AfCFTA's Three Trillion Dollar Opportunity
Report discussing landmark deal aiming to bring together 54 African countries with a combined GDP of over USD 3 trillion.
AfCFTA's Three Trillion Dollar Opportunity
Weighing Existing Barriers Against
Potential Economic Gains
AfCFTA: Good news for the world, as exciting new global trading zone takes shape
The African Continental Free Trade Area (AfCFTA) is a landmark deal that aims to bring together 54 African countries with a combined population of more than one billion people and a combined GDP of over USD 3 trillion.
The agreement, which is slated to take effect in June 2020, is intended to boost intraregional trade by reducing tariffs, thereby allowing companies to expand and enter new markets. Additionally, in the longer term, it will also offer foreign investors new gateways to reach the African market.
At a high level, AfCFTA is focused on stimulating growth, creating employment and diversifying economies across the African continent through the creation of a single African market for goods and services.
AfCFTA's ratification means there are now unprecedented opportunities for Africa to reap economic and social benefits on the back of the possible future improvements in transport infrastructure, reduction of red tape for cross-border dealings, renewed funding and improved liquidity.
It is also expected that AfCFTA will act as a strong impetus for African governments to overhaul regulations relating to tariffs, bilateral trade, cross-border initiatives as well as capital flows. Domestic policies will also play a crucial role in alleviating some of the current trade barriers that are not related to tariffs, such as corruption, lack of investment in infrastructure development (transport; utilities), or security threats.
The implementation of AfCFTA will provide the opportunity for African countries to diversify their economies, scale production capacity and widen the range of products made in Africa, in particular boosting the production of manufactured goods. Indeed, closer integration of neighboring economies is one potential avenue for creating scale and competitiveness through domestic market enlargement, thereby promoting development through greater efficiency. This relates to both intraregional trade and trade with non-African nations.
Taking a longer view, regional trade cooperation could potentially become a successful vehicle for connecting the region’s wealthier and poorer nations, promoting the growth of value chains and laying the foundations for increased international exports, especially given existing strong trade ties with the European Union (EU) and Asia.
The launch of AfCFTA is a positive step, not just for the African continent, but for world trade in general. While there are still numerous challenges to be resolved, we expect that, if the barriers to AfCFTA's effective implementation can be addressed, the next decade will see the growth of the African continental free trade area into one world’s most exciting new global trading zones.
Partner and Head of Global International Commercial & Trade Group
At a high level, AfCFTA is focused on the creation of a single African market for goods and services, accompanied by the free movement of people and capital.
It is hoped that the deal will help to stimulate intraregional trade flows, address Africa’s industrial deficit, and reduce the continent’s overreliance on primary goods exports. Yet, we expect that tangible benefits with a wider reach across the continent will likely only be realized from 2030 onwards due to a number of obstacles, including the ones enumerated below.
AfCFTA holds great promise for the continent, as Africa still ranks well behind other regions in the world when it comes to regional trade integration. Despite gains in recent years, only 17% of exports from African economies are destined for neighboring countries, compared to an intraregional trade share of 64% for the EU and 50% for the USMCA.
If fully implemented, AfCFTA could hold significant benefits for the continent as a whole. For example, lower tariffs being applied on imports of goods produced locally will increase the competitiveness of the continent’s producers and exporters; it will also incentivize new business development, improve prospects for increased local value, encourage the establishment of new intraregional value chains, and serve to lower inflation in the long term.
Nevertheless, AfCFTA's success faces serious obstacles, such as opposition from existing regional economic communities (RECs); resistance from countries with high tariffs; a lack of cohesive and reliable infrastructure; unreliable sources for water or electricity; uneven financial resources — such as access to credit — or liquidity shortages and the inability to repatriate profits; or corruption, as well as political instability —which poses security threats to business.
Trade integration has long been a goal for African countries
— at least at a regional level — as exemplified by the existing RECs that have so far been established with varying degrees of success. The deal is intended to resolve some of the challenges and overlapping policies of existing RECs.
This does not mean that these will be dissolved, but rather that trade policies will be gradually harmonized to align with AfCFTA objectives.
Finally, benefits and costs of the deal will not be distributed evenly across countries. Oxford Economics has mapped the distribution of 14 of the largest African countries based on metrics relevant to trade, creating a ‘maturity curve’. This distribution should be interpreted on a comparative basis, as it reflects trade-related prospects from AfCFTA implementation relative to other countries.
At one end of the spectrum, there is South Africa that has existing strong trade connections across the continent and a well-established manufacturing base to allow for further trade expansion. Close behind are Ghana and Côte d’Ivoire, countries that are currently less well integrated into regional trade, but which have open economies with good infrastructure and supportive business environments. At the other end, there are countries such as Algeria, Sudan or Angola, with more restricted manufacturing capacity, weaker trade ties, and higher security risks.
An Overview of AfCFTA's Trajectory
The Way Forward:
Africa's Economies on a Maturity Curve
The AfCFTA deal will be positive for all the continent's economies in the long-term. However, in the short-term, costs and benefits are likely to be unevenly distributed across countries and sectors.
African countries are heterogeneous, with economies that are at various levels of development. In this context, it is a complex undertaking to attempt evaluating trade-related prospects of one country in relation to its neighbors.
To navigate these complexities and categorize which economies in Africa are best placed to benefit from the trade deal, Oxford Economics has developed a methodology to examine 14 African countries in relation to each.
Understanding the AfCFTA maturity curve
African countries with more established conditions favorable to trade are likely to benefit from tariff reductions first.
Figure 1: AfCFTA maturity curve
The propensity scored on the horizontal axis is calculated based on the following factors:
- Trade impact of removing tariffs
- Attractiveness to foreign investments
- External trade propensity
- Recent trade performance
- Bilateral trade
- Manufacturing capacity to increase production
The vertical axis measures the countries’ scores on existing conditions that are favorable to trade:
There is a positive correlation between existing trade integration conditions and tariff reduction propensity, indicating that performance in each of the indicated areas tends to be mutually reinforcing.
For example, South Africa stands to maximize the benefit from AfCFTA towards future growth and further trade expansion, due to its existing strong connections across the continent and a well-established manufacturing base.
Yet, even smaller economies, such as those of Ghana and Cote d'Ivoire, stand to benefit from the agreement, even though they are currently less integrated. Due to existing favorable conditions such as having open economies, good infrastructure and supportive business environments, they could quickly ramp up their intracontinental exports.
At the other end of the scale, Algeria and Sudan have higher political and security risks. This limits their ability to trade and benefit from regional value chains in the near term. However, diminishing security threats, coupled with reformed policies, could boost their economies longer term. Economic diversification would allow for an increase in foreign direct investment (FDI), which would allow them to realize more gains from the AfCFTA.
The overall analysis reinforces that the African continent comprises a highly diverse set of markets, which in turn, has important implications for their potential gains from the AfCFTA. Economies will reap more benefits when they are more export-oriented, have a higher propensity for tariff reduction, or have more favorable business environments.
AfCFTA represents an exciting promise for inbound investment, even though it will take time to see the agreement fully implemented, and it will be even longer before the continent can see the full benefits of the deal. This is because so far, Africa has proven to be a difficult landscape for investors to navigate, due to geopolitical and economic uncertainty, as well as differing country- and region-specific governance, compliance and regulatory challenges.
As AfCFTA will create a single African market, this will simplify the investment environment. However, there are three factors crucial to the AfCFTA implementation success: aligning and ensuring rule of law among the 54 African countries, getting collaboration right, and solving the problem of reliable infrastructure and energy.
Morne van der Merwe
Partner, South Africa
Mapping Africa's Current Trade Patterns
African trade: Where is it now?
Where can it be in the future?
Increased regional trade integration can provide momentum for Africa’s industrialization and economic development.
Opportunities for trade exist in Africa, in both goods and services. However, the effect of AfCFTA on these two categories will vary. Due to the continent's vast size, as well as the uneven pace of economic and infrastructure development in general, regional integration for trade in goods will have to overcome many obstacles. In contrast, Africa's trade in services can possibly shape a positive and faster outlook for the continent's trade takeoff.
Share of goods exports destined for other countries in the region
Figure 2: Comparison of AfCFTA with other trade agreements / Source: IMF Direction of Trade Statistics
Intraregional trade in goods needs an uplift
Although intraregional trade flows in Africa have risen in recent years, from 10% of total trade in 2000 to 17% in 2018, AfCFTA’s intraregional trade share is still below that of the European Union (EU, 64%) and that of the United States Mexico Canada (USCMCA, 50%).
Currently, African nations tend to trade more with Europe (35%) and Asia (31%) than with neighboring markets. In contrast, less than a fifth of African countries’ exports are headed to other countries on the continent (Figure 3).
Figure 3: Africa's merchandise export share by destination (2018) / Source: Oxford Economics/IMF Direction of Trade Statistics
These intracontinental trade shortcomings underscore the extent of lost revenue and development opportunities for African countries. They also highlight the benefits that African countries could reap by working together towards a successful implementation of AfCFTA.
Yet, the heterogeneous nature of the continent, its sheer size, different levels of economic development between countries and the varying depths of regional integration, all make it difficult to make precise forecasts as to the success of the deal.
For example, Figure 4 ranks the region’s 20 largest economies in terms of the share of exports destined for other economies on the continent. Some economies, such as Uganda and Zimbabwe, buck the overall trend of the continent, trading more with their neighbors than other African nations do.
Figure 4: Shares of exports to Africa's largest economies / Source: Oxford Economics/IMF Direction of Trade Statistics
Yet, their economies pale in contrast to those of Egypt, Nigeria and South Africa, whose economies together represent over half of the continent’s GDP. Egypt and Nigeria, for instance, have very limited trade relationships with their African peers. They are focused on exports outside the continent because they are major fuel exporters.
Generating growth in trade in goods will depend on changes in economic policy, production and infrastructure. For AfCFTA to succeed fully, more countries need to diversify their production of goods to better match the import needs of their continental neighbors.
One reason why African nations do not trade more with each other is a misalignment between what various African countries need and what is produced on the continent. For example, over three quarters of African exports to the rest of the world are heavily focused on natural resources, primarily raw materials (Figure 5).
Figure 5 Africa's exports to the rest of the world (2018) / Source: Oxford Economics/UN Comrade
In contrast, a look at African imports from outside the continent reveals that manufacturing products, industrial machinery and transport equipment constitute over 50% of Africa's combined needs.
Currently, Africa's external imports account for more than half of the total volume of imports, with the most important suppliers being Europe (35%), China (16%) and the rest of Asia, including India (14%). By contrast imports from other parts of Africa account for only 16% of total merchandise imports (Figure 7).
Figure 6: Africa's merchandise import share by origin (2018) / Source: Oxford Economics/IMF Direction of Trade Statistics
Figure 7: Africa's imports from the rest of the world (2018) / Source: Oxford Economics/UN Comrade
Taking a big picture view, manufacturing GDP represents on average only 10% of GDP in Africa. This means that Africa is compensating for limited production capabilities through foreign imports.
Yet, this manufacturing deficit could be eventually satisfied within the continent and enabled by AfCFTA. At the moment, of the 17% of total trade made up of intraregional African trade flows, manufactured products exported to African countries by their peers — primarily industrial machinery and motor vehicles — represent only a third.
But a significant share of these intraregional exports of manufactured goods are re-exports of imported manufactured products from the rest of the world.
This misalignment signals missed opportunities to reduce foreign imports from outside Africa and increase trade flows within the continent. To counteract this, the long-term solution needs to be accelerating industrialization and establishing strong cross-border supply chains to leverage different countries’ comparative advantages and capture more value-added activities within the continent.
Trade in services harbors great potential
Africa's trade in services potential represents a way to overcome current production and industrialization limitations. Debates on trade liberalization are often focused on trade in goods, but the liberalization of trade in services can be equally important for the welfare of African countries. With improved infrastructure and human capital development, African nations can hopefully leverage regional partnerships to reduce their reliance on imports from non-African nations.
Currently, services traded between African countries are largely contained to the transport sector. Other notable mentions include energy, financial services, infrastructure development and tourism. These occur mainly between African countries and are largely contained between the continent's main economic hubs: South Africa, Morocco, Egypt and Nigeria. In contrast, trade in services beyond Africa is oriented towards the information and communications technology and financial sectors.
The value of liberalizing trade in services
With global attention focused on developing the tertiary sector, Africa's performance in trade in services can benefit from new opportunities. Because a service can either be traded directly or can serve as an input into the production process of a product, the liberalization of trade in services is not as hindered by current infrastructural or logistic deficits. In this way, Africa’s service trade sector can benefit from bypassing the industrialization phase.
This is especially promising, considering the services sector currently accounts for over half of gross value added. The increasing importance of services across the continent also suggests Africa could accelerate this growth in the future through AfCFTA. In order to fully realize such benefits, there needs to be a better understanding among policymakers of the important role that services can play in regional value chains. This will allow the continent to address the structural constraints on growth in these sectors.
Engaging the rest of the world
AfCFTA is an initiative primarily aimed at boosting sales of goods manufactured inside of Africa in markets on the continent itself. Yet the longer-term AfCFTA benefits will have a ripple effect that will also lead to increased foreign investment on the continent.
In the short term, the agreement’s relevance to businesses outside of Africa will mainly stem from the possibility that some global organizations may opt to establish manufacturing bases on the continent to take advantage of lower tariffs and establish cross-border value-chain activities that leverage the comparative advantages of different African nations. Global companies will benefit from potential increased opportunities for scale and competitiveness achieved as an effect of the domestic market enlargement enabled by the closer integration of neighbouring economies.
FDI and advanced knowledge will help address Africa’s industrial deficit and reduce the continent’s reliance on primary goods exports. Greater levels of FDI could also help close the finance gap and lower the cost of capital in Africa. And, of course, it will give multinational companies access to what is projected to be the fastest-growing consumer market in the world.
Given the dynamics of trade in Africa and the promises of AfCFTA, potentially the best bets will be made by companies that invest in countries where it is easy to do business, where wages are low, and from which the transport of goods to other African markets is easy. African governments know this, and are accordingly accelerating their initiatives to improve the ease of doing business (a number of governments have explicit targets for moving up the World Bank’s Doing Business rankings), and are making work of the transport infrastructure projects outlined elsewhere in this report.
In this context Ethiopia is an especially promising investment destination: the government is aggressively boosting power generation capacity and transport links to neighbouring countries (and, via, Djibouti, to the world) while undertaking an ambitious policy reform project to make the country an attractive investment destination.
Rwanda is an inviting operating base for companies thanks to regulations that make it easy and quick to set up a company, and it neighbours the massive, and massively underserved, market of the DRC.
Some less exotic places like South Africa and Morocco will continue to attract FDI as they have long been competitive exporters of goods.
If these benefits are realized, they will ultimately contribute to increased regional economic growth, increased job creation and broader economic development in general.
Examining Trade Barriers: Existing Regional Trade Agreements and Tariffs
How do existing regional trade agreements, tariffs and other barriers impact trade?
A patchwork of overlapping regional economic communities — each with its own structure and trade rules — could either help or hinder trade in the African continent.
AfCFTA's success depends on the continent's ability to overcome several challenges that relate to complex regional trade agreements, tariffs and limitations in infrastructure, resources and political climate. For some time, regional integration has been a core element of the trade strategies pursued by countries across Africa through regional economic communities (RECs).
Eight RECs form eight pillars of the African Economic Community (AEC), which was established under the Abuja Treaty of 1991. The AEC manages continent-wide policies aimed at increased regional integration and must now help the RECs coordinate to provide greater clarity on policy to boost trade.
Among other things, RECs are existing trade agreements that involve sub-groups of regional economies within Africa, rather than encompassing the continent as a whole. As Figure 8 shows, most countries are members of at least two official RECs.
Yet, RECs have complex (and often conflicting) policies and they have achieved very different levels of integration so far. For this reason, regional trade integration has remained an ideal — but unachievable — goal to date. Nevertheless, functional trade agreements have encouraged effective trade between member countries.
Figure 8: Member countries of African regional economic communities
For example, based on the import/export in Figure 8, Côte d’Ivoire, Kenya, Senegal and South Africa have become regional trading hubs by leveraging alliances established through their RECs. Hence, the way forward for African economies to further buttress intraregional trade may be to draw on lessons learned from functional, successful RECs.
Africa is immensely diverse: a huge land mass, 54 countries, many different languages, 1, 3 billion people, numerous, different trade hubs and economic communities. It might be a challenge to have one agreement across the whole continent, but RECs offer the promise that -- in time -- it may be possible. RECs constitute the proof that there exists the desire for countries to cooperate towards regional integration in Africa. SACU, for instance, is the oldest customs union in the world. They offer a precedent that, at least, paves the way for countries to work together towards implementing AfCFTA. Yet, the immediate need to address across the continent is infrastructure. Realistically, without addressing infrastructure first, AfCFTA's implementation will be difficult to put in practice.
Partner, South Africa
Source: REC webpages
Most-favored nation tariffs are
affecting trade in Africa
While African nations may trade within their respective RECs under preferential terms, trade beyond these regional agreements is generally subject to most-favored nation (MFN) tariffs. These high costs act as a disincentive to trade integration. The World Trade Organization (WTO) reports that on average, MFN tariffs across various RECs range from 7.7% (SACU) to 18% (CEMAC). Currently, agricultural products, particularly in North and East Africa, have the highest tariffs (Figure 9).
Figure 9: Average tariff MFN applied to RECs (%) / Sources: WTO and NKC Research
RECs have complex and often conflicting policies and have achieved very different levels of integration to-date. Despite these challenges, however, some RECs have successfully encouraged effective trade between member countries. For example, Côte d’Ivoire, Kenya, Senegal and South Africa have become regional trading hubs, having leveraged alliances they established through their RECs. One of the ways forward for African economies to further implement effective intraregional trade may be to draw on the lessons learned from these successful RECs
Uneven MFN rates, uneven effects
A general trend analysis shows that the lower the MFN rate, the greater the trade integration with the rest of the continent. For example, although a member of PAFTA and COMESA, Sudan has the highest overall MFN rate (Figure 10). This and other circumstances have resulted in very limited trade integration.
Countries belonging to the CEMAC tend to have higher MFN rates, mostly notably Central African Republic (18%), Gabon (17.7%) and Chad (17.9%). These countries have reduced propensity for trade. Conversely, Mauritius has a low MFN tariff (0.8%), which increases propensity for trade. Additionally, being part of COMESA and SADC, Mauritius benefits from its FTAs.
Figure 10: MFN Average tariff by country / Source: WTO
Examining Trade Barriers: Infrastructure, Regulatory and Geopolitical Challenges
A view of infrastructure, regulatory and geopolitical challenges
Tariff reductions may have a limited impact on trade in the face of logistical bottlenecks due to limited infrastructure, or when compared with regulatory and political challenges.
Some of the most significant obstacles to AfCFTA are inadequate infrastructure, poor trade logistics, onerous regulatory requirements and complex customs procedures. These can be even more detrimental to trade expansion than tariff measures, which underscores the need for African governments to address these barriers as well.
Nevertheless, finding effective solutions for these obstacles will likely take many years given limited financial capacity in many countries, high risks to private financing of infrastructure, political hurdles, administration shortfalls and lack of resources.
Challenges for developing infrastructure
A focus on developing infrastructure will greatly help to mitigate the internal and external forces that restrict trade growth in the continent. Over the past decade, Africa has made progress in overcoming the infrastructure financing shortfall, which The African Development Bank (AfDB) estimates to be between USD 68 billion and USD 108 billion (AfDB 2018, African Economic Outlook, Chapter 3).
As AfCFTA enters into force, this shortfall has become an increasingly important topic among African leaders. There is a strong consensus that the infrastructure impediment must be addressed so as not to restrict increased trade integration. This includes reducing barriers to trade by boosting transport and utilities infrastructure.
With an area of 30.4 million km2, Africa's size makes it challenging to build reliable transport networks. Also, the continent's major rivers (Congo, Niger and Nile) are unsuited as transport channels due to the existence of cataracts and deltas.
Figure 11: Transport Infrastructure
Africa's transport infrastructure is behind the global average. As seen in Figure 11, countries in North Africa such as Morocco, Egypt, Tunisia and Algeria generally boast more sophisticated transport infrastructure.
However, countries that are landlocked, and therefore lack easy access to ports, are at a disadvantage because their markets are less accessible.
Despite these challenges, there are a number of large-scale projects in the pipeline which aim to mitigate the situation. These projects include:
- The North-South Multimodal Corridor of roads and railways on the multi-modal African Regional Transport Infrastructure Network (ARTIN) corridor that runs through South Africa, Botswana, Zimbabwe, Zambia, Malawi and the DRC.
- The Central Corridor that will modernize the ARTIN corridor in Eastern Africa, connecting Burundi, the DRC, Rwanda, Tanzania and Uganda.
- The Abidjan-Lagos Corridor Highway project on a six-lane dual highway that is being built from Lagos to Abidjan to align with potential new economic zones.
- The Trans-Maghreb Highway that aims to improve the movement of services and goods across North Africa.
Utility infrastructure is essential
Currently, African countries are lagging behind the global average in terms of utility infrastructure. While some countries like Egypt, Morocco, Tunisia and Algeria are just reaching the world average (Figure 12), the continent will need to redouble efforts to ensure that an adequate supply of water and electricity is available.
Within the AfCFTA context, reliable utility infrastructure is vital for businesses to be able to scale up production for regional export or to develop manufacturing bases.
Additional investments in utility infrastructure will incentivize foreign companies to set up production facilities on the continent.
Figure 12: Utility Infrastructure / Source: WEF CGI Scores (100 = best)
Investment in Africa has always been a story of infrastructure that has not changed for the past 50 years. As the African Development Bank estimates, this has meant a cumulative cost of 25% in growth for the continent. Yet, today AfCFTA offers the opportunity to shape Africa's future in a different way. The deal can provide a structure where various trading partners can interact with all 54 African nations to create infrastructure and unlock growth. The top such partner and investor is China through its Belt and Road Initiative (BRI) focus, but the opportunities for investment and collaboration extends far beyond China to other Asian nations, such as Japan, or the US. China itself has a new focus for BRI: to increase international participation in the initiative and encourage a multilateral approach that is more inclusive, sustainable and transparent. This is all great news for Africa.
Wildu du Plessis
Partner, South Africa
Is corruption surmountable?
Corruption at trade borders is a major hurdle that adds substantial costs to transported goods, which the final buyer has to bear. For example, customs officials will extort bribes, or hold up cargoes from individuals who refuse to pay. In addition, the necessity for many transporters of having to cross more than one border exacerbates the situation.
Government policies and political climates will set the AfCFTA course
African governments play a crucial role in enforcing policies to increase financial capacity, lower risks to private financing and to regulate administrative processes. Domestic and foreign trade will benefit from reforms to regulation, political climate and trade-specific policies.
Specifically, trade needs improved access to private sector credit and developing human capital. This includes making information on foreign markets more easily accessible to domestic stakeholders and relaxing the restrictions on immigration, including those on residency work permits. This means that the flow of expertise and human capital will be accelerated, facilitating the liberalization of trade.
A longer-term consideration of Africa's multiple currencies and exchange rate regimes is also crucial. The continent should look to address exchange rate volatility which concerns liquidity shortages and the inability to repatriate profits. These challenges currently act as disincentives to both intraregional trade and trade with non-African countries.
Figure 13 Corruption perception ranking (2018) / Source: Transparency International (1 = most clean; 180 = most corrupt)
Focus on liberalizing service trade
Easing restrictions on foreign government policy throughout the continent will increase the flow of service trade between countries. For example, allowing more access to the information and telecommunications systems would encourage companies to enter a new market.
Lowering the cost of access and usage of communication and fortifying network security will also encourage businesses to set up or ramp up operations in the continent. Currently, over 22% of African countries have higher data costs for 1GB of mobile data than the average for the rest of the world, with Zimbabwe topping the continent at USD $75 per 1GB data (Figure 13). The high costs and limited availability or reliability of data connectivity pose a high barrier to players entering the market and increases the risk of unreliability and lack of efficiency for those in the market.
Figure 14: Cost of 1 GB of Mobile Data in Africa (2018) / Source: Cable
Revamping restrictive policies and competition laws
Greatly reducing or eradicating restrictive policies for industries like telecommunications can make a key difference to softening the barriers to entry. Lifting the restrictions for the number of suppliers in the market will also open the continent to more trade opportunities by increasing competitiveness. In some cases, removing price controls or protectionist laws that put cap on the number of foreign-service providers will help to open up the economy.
In recent years, several key players in the continent, including Nigeria and Angola, have begun adopting modern competition laws. With the AfCFTA, more countries are expected to follow suit. As technical capacity increases, such efforts to liberalize trade in services will occur over time.
Figure 15: Policy-related barriers to trade / Source: WEF Global Competitiveness Index (Score 0 = worst, 100 = best)
International reputation and geopolitical stability are imperative factors for the success of AfCFTA
Managing conflict in the continent remains a major concern in Africa. Closer political and economic cooperation between countries will help to unite the continent and reduce the risk of security threats.
Currently, a number of significant, ongoing conflicts act as barriers to trade integration. Figure 14 shows some of the current and potential conflict hotspots across the continent. The stars mark the approximate geographical areas of conflict.
Many of these are cross-border conflicts, such as those seen in West Africa (Nigeria, Cameroon, Chad and Niger) where Boko Haram's presence is strong. There is also a struggle for control over the oil producing area at the shared border of Sudan, Libya and Chad. The power struggle for resources signals an underlying desire for economic power and growth in Africa.
Other tensions that have impaired trade lately and will do so in the near future are those between Uganda and Rwanda in 2019, instability in the eastern DRC and Burundi, and the rising extremist activity in Mali (and other countries bordering the Sahel).
These circumstances have a negative impact on trade and the flow of people and heighten the risk for businesses, alienating investments.
Figure 16: Current conflict areas in Africa
Standing united to face the world
As parts of the world appear to fragment or turn inwards, AfCFTA provides a new opportunity for African nations to work together. While uniting to launch the operational phase of the agreement, the continent should also focus on forging a new image to present to the world.
Inconsistent practices and public perception on corruption have affected the continent's reputation in the past. Especially now, eradicating extortion and clamping down on bribery will smooth out the process for businesses to function in Africa. It will also reduce the overall cost of doing business in Africa by removing these unsanctioned payments at multiple border posts, which are typically borne by the final buyer.
Greater political and social stability will also increase the overall standard of living and reduce investment risks in the continent. As such, eradicating corrupt practices and streamlining government policies and regulation will go a long way in affecting trade integration in both direct and indirect ways.
AfCFTA aims to create the world's largest free trade zone by population and provide much-needed impetus to economic growth and job creation across the continent. Realizing key goals would help members to establish new cross-border value chains, encourage inward FDI inflows and insulate African economies from global shocks. In the long term, trade liberalization will also allow consumers to access a greater variety of products at reduced prices.
Although AfCFTA represents a real opportunity for the continent, benefits and costs will vary across countries, especially in the short to mid-term. Lowering tariffs will help but there are key areas to be addressed to facilitate the full benefits to trade.
There is now a greater momentum for managing current infrastructure constraints, bureaucracy, corruption and security threats. The tangible benefits of this landmark trade deal will be expected from 2030 onwards.
Understanding the significance of the ‘maturity curve’ presented in this report will allow businesses to strategize, based on countries best positioned to benefit sooner, rather than later, from the AfCFTA. The curve can help investors to understand the balance between potential gains and hurdles to trade in these markets, as well as helping policymakers understand where reform efforts should be focused to ensure the gains from the AfCFTA are distributed more equally.
On the whole, the results demonstrate that the greater the intraregional trade integration, the more beneficial the AfCFTA will be. Economies with established manufacturing bases and strong existing trade ties within Africa stand to gain the most.