Africa’s free trade deal has GCC interested

The newly minted African Continental Free Trade Area (ACFTA) agreement heralds a new dawn for the continent’s states. The free trade deal involves 54 nations with a combined population of more than a billion people and gross domestic product surpassing $3.4 trillion, which would make it the fourth largest economy among G20 nations.

The deal signed in Kigala, Rwanda in 2018 goes a long way in realising the vision of the African Union and its Agenda 2063 to create “an integrated, prosperous, and peaceful Africa, driven by its citizens, representing a dynamic force in the global arena”.

But the ACFTA is the start of a journey rather than its culmination. Creating a single continental market for goods and services, with free movement of business persons and investments, across more than 50 varied nations with different regulatory, political and economic imperatives remains a work in progress.

“In launching the African Continental Free Trade Area and making it work, Africa is overcoming the historic fragmentation and isolation of her economies by opening up huge commercial opportunities as well as improving transport and communication linkages among our countries,” according to the African Union.

It is still in the early days, but the African Union is working towards accelerating the establishment of the Continental Customs Union and the African customs union. Last year, ACFTA held its First Intra-African Trade Fair in Cairo, Egypt, which attracted 1,086 exhibitors, and business deals of more than $32 billion, well above the target of $25 billion.

The member states are also working towards establishing the Single African Air Transport Market as well as the Protocol to the Treaty Establishing the African Economic Community Relating to the Free Movement of Persons, Right of Residence and Right of Establishment.

Opportunity knocks

The Middle East states have long valued the African continent’s immense promise. From the skills and potential of its people, to its natural resources and need for investment in infrastructure and businesses, Africa has long been considered a dynamic investing destination by Arab states, who have been major strategic investors in the region for decades.

The Middle East and Africa enjoy a $108 billion bilateral trade partnership, according to Swiss-based International Trade Centre. Trade between the six GCC nations and Africa dominates the flow, with total two-way trade reaching around $71 billion last year.

In recent years, Gulf states have also invested heavily in African companies and assets. The UAE’s Emirates Global Aluminium recently received its first shipment of bauxite ore from its $1.4 billion mine in Guinea. The western African state will earn $700 million annually from the development.

Dubai Ports World is looking to develop the commercial port of Assab in Eritrea, and in August 2018 the UAE announced a pipeline project linking Addis Ababa in Ethiopia to Assab in Eritrea. Last year, the UAE also agreed to invest $10 billion in South Africa’s economy, including in areas of tourism and mining sectors.

Earlier this year, Saudi Arabia said it plans to invest $10 billion to build an oil refinery and a petrochemicals plant in South Africa.

Clearly, the GCC states are drawn to the African states’ promise, especially as the new pan-continental trade deal will facilitate opportunities and unlock growth in parts of Africa that were previously difficult to access.

Unified access

A singular trading platform, similar to the European Union, will strengthen Africa’s hand when negotiating with trading partners. The African Union believe it will build up the continent’s economic clout in trade negotiations at the global level such as in the World Trade Organisation.

Middle East states, especially Gulf sovereign funds, will also be attracted by the critical mass of a continentwide economy.

“With restrictions lifted on foreign investments, investors will flock to the continent. This adds capital to expand local industries and boost domestic businesses,” according to the World Economic Forum. “New capital enhances an upward productivity cycle that stimulates the entire economy. An inflow of foreign capital can also stimulate banking systems, leading to more investment and consumer lending.”

The UAE has a lead over its Gulf counterparts in investments in Africa, and is leveraging its construction, shipping, logistics, tourism and energy development expertise to position itself as a gateway to Africa. Dubai Chamber of Commerce and Industry organises a Global Business Forum every year to identify investment and business opportunities in the continent.

Shot in the arm

The manufacturing sector may be the biggest beneficiary of the ACFTA as it remains under-represented in Africa’s GDP, and is one of the most crucial segments that can provide jobs, foreign direct investment and infrastructure in African economies. “A bigger manufacturing sector will lead SMEs to create more well-paid jobs, especially for young people, thereby alleviating poverty,” the World Economic Forum said.

Africa’s agriculture sector could also emerge as a winner as Middle East nations seek food security. However, there is a danger that more advanced nations on the continent such as South Africa, Nigeria, Egypt — which make up 50 per cent of Africa’s GDP — may be outsize beneficiaries of trade at the expense of smaller, and more developed nations. There is also concern about revenue losses from tariff liberalisation, estimated at $4 billion.

The next few years are important as ACFTA implements key regulatory pieces in place such as trade documents, tariff schedules, rules of origin and a system for addressing non-tariff barriers, but it appears the continent is gearing up for the next chapter of its development.

“It carries the promise of a much rejuvenated Africa on a high economic growth path, for social economic transformation,” wrote Francis Mangeni, director of Trade and Customs at the Common Market for Eastern and Southern Africa. “The eternal challenge that will remain is to duly implement and utilise it. Leadership in the public, private and academic sectors is required.”

As an international bank with the most extensive sub-Saharan footprint and over 150 years of history in the continent, Standard Chartered is well positioned to capitalise on the opportunities ACFTA agreement will bring to the continent. We will continue to support the agreement, facilitate trade and help companies venture into the continent.

Sarmad Lone is Regional Co-Head, Global Banking — AME, Standard Chartered.