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Explainer – 10 Potential Benefits of AfCFTA

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Explainer – 10 Potential Benefits of AfCFTA

On Sunday, President Muhammadu Buhari signed the African Continental Free Trade Area (AfCFTA) agreement.

The signing of the agreement brought to an end several months of wait by stakeholders in the Nigerian economy.

With a GDP of about $405 billion, Nigeria is considered the largest economy in Africa. It is followed by Egypt ($332 billion) and South Africa ($295 billion). With a population of about 180 million, the nation is also Africa’s largest market.

Analysts are however divided on the impact of the agreement on the economy and what Nigeria’s delayed signing would translate to.

PREMIUM TIMES highlights ten things to know about the agreement:

1. According to a document compiled by the African Trade Policy Centre (ATPC) of the Economic Commission for Africa (ECA) in association with the African Union Commission, the African Continental Free Trade Area (AfCFTA) will cover a market of 1.2 billion people and a gross domestic product (GDP) of $2.5 trillion, across all 55 member States of the African Union.

2. Data has shown that over 75 per cent of Africa’s exports outside the continent were extractives from 2012 to 2014, while less than 40 per cent of intra-African trade were extractives in the same period. The volatility of the extractive market makes the development disturbing. Africa’s industrial exports are therefore expected to benefit most from AfCFTA, with projections that it will help diversify Africa’s trade and encourage a move away from extractive commodities, such as oil and minerals, which have traditionally accounted for most of Africa’s exports. This will, in turn, result in a more balanced and sustainable export base for countries on the continent.

3. In terms of numbers of participating countries, AfCFTA will be the world’s largest free trade area since the formation of the World Trade Organization. Of course, it is also a highly dynamic market. The population of Africa is projected to reach 2.5 billion by 2050, at which point it will comprise 26 per cent of what is projected to be the world’s working age population, with an economy that is estimated to grow twice as rapidly as that of the developed world.

4. With about 80 per cent of the region’s businesses tied to Small and Medium Scale Enterprises, they are key to growth across Africa. Studies have shown that these businesses usually struggle to penetrate more advanced overseas markets, but are well positioned to tap into regional export destinations and can use regional markets as stepping stones for expanding into overseas markets at a later point, via AfCFTA.

5. Africa’s growing youth population and absence of opportunities are key concerns troubling development experts on the continent. AfCFTA is projected to produce jobs for this bulging youth population. This is possible because extractive exports, on which Africa’s trade is currently based, are less labour-intensive than manufactured products and agricultural goods that will benefit most from AfCFTA. With the promotion of more labour-intensive trade, AfCFTA will generate more employment and create opportunities.

6. The supply chain across the continent is one area AfCFTA is expected to impact, by making it easier for SMEs to connect to larger regional companies, who then export within and outside the continent. This will help grow the SMEs and create a bigger market for larger companies.

7. For women across the continent, estimated to account for around 70 per cent of informal crossborder trade in Africa, the agreement will facilitate movement and trade. With reduced tariffs, AfCFTA will make it more affordable for informal traders to operate through formal channels, which offer more protection from harassment, robbery and confiscation of goods as seen today. It is also projceted to provide simplified clearing procedure alongside reduced import duties for women traders.

8. Businesses around the continent currently face higher tariffs when they export within Africa than when they export outside it. The average is put at 6.1 per cent. Of course, AfCFTA is expected to progressively eliminate tariffs on intra-African trade, making it easier for African businesses to trade within the continent and tap from the huge potential of a larger African market.

9. While signing the agreement on Sunday, President Muhammadu Buhari spoke of “fair trade” in relation to free trade. “Nigeria wishes to emphasise that free trade must also be fair trade,” he said. This resonates well with countries nursing the fear of “unfair” trading practices that could hurt their economies. While African countries that are relatively more industrialized are well placed to take advantage of the opportunities for manufactured goods, less-industrialized countries can benefit from linking into regional value chains. These value chains involve larger industries sourcing their supplies from smaller industries across borders, made easier by reduced trade costs and bigger investment.

10. Development is a big challenge across the African continent. AfCFTA, a flagship project of Agenda 2063 of the African Union, is expected to help accelerate Africa’s own development vision. It was approved by the African Union Summit as an urgent initiative whose immediate implementation would provide quick wins, impact on socioeconomic development and enhance confidence and the commitment of Africans as the owners and drivers of Agenda 2063. The effect, as projected, will contribute to the achievement of the United Nations 2030 Agenda, especially the Sustainable Development Goals, SDGs.

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