The AfCFTA has crossed the ratification threshold – what’s next?

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One year ago, when Oxford Business Group released the results of its first Business Barometer: OBG in Africa CEO Survey, almost 50 nations signed an agreement to create what would become the world’s largest trade area: the African Continental Free Trade Area (AfCFTA).

The deal is now closer than ever to becoming a reality after Gambia ratified the agreement in early April, bringing the total number of ratifications to 22 – the threshold required to enter the deal into force.

Unity is strength

Covering a market of 1.2bn people with a combined GDP of $2.5trn, the deal aims to establish a single continental market for goods and services, and ease the free movement of businesspeople and investment across the continent. Ultimately, the deal seeks to boost intra-regional trade levels, promote investment and job creation, and help transform the economic landscape of the continent in favour of higher value added and wealth generation.

Overall, the objectives identified were well received by the international business community, and the results from the second Business Barometer: OBG in Africa CEO Survey also testify to the optimism felt on the ground. Out of the 787 C-Suite executives surveyed across eight countries, 72% said that the AfCFTA will have a positive or very positive impact on intra-regional trade levels.

According to the UN Economic Commission for Africa, the AfCFTA has the potential to see trade volumes rise by 50% in the five years following implementation. As it stands, Africa lags behind other regional blocs when it comes to trade, accounting for a mere 16% of intra-continental trade volumes, compared to over 50% in Asia and over 60% in Europe.

However, with the AfCFTA expected to be implemented within a month after the required signatures reach the African Union headquarters, Africa has much to look forward to. This is not to say it will be an easy ride; the deal has many challenges to navigate before its benefits can be fully felt, from infrastructure gaps and unreliable power supply, to heavy administration and corruption. Nevertheless, Africa boasts a number of strategic advantages that will help put the deal in motion, including its young population, abundant natural resources and fast-growing economies.

Home to some of the world’s fastest-growing economies

In its latest “World Economic Outlook” report released in April 2019, the IMF identified Ghana as the fastest-growing economy in 2019 – not only in Africa, but worldwide – with a projected GDP growth rate of 8.8%. Other top performers include Ethiopia (7.7%), Côte d’Ivoire (7.5%) and Djibouti (6.7%).

These promising projections concur with some of the responses to our survey; 84% say they have positive or very positive expectations of local business conditions, while 78% say it is likely or very likely their company will make a significant investment over the coming 12 months.

The causes for optimism are multiple. These include the rising interest in the continent gathered in recent years – not only from China, but also from countries like Russia, India and Turkey – and the investments that have ensued; efforts to implement monetary and fiscal reforms; and the rollout of public investment programmes to develop infrastructure.

However, as promising as these prospects may appear, immediate-term growth across most African markets remains fragile and subject to a number of external events that could impact economies in the short to medium term. The majority of respondents to our survey indicate a rise in oil prices (38%) as possibly impacting their economy, followed by instability in neighbouring countries (23%). Breaking down these results further by country, it is no surprise to see that respondents from oil-rich and -producing nations such as Nigeria, Algeria, Ghana and Kenya made up the bulk of those that selected a rise in oil prices, while the remaining countries – with the exception of Côte d’Ivoire – chose the latter option.

Sitting in what has been traditionally known as a troubled region, although itself a relatively safe and stable country, some 65% of respondents based in Djibouti consider potential instability in neighbouring countries to have an immediate impact on the economy. In Egypt this number stood at 52% and can be mainly linked to the potential spillover effects of the Libyan crisis.

As for Morocco, instability in neighbouring countries has been one of the main challenges the country has had to grapple with since the uprisings of 2011 elsewhere in the region. While relatively safe and stable throughout this period, Morocco was not spared the reputational damage associated with the instability in the rest of the Maghreb. However, the country has undertaken significant efforts over the years to ensure security at home and
promote this image abroad, and tourist numbers alone are enough to testify to the positive effects this has had, with international visitor numbers exceeding 12m in 2018. In Egypt and Tunisia this number stood at just under 9m and 8m, respectively.

Côte d’Ivoire was the only country where the majority (61%) pointed to volatility in commodity prices as the main external factor that could impact the economy in the short to medium term. This makes sense considering the economy’s dependence on commodity exports such as cocoa, gold and cashew nuts. Cocoa alone accounts for around one-third of export earnings, and therefore, any fluctuation in cost or volume could come with severe consequences. To hedge against these risks, important changes are currently under way to help diversify the country’s economy and generate more value added. These include promoting investment in infrastructure development across different sectors such as transport, telecoms and energy, and increasing local processing output of cocoa to 50% of production by 2020.

The future is digital

High on the economic development agenda is digital transformation. While uptake in some countries – such as Kenya, with its mobile money transfer service M-Pesa – has been impressive, only 22% of the continent’s households have access to the internet.

With one in four people on earth expected to be living in Africa by 2050, filling these digital gaps has become more pressing than ever given the growing social and economic significance of digitalisation. According to the World Bank, digital transformation could see GDP growth per capita increase by 1.5 percentage points annually and the poverty headcount reduced by 0.7 percentage points per year.

Supporting Africa’s digital revolution with the required jobs to carry it out is of utmost importance. The good news here is that the region has a vast pool of labour to pick from, with 10m-12m young people entering the job market every year. According to a joint report by the World Bank, the World Economic Forum and the African Development Bank, Africa’s working-age population is expected to increase by 450m people in the 20 years leading up to 2035.

Not only does this testify to the existence of an abundant workforce, it also highlights the striking urgency to actually create jobs. According to the OBG survey, leadership remains the skill in greatest need, with 36% of responses, followed by research and development (14%), and engineering (14%).

Interestingly, Djibouti is the only country out of the eight surveyed that points to engineering as the skill in greatest need. To some extent this comes as no surprise considering the sheer volume of investment that has been carried out over the past few years to develop the country’s transport and logistics network.

Since 2016 three new ports were opened, a railway linking the capital city to Addis Ababa in Ethiopia was established and the first phase of Africa’s largest free trade zone in terms of surface area was inaugurated. Djibouti partly owes these developments to its strategic location in the horn of Africa, bordering some of the world’s busiest commercial routes – the Red Sea and the Gulf of Aden – as well as one of Africa’s fastest-growing economies, Ethiopia. Ensuring that the right skill sets are available to accompany these developments will greatly help the country meet its economic ambitions.