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Why the African continental free trade area is a game changer for business

Friday January 15 2021
trade pic

The African Continental Free Trade Area (AfCFTA) was signed by 44 of the African Union’s 55 member states in Kigali, Rwanda, on March 21, 2018. PHOTO | FILE

By Raphael Mgaya

The African Continental Free Trade Area (AfCFTA) framework agreement came in force on January 1, 2021 following the delay caused by the coronavirus pandemic. All African countries have signed the AfCFTA framework agreement except Eritrea. Thirty-four countries are yet to ratify the agreement including Tanzania. This is an important milestone in the African continent.

The AfCFTA agreement will create the largest free trade area in the world in terms of the number of participating countries. It will bring under a single market 55 countries with a total population of 1.3billion people and a combined GDP of $3.4 trillion, more than that of the UK ($3.25 trillion) which is the sixth largest economy in the world in terms of the GDP.

The World Bank reports that, the AfCFTA presents an opportunity to bring 30million out of extreme poverty and raise the income of 68million who currently live on less than $5.50 per day. In the East African region, it is expected that 4.8 million people will be lifted out of extreme poverty. The implementation of AfCFTA will also help to usher in the kind of deep reforms necessary to enhance long term growth in African countries.

In the world recovering from the coronavirus pandemic, the coming into force of the AfCFTA framework agreement is a very good news for African economies. The lowering of tariffs by up to 90 percent means that, costs of doing businesses will be lowered tremendously. This will make African businesses and companies competitive throughout the African continent vis-à-vis their counterparts from outside the African continent, seeking a pie into the African market. This means, Africa will progressively cease to be a dumping ground of substandard goods manufactured in other parts of the world.

The AfCFTA will attract more foreign direct investments and boost manufacturing in the African continent. This will present immense opportunities for African businesses for strategic alliances and external finance through equity investors. For foreign companies that are supplying manufactured goods in the African continent, they will be attracted to relocate their production in the African continent, to benefit from lower tariff. This will create jobs for local population and also will lead to transfer of technology and skills. This will even make more economic sense given the fact that Africa is the youngest continent with the majority of the fastest growing economies and with a lot of raw materials.

The possible relocation of businesses from advanced economies into the AfCFTA, will boost the African manufacturing sectors and agribusinesses. This will allow the AfCFTA to replace China and India in the long run as the workshop of the world, manufacturing goods at very competitive prices to be shipped across the globe. Hence, this will increase the share of Africa in the global trade, from the current 2 percent.

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The deep economic integration to be facilitated by the AfCFTA will create comparative advantages for African economies. The Africa manufacturers will have an advantage over the Asian or Western competitors in supplying goods and services within the AfCFTA. This is because, the African businesses will have a cost advantage of reduced tariff by 90 percent, which will boost productivity and profitability.

In order to ensure full realization of the potential benefits of AfCFTA, there are challenges that must be addressed. Countries need to undertake the relevant reforms and ensure that the trade facilitation measures are in place. Existing red tape will need to be addressed; the state of poor infrastructure that characterize many African countries will also need to be addressed. Flagship infrastructure projects such as the electric rail such as Tanzania’s SGR project will need to be developed throughout the continent to connect various economies. Reliable and affordable power will be key in ensuring a thriving manufacturing base and agribusinesses growth.

Tanzania, as the 10th largest economy in Africa, one of the fastest growing economy in the world and the fifth most populous country in Africa, stands to benefit more with the coming into force of the AfCFTA agreement. With its strategic location, relatively better infrastructure, availability of power, political stability and large population, Tanzania may position herself as an economic gateway for Western and South East Asian investments.