The operational phase of the African Continental Free Trade Area (AfCFTA) marks a pivotal moment for the African Union’s vision of economic integration, representing the collective aspiration of African nations to foster trade, economic growth, and sustainable development across the continent. On July 7, 2019, at the 12th Extraordinary African Union Summit in Niamey, Niger, the AfCFTA entered its operational phase after years of negotiation and preparation. The launch, which had been highly anticipated, sets the stage for the continent’s largest trade bloc to transform Africa’s economic landscape, stimulate intra-African trade, and boost development.

The AfCFTA was first adopted and opened for signature on March 21, 2018, in Kigali, Rwanda, with the agreement entering into force on May 30, 2019, after reaching the required minimum of 22 ratifications from African Union member states. The official launch of the AfCFTA operational phase in Niamey was a historic moment that culminated in the formal announcement of key achievements, including the unveiling of the AfCFTA Secretariat’s future headquarters in Ghana.

Key Instruments of the AfCFTA

The operational phase was launched with the adoption of five key instruments designed to promote trade, eliminate barriers, and enhance economic collaboration between African countries. These tools form the backbone of the AfCFTA and are crucial for ensuring its success. They include:

1. Rules of Origin: The rules of origin regime governs the conditions under which a product or service can be traded duty-free across the continent. This ensures that products truly made in Africa are granted preferential treatment, promoting local manufacturing and industrialization. African governments and businesses are expected to benefit significantly as these rules ensure transparency and compliance with AfCFTA’s framework.
2. Tariff Concessions: One of the central goals of the AfCFTA is to liberalize 90% of tariffs on goods traded within Africa, with the remaining 10% being phased out over a period. For sensitive products, there is a 7% buffer with a longer phase-out period. This liberalization will reduce costs for businesses, making African products more competitive and promoting intra-African trade, which currently accounts for just 15-18% of the continent’s total trade volume.
3. Monitoring and Elimination of Non-Tariff Barriers (NTBs): Non-tariff barriers (NTBs) such as poor infrastructure, burdensome customs procedures, and technical barriers have long been a hindrance to trade in Africa. To address these challenges, AfCFTA has set up an online mechanism for monitoring, reporting, and eliminating NTBs, ensuring smooth trade flows between African countries. This is expected to dramatically reduce trade costs and delays, and in turn, increase trade efficiency across borders.
4. Pan-African Payment and Settlement System: Another critical component is the creation of a pan-African payment and settlement system to facilitate efficient, timely, and secure cross-border payments. This system allows payments in local currencies, reducing the dependency on hard currencies such as the US dollar or the Euro. The certainty of payments and reduced currency risk is expected to boost confidence in African trade markets, enabling small and medium-sized enterprises (SMEs) to thrive.
5. African Trade Observatory: The African Trade Observatory is a trade information portal aimed at addressing one of the most significant obstacles to intra-African trade: the lack of accurate and up-to-date information. This platform will provide real-time trade data, market opportunities, export and import statistics, and trade flows, allowing businesses and policymakers to make informed decisions. By leveraging data from AU member states, the Trade Observatory is poised to increase transparency and improve trade dynamics across the continent.

The Significance of AfCFTA

The AfCFTA is hailed as a monumental achievement in African diplomacy and a significant step toward realizing the African Union’s long-standing dream of economic integration. With a current population of 1.3 billion people and a combined GDP of approximately $3.4 trillion, the AfCFTA is the largest free trade area in the world since the establishment of the World Trade Organization (WTO). By 2050, Africa’s population is expected to reach 2.5 billion, amplifying the importance of a unified trade bloc to harness this demographic potential.

Key Benefits of AfCFTA:

1. Increased Intra-African Trade: Currently, intra-African trade accounts for a small proportion of the continent’s total trade volume, ranging between 15-18%. The AfCFTA aims to significantly boost this figure by removing tariffs and reducing trade barriers. This will create a single market that facilitates the free movement of goods, services, capital, and people, enabling businesses to scale and reach wider markets.
2. Stimulating Industrialization: One of the primary objectives of the AfCFTA is to encourage the development of regional value chains. This is expected to stimulate production in industries such as manufacturing, agro-processing, and technology. By reducing dependence on imports from outside the continent, African countries can focus on developing and utilizing their own resources, thereby creating jobs and reducing poverty.
3. Enhancing Competitiveness in Global Markets: The AfCFTA will strengthen the capacities of African businesses, especially SMEs, to access and supply global markets. By harmonizing regulations, streamlining customs processes, and improving infrastructure, African companies will be better positioned to compete internationally. This is particularly important in sectors like agriculture, textiles, and technology, where Africa has comparative advantages but has been constrained by fragmented markets.
4. Promoting Economic Diversification: By fostering intra-African trade, the AfCFTA will help countries diversify their economies and reduce reliance on traditional exports such as oil and minerals. Economic diversification is crucial for Africa’s resilience in the face of global economic shocks, as it ensures that countries are not overly dependent on a single commodity or sector for revenue.
5. Strengthening Africa’s Global Bargaining Power: The creation of a single, unified market will enhance Africa’s global bargaining power, both in terms of trade negotiations and economic diplomacy. By speaking with one voice, African countries can negotiate better trade deals with external partners such as the European Union, China, and the United States, ensuring that the continent’s interests are better represented on the global stage.

The Role of the AfCFTA Secretariat

The AfCFTA Secretariat, based in Accra, Ghana, plays a crucial role in overseeing the implementation of the trade agreement. Its primary responsibilities include developing the annual work program and budget, facilitating the negotiations of outstanding trade issues, and coordinating the efforts of member states to ensure the successful operation of the AfCFTA.

Until the Secretariat became fully operational, the African Union Commission served as the interim secretariat. With the transition to a fully functional Secretariat, it will now be responsible for implementing decisions made by African leaders and providing technical assistance to member states as they navigate the complexities of trade liberalization.

Challenges and Next Steps

While the AfCFTA presents immense opportunities, there are several challenges that African countries must address to fully realize its potential. These include:

1. Infrastructure Gaps: Africa’s infrastructure deficits, particularly in transport, energy, and telecommunications, pose a significant barrier to trade. The lack of efficient road networks, railways, and ports hinders the movement of goods and services across borders. The African Union has recognized this challenge, and there are efforts underway to develop continental infrastructure projects, such as the Programme for Infrastructure Development in Africa (PIDA).
2. Regulatory Harmonization: One of the key obstacles to intra-African trade has been the lack of harmonized regulations across countries. Differing standards, customs procedures, and trade regulations create unnecessary barriers for businesses. AfCFTA’s success will depend on the ability of member states to align their regulatory frameworks to facilitate seamless trade.
3. Addressing Protectionism: Some African countries have been slow to fully embrace the liberalization of their markets due to concerns about protecting local industries. While these concerns are valid, they must be balanced with the need for open markets and competition. The phased approach to tariff reductions under AfCFTA allows for the gradual integration of sensitive sectors, ensuring that economies have time to adjust to new market realities.
4. Building Trade Capacity: Many African countries lack the institutional and human capacity to fully engage in international trade. Investments in education, technology, and entrepreneurship are needed to ensure that African businesses, particularly SMEs, can compete in a liberalized market.

Conclusion

The launch of the operational phase of the African Continental Free Trade Area is a major milestone for Africa’s economic integration efforts. The AfCFTA promises to unlock vast economic potential by increasing trade, boosting industrialization, and creating jobs. While challenges remain, the political will demonstrated by African leaders and the framework established by the AfCFTA provides a solid foundation for transforming Africa’s economic future. As trading under AfCFTA begins, the continent’s ambition to create a prosperous and unified Africa is one step closer to being realized.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

16th September, 2024