be under pressure as the effect of the pandemic lingers through 2021. The GH¢ could aver-age 5.95/$. The government will stay keen on investments to boost small scale mining and provide large mines with protection from illegal incur-sions, which will go a long way to support gold production.

 

Kenya

Kenya will maintain close ties with the US and UK. A Kenyan-US bilateral trade agreement is under consideration and the EIU says it could pose a risk to the EAC, unless all members signed up to the same template. Policy authorities will focus on boosting revenue post-Covid 19. The government will also intensify efforts towards its private sector led development. GDP growth is expected to rise more rapidly in 2021 (2.2%) from -0.5% in 2020. This will be driven by easing of lockdown restrictions, an accommodative monetary policy and a stimulative tax environment. Average inflation rate is expected to rise to 5.3% in 2021, up from 5.1% in 2020. The Kenyan shilling is expected to decline to an average of KSh111.9:US$1 from an estimated KSh106.3:US$1 in 2020. Imports will also outweigh exports, further widening the fiscal deficit.

 

Proshare Nigeria Pvt. Ltd.


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