African Continental Free Trade Area Opportunities and Challenges

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Published on: wapdat25.blogspot.com

The African Continental Free Trade Area (AfCFTA) is a historic project to promote economic integration across the African continent's 55 countries. Established in 2021, it is the largest free trade area in the world in terms of membership, comprising more than 1.3 billion people and a GDP of more than $3.4 trillion. 

 The Opportunities of AfCFTA

The agreement aims to gradually phasing out tariffs on 90% of goods and open up services. It has bold aims of increasing intra-African commerce, stimulating industrialization and reducing poverty, and improving Africa's competitiveness on the international stage. 

 Key Opportunities

Exports, expansion of markets and economic growth.

AfCFTA creates a single African market that will boost intra-African trade by over 50% by 2035, contributing to the creation of about $450 billion in income. The elimination of trade barriers facilitates the expansion of business and the realization of economies of scale. 

Industrialization and Diversification

AfCFTA will stimulate value chains in the region,  beyond primary commodities exports, by increasing the market for intermediate goods. Strong growth areas include automobile assembly, pharmaceutical, textiles, agro-processing and manufacturing. 

Foreign Direct Investment

The investment protocols are harmonised in the agreement and this will increase the FDI attractiveness of Africa. Research suggests that if fully implemented, it will increase intra-Africa FDI by 68% and external investment by 122%. 

Poverty Reduction and Job Creation

By 2035, it is estimated that AfCFTA will lift 30 million Africans out of poverty and boost the incomes of 68 million others by 2035. There will be improvements in wages for both skilled and unskilled workers, though women projected slightly higher wages. 

Sectoral Growth Projections

The volume of intra-African trade is expected to grow considerably in 2045 by 49.1% in value of agri-food trade, 37.9% in services, 35.7% in industries and 19.4% in energy and mining. 

 Major Challenges

Non-Tariff Barriers

Many countries, despite tariff reductions, continue to have high NTB levels including import quotas, excessive documentation, licensing requirements and inefficient customs processes. These have an impact on the ease of doing business and full market integration. 

Infrastructure Deficiencies

Underdeveloped transportation networks in Africa are expensive due to poor roads, rail systems and ports. The estimated cost of closing this infrastructure gap is from $130 billion to $170 billion per year. 

Only 40% of all the food in Africa makes it to the table, which is a major problem given the need for infrastructure development. 

Payment Barriers and Currency Fragmentation,

The continent of Africa has more than 40 currencies in use, making a cross-border transaction difficult. Relying on foreign currencies and currency fluctuations raise transaction costs and financial risks. AfCFTA has provided for the creation of the Pan-African Payment and Settlement System (PAPSS), which will help solve that problem, but the full currency harmonisation is not yet in sight. 

The political will and gaps in implementation remain a concern.

Certain member states have not ratified, harmonised and domesticated AfCFTA protocols. The political instabilities, protectionist attitudes and lack of awareness among small and medium business enterprises limit effective participation. 

REC Overlapping.

AfCFTA faces governance challenges and difficulties in harmonizing regulations because of the presence of eight RECs with different trade agreements. 

The Smallholder Farmers' Role

Two-thirds of Africa's workforce, more than 70% of the food eaten on the continent and Africa's 33 million smallholder farmers. But their livelihoods are in danger due to the rise of industrial agriculture and the compliance requirements. By 2030, the African agriculture market will rise from $280 billion to $1 trillion, but with policies that are not inclusive, only a few producers will reap the benefits. 

Costs to Mobility and Business Costs.

In Africa, a number of obstacles are present such as high visa fees and political risk. One CEO said he paid N450,000 to get an Algerian visa, which is N78,000 at the embassy, showing the need of having an AU passport to promote true integration in Africa. 

 Policy Recommendations

To unlock AfCFTA's full benefits, African governments should:

- Expedient implementation of all protocols, particularly with regard to investment, competition, e-commerce and intellectual property rights

- Improve the facilitation of trade, customs and remove non-tariff barriers quickly

- Put significant investment into infrastructure to boost transport, logistics and digital connections

- Build awareness and capacity of businesses particularly SMEs

- Increase cooperation on the harmonisation of monetary systems by continuing the development of PAPSS

Formulate policies to safeguard smallholder farmers and to promote inclusive growth. 

The Bottom Line

AfCFTA is a game changing moment in Africa's economic destiny. However, the benefits of this potential can only be realised if it can be realised on the ground and overcome the many challenges of infrastructure, policy alignment, trade facilitation and political commitment. The successful implementation will not only bring about integration of the African economies, but also radically transform Africa's role in the global economy, and the lives of African people. 

What do you think of the AfCFTA? Share your thoughts on the comments below!

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