For Africa Day 2023 the African Union chose as its main theme the acceleration of the implementation of the African Continental Free Trade Area (AfCFTA) as a way to underscore the importance and urgency of the continent’s need to prioritise its economic unity and strength in the current climate of global crises. Wamkele Mene, Secretary General of African Continental Free Trade Area (AfCFTA), speaks during a panel discussion at the 2023 Africa CEO Forum in Abidjan on June 6, 2023. (Photo by Issouf SANOGO / AFP)
Jaya Josie, Advisor China Africa Center, Zhejiang University International Business School (ZIBS) and Adjunct Professor University of the Western Cape and University of Venda
On Africa Day on 25 May 2023 the African Union celebrated sixty years of its founding. A key theme of the 60th Anniversary was “Our Africa Our Future” in which Africa Day commemorated the vision of the founding principles of an integrated, prosperous and peaceful Africa. The dynamic force for such a vision is the citizens of Africa in the world today. For Africa Day 2023 the African Union chose as its main theme the acceleration of the implementation of the African Continental Free Trade Area (AfCFTA) as a way to underscore the importance and urgency of the continent’s need to prioritise its economic unity and strength in the current climate of global crises. One year later what progress has been made?
Prior to the establishment of the AfCFTA intra-African trade was limited within a few regional blocs such as the Southern African Development Cooperation; the East African Community and, the ECOWAS in West Africa where trade was largely dominated by economic relations with the European Union, the United States and countries in Asia such as Japan, China, India and South Korea. Almost all international trade and investment transactions were carried out using the US$ or the Euro. Raw materials were exported to the developed world and manufactured goods were imported into Africa.
The establishment of the AfCFTA in 2018 and the acceleration of implementing the AfCFTA program as the theme for the AU’s sixtieth Anniversary was to reverse the dependent economic relations with the West and promote Africa’s commitment to go beyond political unity towards economic unity, progress and shared prosperity. Africa Day 2024 is a good time to reflect and evaluate the extent to which the implementation AfCFTA has progressed six years after its inauguration.
As soon as the AfCFTA was established the world was hit by the Covid-19 pandemic that lasted until the end of 2022. All countries were severely affected, and Africa was hit the hardest. There was very little assistance in vaccines and other medical supplies from the so-called developed western countries with many of them, especially in the European bloc showing a cynical disregard for the plight of African countries. At an African Union meeting in 2023 the President of South Africa exposed the blatant disregard of the West to Africa’s plight in the time of its greatest need. During this speech he highlighted that it was only China that came to the rescue of Africa during the pandemic.
One of the key constraints to intra-African trade has been the inability to pay for goods in local currency. Companies and traders in Africa are constrained by bureaucratic and time consuming burdensome procedures to pay their counterparts in foreign exchange currencies such as the US Dollar and the Euro.
In addition the macroeconomic customs and tax regimes and monetary policies are not synchronised across the continent except in some regional blocs. In Southern Africa countries such as South Africa, Botswana, Lesotho and Swaziland are integrated into the Southern African Customs Union (SACU) that facilitates the ease of the flow of goods and services in this region.
The East African Community (EAC) is another regional economic community with six partner states that includes Burundi, Kenya, Rwanda, South Sudan, Tanzania and Uganda. The Democratic Republic of Congo joined in 2022 and Somalia joined the bloc in 2023. The EAC headquarters are in Arusha, Tanzania and is a rapidly growing bloc that has established an East African Customs Union and common market and is now implementing the East African Monetary Union Protocol.
Currently the regional integration process is in full swing as reflected by the encouraging progress of the East African Customs Union, the establishment of the Common Market in 2010 and the implementation of the East African Monetary Union Protocol.
This mechanism is expected to address issues of higher costs, delays. Following the 2008/09 financial crisis administrative processes became more complicated when international banks stopped offering correspondent services to smaller African countries. Over the recent past China has invested heavily in transport infrastructure in East Africa to facilitate trade and economic development for the region.
In West Africa the situation has become critical in recent years as countries that are members of Economic Community of West African States (ECOWAS) are undergoing fragmentation as several members have broken away and other members are questioning the groups links with the CFA or African Financial Community currency. The group was initially made up of 8 former French colonies in West Africa and constituted the West African Monetary Union.
Since its creation in 1945 the CFA franc was issued as a currency by the Bank of France. In recent years countries in ECOWAS have questioned whether the CFA is a way for France to maintain its control over its former west African colonies as France only guarantees the value of the CFA as long members of ECOWAS keep 50% of their foreign assets in the French national treasury. As France no longer uses the French Franc but uses the Euro, the CFA franc now takes the value of the Euro. In 2024 the ECOWAS fractured with Burkina Faso, Mali and Niger breaking away and, Senegal and other members raising serious reservations over the influence of France in the control of the regions monetary policy and trade.
The control of monetary policy in Africa by former colonial powers and the dominance of foreign currencies in transactions for trade and investment in intra-African trade is one of the greatest impediments in consolidating Africa’s sustainable economic development and unity. It is for this reason that the AU established the AfCFTA.
To accelerate the implementation of AfCFTA a uniquely developed African payment mechanism called the Pan-African Payment and Settlement System (PAPSS) was launched by Afreximbank in August 2022 and fully supported by the AfCFTA secretariat. The Afreximbank was set up in in Nigeria in 1993 by African states under the auspices of the African Development Bank. In mid-May 2024 the AU and the AfCFTA Secretariat brought together in a consultative forum, CEOs of African commercial banks, banker’s associations, payment groups, the association of African stock exchanges and other financial service providers.
The delegates to the forum reaffirmed the 2020 decisions of the AU, the AfCFTA and the decision of PAPSS and the African Financial Market Infrastructure for cross-border payments and settlements. The Forum provided a platform for discussing and scaling up and exploring the potential for the urgent introduction of the PAPSS to support the implementation of AfCFTA.
The two major challenges with the PAPSS include the fact that currently intra-African trade only accounts for less than 15% of Africa’s exports; and secondly, trade between African countries is not balanced with some African countries exporting goods of higher value and importing goods of lesser value. If own currencies are used in these transactions the exporting countries will end up with a currency they do not need presenting a serious currency risk.
In such cases the countries choose to transact using the US$ or another convertible foreign currency to overcome the currency risk. The mid-May 2024 Forum was aware of the risks and called for increasing the scale of the PAPSS as the more the system is used the easier it will be to settle transactions in own currencies and currency risk will diminish. However, in the meantime the PAPSS will have to build up a strong balance sheet to carry some of the risk in the interim.
In the meantime the Afreximbank and other African financial institutions represented at the last Forum have undertaken to support the PAPSS as a potential pathway for accelerating the implementation of the AfCFTA. Already the AfCFTA Secretariat has embarked upon a pilot scheme called the Guided Trade Initiative (GTI) of the African Continental Free-Trade Area (AfCFTA).
Scaling up the PAPSS is already underway as in 2024 24 new countries joined the 7 other GTI members that joined in October 2022. The aim of the GTI is to boost intra-regional trade, increase the African revenue base, improve resilience and mitigate against external shocks. In January 2024 South Africa became one of the 24 new countries to join the GTI. As a pilot scheme the GTI will attempt to address the issues of tariff and non-tariff barriers and other structural challenges such as the lack of transport infrastructure and skills levels in Africa.
So far, the GTI that started in West Africa has same level of complexity existing in Africa in general and the pilot there proved a success. Reporting at the 2024 Davos Economic Forum the AfCFTA Secretary General indicated that Africa’s real income could increase up to 9% by 2035 provided the implementation of policies on investment, e-commerce and intellectual property rights are adopted. In addition, cross-border transactions using PAPSS has bypassed the use of the US$ or Euro resulting in a saving of US$5bn while at the same time accelerating transactions.
Despite this level of success non-tariff barriers such as infrastructure and logistics act as serious obstacles in the medium term. In this regard China, through its infrastructure investment in African countries and regions and, its shareholdings in some of Africa’s biggest banks will play a key role in the implementation of the AfCFTA and its payment system.
China owns 20% of Standard Bank in Africa and banks and financial institutions from China have been operating in some of Africa’s major economies for several years now. In addition, China’s advances in innovation and technology in financial systems and payment systems will be a boost for aiding in the implementation of the PAPSS.
The 61st Anniversary theme of the African Union was “The Year of Education - Educate an African fit for the 21st Century”. Promoting and advancing education for sustainable development in Africa is an important program as one of the greatest structural impediments to the development of AfCFTA and the PAPSS is the lack of adequate skills for African countries to take the leap forward in advancing development.
Here too China has shown the way in investing in educational opportunities in Africa and offering scholarships and internships for African students in world ranked universities in China. Africa can take a leaf out of China’s experience in wiping out absolute poverty in thirty years and over the next thirty years extreme poverty and underdevelopment can be eliminated in Africa. Over the past sixty-one years Africa has managed to liberate itself from colonialism and apartheid. Perhaps over the next thirty years, given the potential of a GDP of US$ 3,400bn, 54 countries and a population of 1.3bn the full operationalisation of AfCFTA will transform Africa into the largest free-trade zone in the world.