BACB’s Nabil Frik, head of financial institutions, and Amine Mouffok, senior manager, Africa, Middle East and Asia, analyse the progress made so far in achieving African economic unity, and discuss the outlook for North Africa’s participation in the wider continental project. What are the implications for financiers and traders, and how can specialist banks help them navigate the evolving economic environment?

 

The African Continental Free Trade Area (AfCFTA), which came into being in 2021 following the ratification of a landmark trade agreement, is the culmination of a long process of African efforts towards economic integration.

The goals of the intra-African trade agenda are laudable – it promises to accelerate the growth of industry, lift citizens out of poverty, and help African markets become more competitive relative to their peers.

Meaningful progress, though, has been slow – and few countries have begun wholescale implementation. Realising the potential of the world’s largest free trade zone by area will be a long-term process. The continent’s 54 economies, each containing its own regional differences, cannot simply be united with the stroke of a pen.

 

Stubborn obstacles to African integration

In North Africa, historical patterns of trade have led countries to traditionally look to European and Asian trading partners. The figures speak for themselves – only about 12% of North Africa’s trade is intra-African, according to multilateral institution the African Export-Import Bank (Afreximbank).

There are limited cross-border trade flows even between North Africa’s economies, and less with the markets south of the Sahara. The desert serves as a stubborn physical barrier to integration – but it is not the only obstacle. Cultural differences, which today can be seen reflected in the different political, regulatory and administrative characteristics of neighbouring African states, make economic integration harder to achieve. And North Africa’s financial institutions do not typically see the financing of intra-African trade as a key priority – with the exception of Morocco, which has made keen efforts to expand towards southern markets.

Nevertheless, some of the obstacles to intra-African trade are similar in North Africa to other parts of the continent. Most African economies are still very reliant on natural resources and agriculture, and many have developed strong service sectors. There is, however, an acute lack of industrial manufacturing capacity – which means that goods often need to be exported elsewhere to be processed or refined, and a finished product is then re-imported.

And as with any free trade area, there are innate imbalances between the economies concerned – which leads to some reticence among smaller markets about embracing totally free trade. Once tariffs and trade borders are reduced to allow more free circulation of goods, services and people, it is natural that the larger economies (the likes of South Africa, Egypt, Algeria and Nigeria) will enjoy advantages and sectors will begin to consolidate. The AfCFTA Adjustment Fund was established to support smaller markets’ loss of income, but it is unlikely to be enough to limit all the damage.

But that is not to say that all current intra-African trade flows are captured by current statistics. At least 50% of trade in Africa is informal and unregulated. Historically, before the days of air freight and cross-border highways, international trade was managed by communities, families and tribes that straddled national borders – and this pattern continues into the present day.

 

Potential for great economic growth – but it requires strong political foundations

While progress in achieving intra-African trade integration has so far been limited in North Africa, the opportunities are undeniable. Some short-term disruption is inevitable, but in the long run an increase in intra-African trade promises to bring economic diversification, efficiency and growth.

Libya, for example, depends on external imports for almost all of its food requirements. It buys large quantities of frozen meat from as far afield as Ireland and New Zealand. But Mali, not far from Libya’s southern border, produces high-quality livestock that, given the right infrastructure, could potentially reach Libyan markets for a fraction of the price (and the carbon emissions). The World Bank estimates that intra-African exports could double by 2035 – and we believe that with the requisite political will, this figure could rise even further.

The benefits of economic integration will take time to be realised – not least because economic integration is impossible without political integration. The current situation in West Africa serves as an example – the political instability in countries like Burkina Faso, Mali and Niger led to the countries being suspended from ECOWAS, and they later left the regional trade bloc altogether.

To thrive in a sustainable way, an international free trade zone requires common rules, institutions, and – the most difficult to achieve – a common currency. In Europe, this was not achieved in one fell swoop. European unity emerged over time, and from a small core of founding states, before expanding in both scope and geographical area over the past half-century.

African unity will not necessarily follow the same pattern – it will find its own model. The existing network of regional economic communities such as ECOWAS could serve as smaller units for integration, which can then collaborate increasingly on a pan-African level. This will inevitably be an asymmetrical and multi-speed process.

 

Improving access to international financing is crucial

Cross-border trade doesn’t just need a stable political environment, it also needs a supportive banking environment. Deals cannot be settled quickly if African banks do not offer adequate facilities for financing and currency exchange.

Afreximbank has made some effort to remedy this with its Pan-African Payment and Settlement System (PAPSS), which aims to provide secure, instant cross-border payments across the continent. The system, which has already secured participation from 13 central banks and a number of commercial banks, reduces the demand for foreign exchange liquidity and eases pressure on current accounts.

But ultimately, more intra-African trade will require more trade finance. Since the economic crisis of 2008 triggered a largescale withdrawal of foreign lending capacity from the region – due to the corresponding hike in regulation and revised risk appetites among many international banks – many businesses in the region struggled to stay connected to the global financial markets. This trade finance gap is an issue disproportionately affecting small and medium-sized businesses looking to grow and internationalise.

This is where specialist trade finance banks have a crucial role to play. With longstanding local relationships and physical market presence, banks like BACB provide in-depth knowledge that is otherwise hard to access. Specialist banks serve as facilitators for investment, reducing transactional friction, promoting compliance with international standards, and building the trust of those looking to trade and invest in African markets.

Issues around the trade finance gap have improved in recent years – in no small part due to the work of private banks across Africa – but there is still more to be done. The average African economy grows between 3% and 4% per year, and international risk appetite for these markets cannot necessarily keep up. This makes it all the more crucial for investors and traders alike to engage with partners who can help bridge the gap.

The integration of the North African economies – first with each other, and subsequently with the rest of their African neighbours – will take time. But a more united African economy is a question of when, not if. Africa has all the natural resources needed to thrive, it has a young, diverse population, and increasingly it has the political will to implement landmark initiatives like the AfCFTA. Africa will find its own model of achieving continental unity, and when it does, North Africa will surely be at the heart of the project.