How will AfCFTA transform intra-African trade & overcome regulatory issues?

By tackling regulatory hurdles and fostering integration, AfCFTA promises to boost intra-African trade, drive growth, and reshape the continent's economic future.

Africa stands at a pivotal moment in its economic journey. Rich in diversity and resources yet hampered by complex regulatory challenges that have long impeded the continent’s logistics sector. The African Continental Free Trade Area (AfCFTA) is leading the way in this transformative era. As the world's largest free trade area, it unites all 54 African Union (AU) countries and eight Regional Economic Communities (RECs) with the goal of creating a single market for the African continent.

The current landscape
Every African country operates with its own set of import/export regulations, customs procedures, and documentation requirements, creating a patchwork of rules that significantly hinders the smooth flow of goods across borders. This fragmentation has led to scenarios where truck drivers transporting cargo across multiple African countries face a different set of regulations at every border crossing, exemplifying the complexity of intra-African trade.

During a panel discussion at the Africa CEO Forum 2024, William Ruto, President of Kenya captured the stark reality of this situation: "We are struggling to get markets elsewhere while not trading enough with ourselves. Intra-European trade is at 70%, and intra-Asian trade is at 60%, whereas intra-African trade is at 16%."

This comparison underscores the vast untapped potential within the continent and the urgent need for change. The AfCFTA, one of the flagship projects of the African Union (AU) Agenda 2063: The Africa We Want, aims to address this imbalance, with projections indicating that it could grow the market to 1.7 billion people and $6.7 trillion in consumer and business spending by 2030.

Lucia Munoz De Blas, Group Chief Logistic Officer of the Nigerian e-commerce platform, Jumia, emphasised the complex regulatory landscape in Africa: “Varying trade laws across different RECs create significant challenges for businesses attempting to offer consistent and efficient services throughout the continent. High customs duties and taxes are often passed on to consumers, making cross-border online shopping less attractive and potentially limiting market growth. Additionally, bureaucratic delays, particularly in the form of lengthy customs procedures, slow down deliveries. These delays not only impact customer satisfaction but also increase operational costs for logistics providers and e-commerce platforms.”

"Varying trade laws across different RECs create significant challenges for businesses attempting to offer consistent and efficient services throughout the continent."

Lucia Munoz De Blas, Group Chief Logistic Officer, Jumia

The regulatory hurdles extend beyond mere paperwork. While progress has been made in reducing tariffs, many African countries still maintain taxes on imported goods. This not only increases costs but also dampens the incentive for businesses to engage in regional trade. Compounding this issue are non-tariff barriers (NTBs), which include cumbersome customs procedures, lengthy inspections, and a lack of harmonised standards. These NTBs can lead to scenarios where perishable goods spoil at border crossings due to prolonged clearance processes, highlighting the tangible economic impact of regulatory inefficiencies.

The regulatory challenges are further aggravated by inadequate infrastructure across much of the continent. Poor road networks, limited rail connectivity, and underdeveloped storage facilities create significant obstacles to efficient transportation. According to the United Nations' Africa Dialogue Series 2023, the continent's private sector loses up to 30% to 60% of its productivity due to poor infrastructure. This infrastructure deficit, coupled with bureaucratic bottlenecks, creates a storm of inefficiency, discouraging investment and stifling economic growth.

Filipe Nyusi, President of Mozambique addressed the critical role of infrastructure in fostering intra-African trade during the Africa CEO Forum 2024 stating, "In Africa, we still have some challenges including infrastructure issues and connectivity. To promote connectivity, we need to build infrastructures such as railways and roads. We must also build the capacity and create the possibility to promote the free movement of goods and people across Africa."

The AfCFTA solution
Against the backdrop of challenges, the AfCFTA emerges as a potentially transformative force. The agreement creates a market of 54 countries with 1.3 billion people and a combined GDP of US$3.4 trillion. According to a 2022 AfCFTA report, full implementation of the agreement could raise incomes by 9% by 2035 and lift 50 million people out of extreme poverty.

As of early 2024, significant progress has been made in implementing AfCFTA. Trade under the agreement has commenced, with 54 AU countries having signed, and 47 having ratified their instruments of the AfCFTA agreement. Seven countries, including Benin, Liberia, Libya, Madagascar, Somalia, South Sudan, and Sudan have signed but are yet to ratify, and only one country (Eritrea) is yet to sign.

The potential for business and trade under AfCFTA is vast which presents a bunch of opportunities for the continent and its people. The agreement focuses on promoting industrial development through diversification and regional value chain development, with sectors including agriculture and agro-processing, automotive, pharmaceuticals, and transport and logistics singled out for their potential to increase intra-African trade, production, and inclusivity.

For instance, Zambia, Africa's second-largest copper producer, relies heavily on its mineral exports. However, it often needs to import refined petroleum products from countries like South Africa. AfCFTA could streamline this exchange, reducing tariffs and simplifying the process for Zambia's copper exports. Similarly, Nigeria is rich in crude oil but lacks sufficient refining capacity, while Ghana has recently expanded its refining capabilities. There are numerous such examples across the continent where African countries depend on each other for crucial resources and finished products and embracing initiatives like AfCFTA, African countries can pave the way for a more integrated, efficient, and prosperous future.

The ambitious goals of AfCFTA address many of the regulatory and logistical challenges currently hindering intra-African trade. By harmonising trade policies, reducing tariffs, and streamlining customs procedures, the agreement aims to create a more integrated and efficient African market. This could lead to increased competition, improved productivity, and ultimately, economic growth across the continent.

During the Africa CEO Forum 2024, Paul Kagame, President of Rwanda emphasised the importance of free movement within the AfCFTA framework: "You can't create an AfCFTA and at the same time constrain the movement of people. The AfCFTA means you must allow the freedom of movement of people, goods, services, and so on. Otherwise, you do one thing while hindering another."

To support the goals of AfCFTA, various initiatives have been launched to address specific challenges in the logistics sector. One notable example is the African Collaborative Transit Guarantee Scheme (AATGS), launched by Afreximbank in July 2023. This programme aimed to ease the movement of goods across African borders by providing cheaper guarantees for businesses shipping goods, allowing them to clear customs faster and at a lower cost.

In January 2024, South Africa sent its first shipment of products to other countries trading under the agreement. President Cyril Ramaphosa highlighted the significance of this event, stating: "For South Africa, as with many other African countries, the start of preferential trade will create great opportunities for growth and development. Not only will it benefit our country's producers, but it will also see a huge increase in traffic through our ports, our airports and our land-based border posts."

"We must fix our AU so that it has a loud and clear voice that speaks to the issues that affect us and ensures the AfCFTA has meaning."

William Ruto, President of Kenya

In July 2024, Sultan Ahmed Bin Sulayem, Chairman & CEO, DP World, announced that it plans to work with the AfCFTA Secretariat to develop efficient trade corridors, invest in infrastructure, use technology to streamline customs processes and foster regional integration.

President Nyusi of Mozambique highlighted the importance of incremental progress in removing trade barriers: "We are trying to remove trade barriers, including visas. We have opened our borders among eight countries in southern Africa, and the same can be done elsewhere in Africa. After doing this, we have observed that tourism has increased significantly in the region. It is only by taking such steps that we can achieve our goals."

This step-by-step approach to removing barriers showcases the potential benefits of increased integration. By starting with regional initiatives and gradually expanding them, African countries can build momentum towards full implementation of AfCFTA.

The road ahead
While AfCFTA offers immense potential, its success is not guaranteed. Full implementation will require significant effort from member states to harmonise regulations, streamline procedures, and build capacity. Moreover, the initiative's success depends on robust infrastructure development, necessitating substantial investments in roads, railways, ports, and storage facilities.

Presidents Ruto and Kagame emphasised the need for African unity and self-responsibility. Ruto stressed the importance of a strong African Union, stating, "We must fix our AU so that it has a loud and clear voice that speaks to the issues that affect us and ensures the AfCFTA has meaning." Ruto cited the 2018 US-Rwanda dispute over used clothing tariffs to highlight the need for unity in trade negotiations. Adding to it, Kagame stated, "We can't blame outsiders; we should blame ourselves, correct it, and put things right," urging African countries to take charge of their own progress.

World Bank projections reveal that AfCFTA has the potential to lift 100 million people out of poverty, including 60 million Africans out of abject poverty. It could also contribute about $450 million to Africa's overall GDP and potentially increase wages by close to 9%. A further enabler has been ongoing work on implementing the pan-African payment and settlement system, which will allow countries to trade in their own currencies, without worrying about exchange rates across countries.

As Africa stands at this crossroads, the path forward is clear yet challenging. The success of AfCFTA could truly be a game-changer, transforming intra-African trade and driving economic growth across the continent.

This article was originally published in the July-August 2024 issue of Logistics Update Africa