The African Continental Free Trade Agreement

Africa’s great economic opportunity is tempered by infrastructure and regulatory risk

What is a trade agreement and why do we have them? These are 2 important questions to understand if we are to make sense of the African Continental Free Trade Agreement (AfCFTA — the world’s largest trade agreement).

The purpose behind a trade agreement is to reduce barriers and the cost to trade between member states, hopefully resulting in the businesses in these countries directing more of their trade between the member states than the rest of the world. The less friction there is, the more trade will happen. This makes sense in the same way that if we built a wall around Cape Town and forced people to pay a tax every time they moved something through the wall, the cost of trading with Cape Town would increase and the amount of business the rest of the country did with Cape Town would decrease.

The AfCFTA aims to take this a step further and remove most of the barriers to and reducing the cost of moving trade between African countries, resulting in more business being done within the continent. Should all of this work, the result should be more money being made inside Africa, with greater prosperity for the citizens of the continent.  Before this ambition can be converted into reality, the following big hurdles will have to be overcome for the agreement to generate any real benefit…

Infrastructure and duties need to be tackled

  1. We need to get the infrastructure improved so that goods can physically move with greater ease between African nations. At present the infrastructure is designed to only extract rock out of the mines and transport to the port nearby to be sent to one or other historical colonial master. The roads were never developed to encourage trade between African countries, so even trade between neighbouring nations can cost more than trade between Africa and Europe. This is a problem being gradually addressed, but the journey to improve infrastructure is long and challenging.
  2. Import / Export duties need to reduce between African states. This is a bigger challenge than presented in the media in large part because most African nations rely heavily on the collection of Customs duties to fund their revenue, more so than developed countries, including South Africa. If we can’t fix the revenue problem, the trade agreement will simply not provide any meaningful benefit to member states.

Tariff codes and rules of origin are key

  1. But even if we solve the revenue problem, we still need to reach agreement on which products will see their duties decrease and over what period. A typical tariff book (the book which sets the duty rates for each product) consists of over 5 000 tariff codes, many of which attract duty (South Africa is an exception here as most of our duties are at zero and will probably remain there for this agreement). The problem arises when we get to the tariff codes of products which do have local production in a given country. It will be very difficult to get them to simply drop those duties and of course, this is what matters in order for the agreement to be effective.
  2. Finally, we need to deal with rules of origin. These are the rules that ensure someone in Kenya doesn’t import a shirt from India, sew the buttons on in Kenya and then call it a Kenyan product. The rules of origin are complicated and need to be properly negotiated to ensure the agreement is not undermined.

According to Shereen Benjamin, Head of Treasury at Grobank, one important factor that hasn’t received much attention in the communication around AfCFTA is the role exchange controls will play within the new agreement given that the majority of countries on the African continent have some form of exchange control.

“The opportunities provided to the continent by this agreement are immense”, says Benjamin, “but one of the areas that will need significant focus from all signatories will be that of exchange controls. As recent as the midterm budget speech by Finance Minister Tito Mboweni, on the 30 October 2019, he had stated the following – in brief: The South African Reserve Bank will take stronger measures to mitigate illegitimate cross-border flows and tax evasion. The South African Reserve Bank will, again, propose a more transparent and risk based approach to cross-border flows, rules on active hedging.

The Pan-African Payment and Settlement System (PAPSS) is a platform, developed by Afreximbank and is aimed at domesticating intra-regional payments to facilitate the African continental free trade area. If implemented the benefits would be enormous as seen with SIRESS which was developed by SADC member states to settle regional transactions among banks.

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