The Gambia has become the 22nd nation to ratify the African Continental Free Trade Area (AfCFTA), the number required for the agreement to take effect.
While this marks a significant step towards the continent’s ambition to create a single market, the free trade area will face a bumpy road to full implementation.
The news of the Gambia’s approval comes one year after leaders of 44 countries first signed the free trade agreement into life in Kigali in what was described as a historic moment for Africa. Since then, another eight countries have joined the agreement.
AfCFTA comes with big ambitions: if fully implemented, it will create a single African market for goods and services, covering 1.2 billion people and a GDP of US$2.5tn across 55 member states of the African Union.
According to the African Union, the agreement has the potential to boost intra-African trade by 53% by eliminating import duties, and to double trade on the continent if non-tariff barriers are also reduced.
Such a growth in intra-regional trade could boost the diversification of Africa’s revenues significantly, which in turn will help develop its local economies, according to Moody’s. The credit ratings agency also expects that AfCFTA will lead to improved credit profiles “given the greater stability and sophistication that intra-regional trade can offer”.
While most of the continent has signed up to the deal, each nation still needs to ratify it. With 22 countries having now completed this process, AfCFTA is ready to be put into action by the African Union.
“I cannot overstate the significance of this achievement,” says Moussa Faki Mahamat, chairperson of the African Union Commission, commenting on the Gambia’s approval, adding that it “marks the legal threshold for this historic agreement to enter into force”.
But it may be too soon to hail its launch: AfCFTA is still subject to negotiations around tariffs and rules of origin, a process that has not even begun.
With the aim to liberalise 90% of trade taking place between the member states, countries will have to determine which imports they will let in tariff-free and which they will not. Members can continue to protect 10% of their trade to shield their most important and nascent industries from competition. Of the 10%, 7% of imports will be classed as “sensitive” and carry a tariff, and 3% “excluded” entirely, remaining on full tariffs.
Deciding which sectors to protect and which to liberalise will likely be a long and more protracted process.
“It comes down to which 10% you care about. Countries will list all the items they want to protect and say, ‘on this 10% I will not reduce tariffs’,” Olu Fasan, a visiting fellow in the international relations department of the London School of Economics, told GTR for its upcoming Q2 publication.
Another challenge is that, because imports are often concentrated in a narrow range of goods, the 10% rule could allow countries to leave duties unchanged on most of their current imports.
Added to that comes the fact that three countries – Nigeria, Benin and Eritrea – are still refusing to sign up.
And should the area finally come into effect, non-tariff barriers may well limit the full potential of the deal. Moody’s has raised concerns that barriers such as corruption, poor infrastructure and a lack of trade finance “will continue to restrict the trade sector’s development and long-term growth potential”.
According to World Bank estimates, the cost of intra-African trade is around 50% higher than in East Asia. The number of days it takes to clear exports and imports are on average double that of high-income OECD countries.
Meanwhile, the African Development Bank has estimated that Africa has an unmet demand for trade finance of more than US$120bn annually.
But promoters of the deal are optimistic of the changes AfCFTA can bring about. In Kenya, for example, one of the first countries to ratify the agreement, there’s faith that the potential of AfCFTA won’t be limited due to lack of trade finance, but rather bring more financing into the continent.
“Trade finance tends to follow the ease with which people are able to trade, and so governments have to move in first, then the commercial banks will follow,” Adan Mohamed, cabinet secretary for Kenya’s ministry of industry, trade and cooperatives, told GTR at its East Africa conference last year. “There are some issues that we need to fix on the continent of Africa around border controls between different countries, movements of people and movement of capital. All of these are defined within the framework of the free trade agreement and they are being dealt with step by step. The commercial banks will see it, and I think they will follow.”
Additional reporting by Sarah Rundell.