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Is Africa’s historic free trade agreement stuck or sailing?

A pilot trading scheme under AfCFTA rules commenced in July, which involves Rwanda, Cameroon, Egypt, Ghana, Kenya, Mauritius, and Tanzania. A successful pilot would be the biggest assurance yet that AfCFTA will work.
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Is Africa’s historic free trade agreement stuck or sailing?

When trading under the Africa Continental Free Trade Agreement (AfCFTA) officially began on the first of January 2020, it signalled the dawn of a new era for intra-Africa trade. At the time, AfCFTA was the world’s largest trade area. Africa’s milestone agreement was hailed as a game changer that would create a continent-wide single market that adds up to $70 billion to trade between African countries and would potentially move 50 million people out of extreme poverty. A year and a half later, AfCFTA seems to be trudging along its runway struggling for momentum. The buzz that propelled it into popular consciousness when it went into effect in May 2019 after the Gambia ratified seems to be fading. There are a number of reasons for this.

First, the agreement does not seem to be well understood by some of the most crucial interest groups: “African businesses do not have a clear understanding of the AfCFTA mechanisms of operation and market opportunities at the continental level”, wrote representatives of the United Nations Economic Commission for Africa in a Brookings Institution article. It sounds ominous that a pan-African operation that has taken a decade to bring to life remains rather vague to businesses. Africa’s trade ministers and envoys appear to have put in several hours convincing one another of the benefits of free trade without doing enough to engage those who will do the actual trading. This kind of policy rollout misstep has, unfortunately, been common on the continent, supporting the argument by some policy analysts that African countries tend to lack in planning before implementation.

Second, the Pan-African Payment and Settlement System, or PAPSS,  which is supposed to facilitate intra-African trade, has not yet got the buy-in of all 54 signatory countries (Eritrea is not expected to join the party anytime soon). PAPPS is designed as Africa’s centralized payment and settlement system, connecting central banks, commercial banks and other financial institutions for seamless, real-time payments, especially for trade. Exerting financial independence, Africans will transact and settle payments in African currencies within minutes courtesy of PAPPS. However, only 8 central banks, mostly in English-speaking West Africa, are part of the network. An effort is ongoing to persuade all central banks, including the vital Central Bank of West African States in charge of the West African CFA franc in 8 countries, to join by the end of 2024. Of the 763 or so commercial banks in Africa, only 28 are currently plugged into PAPPS. The rest are expected to join by 2025 or so.

It is worth noting that while technology innovators in the private sector have founded payments processing companies (such as Paystack, Flutterwave, MFS Africa, Zeepay, and Yoco) to solve the fragmentation of financial transactions across Africa, PAPSS is the most significant effort by a bilateral African body to integrate payments within the continent. Indeed, PAPSS incorporates the work already done by these financial technology companies. Backed by the AU (through the Africa Import Export Bank), its unique promise is that payment settlements between businesses in different African countries would no longer be expensive and time-consuming due to the cost of needing correspondent banks outside Africa and dealing in currencies like the US dollar.

Third, it took time for AfCFTA to finalise the terms under which goods will be eligible for preferential treatment based on the nationality of those goods. These terms are called the rules of origin in international trade jargon. Because the original agreement establishing the AfCFTA did not specify the criteria and conditions for these rules of origin, it was left up for debate in subsequent meetings. The first version of the rules of origin manual was published in July this year. Among other things, it is intended to “enable Customs officers and other stakeholders involved in the clearance of Goods to understand the mechanisms of according preferential tariff treatment to goods traded in the AfCFTA.”

AfCFTA intends to eliminate tariffs for 90% of goods produced within Africa but that would only be a wish if member countries have no clear sense of whether or not their goods are exempt. Best practice requires the rules to be “simple, practical, and business-friendly to enable African businesses to optimize the trade gains” while leading to “a transformation process that generates value through intellectual property gains and/or new jobs,” as the UNECA experts describe it. This is an essential high standard required for a consequential agreement meant to affect the lives of 1.3 billion people. Africa’s industrious entrepreneurs finally have a real chance to resume the exchange of goods and services more easily after being hampered for decades by the adverse effects of colonialist partitions.

To be sure, the incomprehension on the part of the business community has not ground the AfCFTA to a halt. In this regard, Wamkele Mene, the AfCFTA Secretary-General, has increased engagement with businesses lately, having met CEOs of South African companies in November last year in a push for “the start of commercially meaningful trade”.

Most importantly, with the rules of origin now in place, a pilot trading scheme under AfCFTA rules commenced in July, which involves Rwanda, Cameroon, Egypt, Ghana, Kenya, Mauritius, and Tanzania. Known as the ‘guided trade’ initiative, these countries are expected to test the trade agreement’s documents and the reformed custom procedures with actual shipments of goods until September 2022.

A successful pilot would be the biggest assurance yet that AfCFTA will work.

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