Ongoing political and economic instability in Ukraine, Gaza, and elsewhere has dampened global trade activity, fostering the urge to achieve continental self-sufficiency in Africa.
Intra-African trade is key to the continent’s economic progress and integration. “Enhancing intra-African trade presents a multitude of benefits for our region,” Olumide Olatunji, managing director of Access Bank Ghana, said in March. “By reducing our reliance on external markets, we fortify our resilience against global economic upheavals.”
In that regard, the African Free Continent Trade Agreement (AfCFTA ), which came into force in May 2019, is essential for promoting regional trade. According to the African Trade Report 2024 released in June by Afreximbank, AfCFTA aims to eliminate tariffs on 97% of goods traded among African countries, liberalize the trade in services, and improve the infrastructure of regulation and trade.
Intra-African trade potential is enormous as AfCFTA is the largest free trade area in the world, connecting 1.3 billion people across 55 countries with a combined GDP of $3 trillion.
Alongside significant economic returns, AfCFTA can support advancing the continent’s climate adaptation efforts. As highlighted in an August policy brief by ODI, a global affairs think tank, “Implementation of the AfCFTA is instrumental in supporting adaptation to climate change through industrialization.” That encompasses investment in green infrastructure, agricultural modernization, and enhancement of climate-friendly manufacturing.
However, despite being ratified by 47 countries and taking effect in January 2021, the AfCFTA’s “meaningful trade has only begun in eight countries,” according to a November article by Charles Dietz in African Business. That means it may take years before the AfCFTA reaches its full potential.
Africa’s overview
According to the Afreximbank report, Africa recorded a growth rate of 3.2% in 2023 compared to 4% growth in 2022, reflecting less output in the region’s three largest economies: Egypt, Nigeria, and South Africa.
In 2024, growth in Africa is projected to reach 3.5%, with Africa’s export volume growing faster than any other region at a rate of 5.3%, up from 3.1% in 2023, noted the report.
The continent’s slowdown in 2023 was attributed to several reasons, such as weather shocks that affected crop yields, a global economic slowdown driven by the Ukraine crisis and its disruption to energy and food supplies, and the Gaza-Israel violence, which continues to affect the flow of goods through the Red Sea.
Additionally, the high cost of living has limited consumption growth. According to the African Development Bank in November, Africa’s average inflation was 18.5% in 2023 and is expected to decrease to 17.1% in 2024.
These factors led to the underutilization of intra-African trade, which saw a modest growth of 3.2% in 2023, a significant slowdown from the 10.9% growth in 2022.
Promising gains, delayed action
With manufactured goods dominating intra-African trade, Hippolyte Fofack, chief economist and director of research and international cooperation at the African Export-Import Bank, noted in February that expanding regional trade could boost the continent’s industrialization efforts. He said intra-African trade will drive the “operationalization of the commodity-based industrialization model.”
Intra-African trade also can unlock agricultural potential. Daniel Njiwa, head of regional food trade and resilience at AGRA, said African nations should harness their unique agricultural resources and create a self-reliant food network. “This shift away from heavy reliance on external markets empowers African nations to tap into their capabilities and address food security challenges,” he said.
The development of resilient agricultural supply chains on the regional level limits Africa’s vulnerability to external disruptions. “Robust supply chains facilitate the efficient distribution of agricultural products, minimize post-harvest losses, and ensure timely access to nutritious food for all Africans,” said Njiwa.
Despite promising projections, Africa’s regional trade remains low. In 2023, Njiwa stated that low regional trade numbers “indicate an underutilization of trade opportunities within the continent.”
Therefore, African nations should effectively leverage the power of AfCFTA to reach their full trade potential. Sunil Kaushal, CEO of Standard Chartered Africa and the Middle East, said in an interview with African Business in January that AfCFTA could boost intra-African trade by 3.9% annually, reaching $140 billion by 2035.
He added that the bank expects robust intra-regional trade for West Africa, with a projected growth of 13.3% annually over the next decade, “driven by a great potential for agricultural products such as shea butter and cocoa beans.”
Furthermore, East Africa will be a key beneficiary of AfCFTA. He said this region is set to grow at 15.1% annually, driven by large-scale cross-border infrastructure developments such as the Lapsset Corridor Project connecting Ethiopia, Kenya, and South Sudan.
Overall, AfCFTA plays a critical role in boosting revenues. The World Bank estimates AfCFTA trade activities could increase the continent’s real income by as much as 9% by 2035.
In addition, AfCFTA should attract substantial investment. According to a World Bank study on AfCFTA and investment in 2022, Africa could see an increase in foreign direct investment of between 111% and 159%.
Roadblocks
AfCFTA has been underperforming throughout the past five years. According to an OECD report titled “Production Transformation Policy Review of Egypt: Spotlight on the AfCFTA and Industrialization” in November, intra-regional trade in Africa still stands at 15%, much lower than for Europe (61%) and Asia (59%).
High trade costs and inadequate infrastructure are obstacles. “The continent’s road and rail infrastructure has remained relatively underdeveloped, making intra-African trade both slow and expensive,” said Dietz.
Olatunji added that inadequate infrastructure is seen in roads, railways, and ports, making transportation of goods costly and inefficient. Other challenges, he said, include complex customs procedures and regulatory hurdles, and limited access to finance, “particularly for SMEs, which, while being the backbone of our [African] economies, face an annual trade finance gap of approximately $81 billion.”
Dietz said traders can submit online complaints about factors that affect their business to the Continental Non-Tariff Barrier Mechanism. However, he said, few submissions have been made.
In Africa, the rules of origin under the trade in goods and services protocol have also proved to be a sticking point because tariff reductions apply only to goods produced in member states. Thus, ambiguities arise when products contain inputs from non-AfCFTA countries, Dietz added.
AfCFTA needs to learn from other free trade areas to streamline transportation and diversify its options. Implementing efficient transport systems within Africa will also increase intra-African trade by 40% to over 50% by 2040, Philippe Scalabrini, president of Europe and Africa at VistaJet noted in July.
Scalabrini said that the North American Free Trade Agreement (NAFTA) and the European Union (EU) could be examples for Africa. “Transportation, especially by air, has continued to propel economic growth in those regions,” he said.
In that sense, the OECD report highlighted that the experience of other regional integration processes “has shown the importance of having mechanisms to manage divergences between countries, as well as between actors within countries, to ensure no one is left behind and all are given the possibility to benefit from the newly created market.”
Greening AfCFTA
Despite being the lowest contributor to greenhouse gas emissions in the world, climate change has had a devastating impact on Africa. Notably, economies on the continent today contribute only about 3.78% of greenhouse gas emissions, compared to 14% and 9% of global emissions in the economies of the United States and European Union, respectively, according to the Afreximbank report.
While pushing for industrialization, Africa should be careful not to harm itself with accompanying carbon emissions. Teniola Tayo, a trade policy fellow at the Africa Policy Research Institute, noted in December, “Africa is the least industrialized region globally, and the current push for sustainability means that African nations have fewer environmental allowances toward structural transformation.” Thus, joining forces for industrialization in Africa allows it to learn from others’ mistakes regarding climate responsibility.
Tayo stressed the need to adopt sustainable approaches in the early stages of African industrialization, which in turn “could give the region a competitive advantage in the near future.”
Effective environmental responsibility measures should accompany the implementation of AfCFTA. “As we strive to harness the potential of the AfCFTA, it is essential that we do so in a manner that safeguards our natural ecosystem, promotes renewable energy, and mitigates the impact of climate change,” Claver Gatete, executive secretary of the UN Economic Commission for Africa (ECA) noted in December 2023.
By increasing intra-continental trade and minimizing the necessity to export to or import from distant locations, AfCFTA will likely have a minor impact on Africa’s carbon emissions. According to a February working paper titled “Greening the implementation of the African Continental Free Trade Area Agreement” by CEPII, the adoption of climate policies in line with African countries’ Nationally Determined Contributions (NDCs), in addition to implementing the AfCFTA Agreement, “would enable a 25% decrease in greenhouse gas emissions by 2045.”
In addition to improving the climate, African governments could generate income from their efforts to lower emissions, as the IMF is proposing an international carbon price floor that would benefit low-income countries. “[The world needs to cut emissions rapidly in this decade,” the report said. “Carbon pricing is a central decarbonization instrument.”
This article first appeared in September’s print edition of Business Monthly.
