AfCTFA: What it means for companies with an appetite to invest

By Jan-Hendri Tromp, Associate Director: Client Acquisitions, Egypt.

Johannesburg, 20 Mar 2024
There are big opportunities in manufacturing.
There are big opportunities in manufacturing.

The African Continental Free Trade Agreement (AfCTFA) establishes a continent-wide market embracing 54 African countries, creating the world's largest free trade area. The agreement addresses tariff reduction, trade facilitation and regulatory measures. Though negotiations on rules of origin, intellectual property rights, investment and competition policy and e-commerce are still under way, it promises to create massive opportunity for companies operating in Africa, and those keen to establish a footprint on the continent.

Until now, trade integration across Africa has been challenged by outdated border and transport infrastructure, and inconsistent regulations across multiple markets. Intra-African exports accounted for only 16.6% of total exports in 2017, compared with 68.1% in Europe, 59.4% in Asia and 55% in America, according to the United Nations Conference on Trade and Development (UNCTAD). Intra-African trade, defined as the average of intra-African exports and imports, was around 2% during the period 2015-2017.

The AfCFTA promises extensive economic integration in Africa by attracting increased investment, fostering trade, creating better jobs, reducing poverty and boosting shared prosperity. The World Bank projects a potential FDI surge of 111% to 159%. Successful AfCFTA implementation could lift 50 million people out of extreme poverty by 2035 and increase real income by 9%, with a substantial rise in intra-African exports.

In October 2022, the Guided Trade Initiative was introduced, enabling partial free trade among nations meeting minimum AfCFTA requirements. Prior to its launch, in September, Kenya and Rwanda exported their inaugural AfCFTA goods to Ghana, featuring Exide batteries and premium coffee, marking a significant step in the initiative's implementation. South Africa sent its first shipment of products to other countries trading under the agreement in January 2024, making it the first among the Southern African Customs Union (SACU) member states to practically realise the agreement.

My recent visit to the Intra-Africa Trade Fair (held in Cairo in 2023) brought home the enthusiasm with which African nations are embracing opportunities under the AfCFTA. The sheer volume and variety of businesses in attendance, showcasing products and services from high-end coffee and rooibos-infused skincare products to automotive manufacturing, is testament to the desire to foster collaboration across borders.

Some of the biggest opportunities lie in manufacturing (particularly automotives, leather and leather products, textiles and apparel, and lithium-ion batteries), agriculture (with emphasis on cocoa and soya), healthcare (pharmaceuticals, vaccine manufacturing), mobile financial services, and cultural and creative industries.

The automotive sector is garnering particular attention. As automobile manufacturers seek out opportunities to source components with an African point of origin, so component manufacturers are looking for opportunities to expand existing operations and develop relationships that will add value along the long supply chain. The resulting hub-and-spoke model promises to see this industry make great strides under the AfCFTA.

Perhaps the most significant impact of the AfCFTA so far is the Pan-African Payment and Settlement System (PAPSS). This centralised system facilitates instant cross-border payments in over 40 African currencies, reducing reliance on foreign currencies like the US dollar. It has major implications for financial services on the continent and benefits small and medium-sized enterprises by easing access to hard currency, fostering trust and streamlining cross-border trade.

With systems like PAPSS coming online, and the abundant opportunities in mobile financial services, African banks are seeking to transform digitally. There is a palpable shift from being digitised (offering consumer-facing digital solutions like banking apps) to becoming truly digitalised – digitally transforming back-end systems to improve operations, data management, data security, customer experience and more.

The financial services industry is visibly attracting interest, and often from unexpected sources. Retailers and point-of-sales businesses are beginning to offer consumer credit, for example – a practice that has been the purview of traditional banks in most African countries, with South Africa being a notable exception.

Further opportunities lie in addressing Africa’s infrastructure deficit as a major enabler of the AfCFTA’s success. Electricity demand will increase by 93% by 2035, approximately 47% of roads will need to be paved, ports must increase their average container handling performance from 20 to 25-30 moves per hour, and another 300 million people must gain access to the internet to keep up with the continent’s economic growth prospects.

The urgency of addressing this deficit is particularly visible in Egypt, where the rate of construction is reminiscent of development in the United Arab Emirates 20 years ago. Heavy investment in the country’s ports and ancillary infrastructure intends to maximise Egypt’s capabilities as an export hub from Africa to the rest of the world. Policy redevelopment to support this aim is also well under way.

In Kenya and Ghana, policies and procedures designed to support manufacturing are being developed, while countries like Zambia are actively pursuing government partnerships with private investors to develop agricultural infrastructure, fisheries and border and transport infrastructure, among others.

Companies keen to join this economic transformation must consider certain practicalities of business success in Africa. The first is establishing a footprint that enables profitable operations but minimises the impacts of regulatory and governance disparities across borders, and operational costs. Linked to this is reporting in an environment that remains challenging even as the AfCFTA takes root.

And, with the global rise in environmental, social and governance (ESG) reporting requirements and the AfCFTA’s clear intent to address long-standing socio-economic problems on the continent, managing, monitoring and reporting on ESG impacts will also be important.

And finally, the availability of appropriately skilled labour in Africa can be a further challenge. Perhaps the biggest hurdle AfCFTA now faces is a resolution around the free movement of labour. It will be a key contributor to the success of the free trade area, but not all African countries are committed to the concept. So, organisations seeking to staff new African operations will need a trusted partner to support the recruitment, employment and training of their human resources in the short-term. In the longer term, facilitating cross-border transfers may become a further requirement.

The AfCFTA represents an exciting time in Africa’s economic development. As SoluGrowth, we aim to shed more light on the key business considerations in a series of thought leadership pieces.

There has never been a better time to take the leap and invest in an African footprint for your business.