The African Continental Free Trade Area has raised opportunities for both African and non-African companies. The agreement could contribute to growth after the negative impact of the Covid-19 pandemic
The African Continental Free Trade Area (AfCFTA) that came into effect on January 1st, 2021 has raised opportunities for both African and non-African companies. The agreement could contribute to accelerating African growth rates after the negative impact of the Covid-19 pandemic. The impact of the pandemic was diverse across African economies, with most suffering economic contractions, while others managed to record small growth rates.
The post-pandemic outlook is highly diverse and subject to high uncertainty. In the longer-run, the African Continental Free Trade Area (AfCFTA) could be a boost to Africa’s growth potential as the agreement foresees a fundamental liberalisation of trade in Africa in the next few years.
However, in the short-run there remains several challenges to the implementation of AfCFTA. These challenges include protectionist tendencies, insufficient capacity to expand cross-border infrastructure, political instability and weak government finances.
Overall, we expect countries to benefit the most if they already have action plans and customs procedures in-place, next to relatively low barriers to trade with other African countries.
This means that large countries, particularly South Africa, with a diversified economy and well-established trade links, will likely benefit most from AfCFTA. Other regional hubs like Kenya, Senegal and Cote d’Ivoire would also have a sound point of departure if AfCFTA will be implemented as currently planned.
Key points
- Economies across Sub-Sahara Africa (SSA) are recovering from the severe downturn of last year. However, this growth is uneven and moderate due to the limited room of governments to support their economies. On top of this, the limited availability of vaccines and the spreading of the new delta variant in many countries has jeopardized this year’s forecasted recovery.
- Some of the more diversified economies fared relatively well through the pandemic and will show a stronger recovery than others. Nonetheless, many will still not return to the high pre-pandemic growth figures because of high government debt that constrains public investments.
- The AfCFTA could become the largest trade bloc in the world in terms of participating countries. Although the AfCFTA officially started on January 1, 2021, its full implementation is still a long way to go. Many countries would first need to establish the necessary customs infrastructure and required procedures to trade. So far, only Egypt, Ghana and South Africa have accomplished this.
- There are still many challenges to overcome in order for countries to reap the full benefit of the AfCFTA agreement. Protectionist tendencies in different countries, weak infrastructure, political uncertainty, weak government finances and weak banking sectors are among the factors that delay the required processes and limit the desired outcomes.
- Most African economies are expected to ultimately benefit from the AfCFTA. This applies particularly to the elimination of non-tariff barriers that would accelerate trade and growth in the region. The most open and diversified economies with already well-established trade links will benefit the most.
