Africa: Will CFTA redefine African banking?
By Wanjohi Kabukuru – Even though Africa’s trade balance in the last five years has deteriorated, the continent is determined to create the world’s largest trading area to redress the trade imbalances that stifle its progress.
To achieve this, studies by the World Bank and the International Monetary Fund (IMF) show that a planned African Continental Free Trade Area (CFTA) set to be inked this year will transform African banking system significantly as it will bring together a population of 1 billion people drawn from 55 African countries with a GDP estimated at $2.19trillion.
The CFTA is primed to redress the current trade deficit in the continent. According to the latest statistics given by the Addis Ababa based UN Economic Commission for Africa (ECA) between 2012 and 2016 Africa’s surplus of $24bn turned into a deficit of $154.9bn. There was also a steep decrease of African export goods from $640bn in 2012 to $346bn in 2016. In 2012 Africa’s share of global exports stood at 3.5 per cent. By 2014 it had declined to 2.9 per cent and decreased further in 2016 to 2.2 per cent. And in 2015 African countries spent $63bn on food imports. Much of Africa’s largest exports still remain fuels, ores, metals and agricultural raw produce with little value addition.
Offshore oil and gas drilling off the Mozambican Coast: Much of Africa’s largest exports still remain fuels, ores, metals and agricultural raw produce with little value addition.
In a rapidly changing global trade and economic environment this shift in fortunes underpins Africa’s numerous challenges such as its inadequate speed to adapt, strained diversification and limited competitiveness.
“This slowdown has been driven in large part by the commodity price downturn, especially for oil products on which Africa still depends heavily.” Dr. Vera Songwe, the Executive Secretary of the UN Economic Commission for Africa (ECA) says. “By reducing tariff and non tariff barriers, the ECA estimates that the CFTA will on aggregate, at a minimum increase intra-African trade to reach 52.3 per cent by 2022. The more exciting story in this expected trade growth is that two-thirds of this growth will be comprised of Africa’s industrial exports.”
For the last 50 years Africa has pursued trade and regional cooperation as a tool to integrate, shore up development, enhance food security, fight poverty and create employment. It has not been an easy path as sovereignty issues and historical diversity slowed the process. While some progress has been made and key milestones achieved, boosting intra-African trade, has not been at the desired pace and volume.
The cooperation and integration concept as a tool of ‘structural transformation’ to boost African economies and reduce poverty has remained a key pursuit of African governments, governance technocrats and academicians for decades now. However in the last three years this quest has taken a new impetus with renewed push from the African Development Bank (AfDB), African Union and the ECA consolidating the gains made by the six African regional economic communities in achieving the ambitious CFTA which aims to unlock intra-African trade by creating a single continental market for goods and services together with the free movement of people and investments.
Vera Songwe, the Executive Secretary of the UN Economic Commission for Africa.
Intensive negotiations touching on non tariff barriers, liberalisation, rules of origin among other trade concerns have been the core issues of discussions held from 2015 and culminating in the historic decision arrived at in Niger’s capital, Niamey in mid December 2017. It now awaits the decision by the AU Heads of State and governments’ summit in March 2018.
According to Dr Bekele Bulado, Ethiopia’s trade minister, the CFTA has taken into consideration and accommodated the different levels of development, together with trade liberalisation and concerns raised by small island, landlocked, least developed and vulnerable countries. “We firmly believe that strengthening our trade relations among the African nations from the current lowest level compared to the other regions in the world, through the implementation of the continental free trade area is very important. “ Dr Bulado says. “The objective goes beyond improving today’s trade volumes figures. Trade as an integrating factor, it is a practical instrument for realising the Pan African movement in the framework of creating and a united Africa.”
Should the CFTA be achieved, it will have taken Africa some 24 years to actualise the Abuja Treaty which was signed in 1991 and became operational in 1994 establishing the African Economic Community (AEC).
Reaching the high point of the CFTA has not been easy. “We have been part of the CFTA from the onset and we feel proud of the progress made so far. Moving forward we expect to overcome difficulties in the rules of origin, agreeing on the tariffs, special and preferential treatment and putting together countries like Nigeria, South Africa and Kenya which are big economies with other smaller and vulnerable economies on the same trade platform.” Zadwe Mabuza a negotiator from COMESA trade bloc says.
Studies and modeling by ECA show that should the implementation of the new trade agreement follow a smart and coherent implementation process accompanied by trade liberalisation and facilitation reforms intra-African trade could amount to more than $40bn in agricultural goods, $40bn in mining and energy and $240bn in industrial products.
At the heart of this trade facilitation process are African banks primed for a continent trading with itself and requiring heavy financial cushions. Statistics availed by both ECA and AfDB indicate that Africa’s development financing needs require some $93bn per year to finance infrastructure gap; $60bn annually to finance SDGs; $50bn annually to meet the cost of climate adaptation and $25bn annually to achieve universal access to energy.
At the heart of this trade facilitation process are African banks primed for a continent trading with itself and requiring heavy financial cushions.
“Africa’s funding needs outstrip its current domestic resource capabilities – due to low domestic savings, shallow capital markets, weak financial intermediation, large informal sector, illicit transfer of funds and public financial management and governance challenges.” Dr Songwe says. “The banking system in Africa plays a less prominent role in giving credit to firms than in other world regions. The use of bank loans and credits in Africa is lower than in other developing regions of the world, even though there is variation between countries.”
According to Dr Songwe better, friendlier, sound and sustainable monetary and fiscal policies ought to be put in place by African governments to safeguard banks so as to lower risk premiums and enable small and medium enterprises to access credit and enhance smoother and hassle-free intra-African trade.
