Africa presents a wealth of opportunities for its citizens and for those interested in doing business in the continent. In particular, the African Continental Free Trade Agreement (AfCFTA) will play a significant role in fostering trade and investment amongst African member nations.
THE POPULARITY OF FREE TRADES GLOBALLY
Free Trade Agreements Such As The Former NAFTA (now USMCA) has made headlines over the past few years IMAGE SOURCE GETTY
To understand the context of not just AfCFTA but free trade agreements in general is important. Why is this significant?
Globally, free trade agreements have played a strong role in the international trade and investment ecosystem, particularly the rise of globalisation in its current form. Free Trade Agreements are plentiful and there are those who have an economic and political union (i.e. the European Union (EU)) or those with a regional intergovernmental political and economic union (i.e. the Gulf Cooperation Council (GCC) consisting of: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)).
Despite the challenges in the global economy and increase in nationalism (i.e. President Donald Trump), the President-elect Joe Biden most likely will begin a new chapter in international collaboration and partnerships. Despite an environment of increased nationalism, free trade agreements in the past few years were signed and/or implemented, including the likes of the Comprehensive Economic and Trade Agreement between Canada and the EU – commonly known by its acronym CETA – as well as The Regional Comprehensive Economic Partnership (RCEP) which are 15 countries (China, Australia, Japan, New Zealand and South Korea alongside members of the 10-nation Association of Southeast Asian Nations (Asean) that include the Philippines, Indonesia, Malaysia, and Thailand.
There is of course the renegotiated former North American Free Trade Agreement (NAFTA) between the United States, Canada and Mexico to its current form, the United States Mexico Canada Agreement (USMCA). And of course the United Kingdom, whom in a Brexit world has or will sign agreements with Japan, Canada – to name a few. With respect to Africa, the UK recently signed one with Kenya last November.
THE VALUE AfCFTA CAN BRING TO AFRICAN MEMBER STATES
AfCFTA will begin January 2021 and one of its forecasted benefits is it will lift 30 million Africans out of extreme poverty IMAGE SOURCE GETTY
Africa is a vast continent with different languages and cultures, even within a country itself the diversity is tremendous. According to United Nations estimates, the continent is home to over 1.3 billion people. From the islands of Mauritius to Western Africa to Northern Africa such as Tunisia and Egypt to the southern tipping point of Africa, South Africa, the continent has various levels of their own economic development. Therefore, a free trade agreement such as AfCFTA can help foster and promote further economic trade and investment between member African nations.
According to the African Union, trading under the AfCFTA that was originally planned for the first of July 2020 got delayed because of the COVID-19 pandemic; it will now begin in January 2021. How can this benefit the member African countries? From a high-level overview, the World Bank highlights that the 55 member nations with their populations of over 1.3 billion people would have a combined gross domestic product (GDP) $3.4 trillion.
The World Bank report, The African Continental Free Trade Area: Economic and Distributional Effects, further highlights other benefits. First, extreme poverty would decrease across the continent as a result of AfCFTA, where it is estimated that 30 million Africans would be lifted out of extreme poverty; it would boost the incomes of almost 68 million other Africans living less than $5.50 a day. In terms of being lifted from extreme poverty, West Africa potentially would see the biggest decline of 12 million Africans (over a third of the total for all of Africa), following Central Africa with 9.3 million Africans then Eastern Africa at 4.8 million and Southern Africa at 3.9 million.
A key aim for free trade agreements globally is the reduction of bureaucracy to help facilitate trade between member countries and this applies as well to AfCFTA. The same report also highlights that of the estimated $450 billion in income gains from AfCFTA by 2035 (this would be a gain of 7 per cent), $292 billion would come from stronger trade facilitation. As mentioned, it would be a result of reduced red tape with streamlined and simplified customs.
Other benefits include that AfCFTA will increase Africa’s exports by $560 billion, which would come mostly from manufacturing. In addition, it is predicted it will spur larger wage gains for women (at 10.5 per cent) than for men (at 9.9 per cent). Also, it is estimated that AfCFTA will boost wages for both skilled and unskilled workers—10.3 per cent for unskilled workers, and 9.8 per cent for skilled workers.
HOW CAN HIGH-TECH INDUSTRIES (FINTECH AND WIDER TECH) BENEFIT?
AfCFTA has the opportunity to help accelerate the fintech sector in Africa IMAGE SOURCE GETTY
As highlighted previously with the predicted benefits of AfCFTA and showing that Africa, similar to the rest of the world with their own economic and political free trade agreements, the question amongst many is how can highly-skilled industries such as fintech, wider tech and even the financial services industry benefit from AfCFTA? It remains to be seen how that will come into play, given that the launch date of the free trade agreement is in January 2021. Nevertheless, it provides the AfCFTA Secretariat, and the member states the following basic considerations:
Fostering Innovation and Talent – The continent overall has a high proportion of youths and historically, particularly in highly skilled professions, often immigrated abroad to countries such as the United States or the UK or France. Sectors like fintech and wider tech need aspiring entrepreneurs and scientists to help continue bringing home-grown products and solutions that are made and developed in the African continent. The continent is home to some of the brightest fintech solutions, for instance that is known on a global scale like MPesa and Paystack and various smaller yet of equal innovative products. The implemented AfCFTA should continue and morph to help foster the talent and innovation with member states.
Harmonising legislation – fintech and tech in general often brings with it certain requirements where it needs a licence and other means to operate. For an integrated AfCFTA, potentially fintech could benefit if regulations where harmonised amongst member states. It could make it easier for fintech and tech entrepreneurs to do business amongst other member states, particularly in the expansion and foreign direct investment (FDI) stage.
Access to finance and other support mechanisms – potentially a more open border relationship could also set the foundation for more open opportunities for finance. Not unique to Africa but a global challenge is often entrepreneurs face is access to finance – whether it be from banks to government grants. Potentially AfCFTA could help banks and challenger banks reach out cross border easier and also stimulate more government grants and loans to future entrepreneurs. The top ten largest banks in the African continent, as researched by The FinTech Times, have a total of $600 billion (based on assets) which include banks such as Standard Bank (South Africa), Absa Bank (South Africa), National Bank of Egypt and Zenith Bank (Nigeria)- to name a few.
Much remains to be seen, especially in the longer term to see how AfCFTA develops and whether it becomes more economically and politically integrated such as that of the EU. In fintech in particular in terms of economic development and integration, AfCFTA could provide thought leadership in a unified African approach to further accelerate the sector, which like the rest of the world in a pre and particularly in a COVID-19 has boosted the likes of paytech, insurtech and artificial intelligence (AI).
Nevertheless, given the sheer size of Africa and the 55 member states, AfCFTA truly is an exciting time in terms of fostering international trade and investment.