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Africa eyes moment of free-trade transformation

In March, under the auspices of the African Union and its chair, Rwandan president Paul Kagame, 44 African countries signed up to be part of the largest trading bloc in the world after the World Trade Organization. 

In July, after dragging its feet, South Africa finally signed up. 

“When South Africa came to the table, we knew things were getting serious,” says Peter Enti, partner and portfolio manager at Nubuke Investments, an investment and advisory business that focuses on Africa.

Peter Enti,
Nubuke Investments
Along with South Africa, a further four African countries joined the African Continental Free Trade Agreement (AfCFTA) bringing the total to 49 so far. Some countries have even started to ratify it – 22 countries will need to do so for the agreement to come into force. 

At the heart of the agreement is the creation of a single market, with free movement of investment and capital, eventually leading to the creation of an African customs union for the entire continent covering 1.2 billion people and with a GDP of $2.5 trillion. Its size, in terms of population and GDP is close to India’s. Africa’s continental advantage, however, is the huge range and volume of its natural resources. 

“The AfCFTA will help to boost growth across the countries in the free-trade area,” says Wola Asase, senior vice-president, syndications and trade finance at the Africa Finance Corporation (AFC). “One of the benefits that will drive growth will be the need to integrate value chains across the area. Countries within the area will be able to develop industries not just with local markets in mind, which would probably make investments unviable, but with the larger 1.2 billion market created by the agreement.”

Kevin Holmes, head, trade, product management at Standard Bank, says: “If industry leaders and local regulators create a frictionless environment to stimulate investment opportunities across the continent supported by the AfCFTA agreement, the prospect of intra-Africa trade will be realized.”

A free-trade agreement that encompasses the whole continent will also give Africa a stronger negotiating position to obtain better terms of trade with the rest of the world – especially as global trade ties shift in response to Brexit and US-China trade disputes.

There is already talk of the introduction of an Africa-wide currency, an African central bank and the multiplicity of regulatory bodies that come with creating a customs union. First and foremost, however, the continent will focus on increasing intra-African trade.

Intra-African trade as a percentage of total African trade is extremely low at 15% by volume, especially when compared with the internal trade figures for Europe (67%), Asia (58%) and North America (58%). 

The African Union believes that the formation of a trade bloc between all African countries will increase intra-African trade to 52.3% as early as 2022. 

African trade volumes amount to a just 3% of total world trade.

“The [intra-African trade] number may be slightly fanciful, but the ambition is there,” says Gregory Kronsten, head of macroeconomic and fixed income research at FBNQuest, an investment bank and financial advisory company based in Nigeria. 

Indeed, Africa trades more with Europe and Asia than it does with itself, often exporting raw materials at one price and importing value-added products from Europe and Asia at a higher price. 

Takunda Pongweni, Rand Merchant Bank
“That needs to change,” says Takunda Pongweni, head of financial institutions for trade and working capital at Rand Merchant Bank. “You can go into a shop in Luanda and find a wide selection of French wines, and yet none from South Africa; South Africa still buys an estimated 65% of its oil from outside of Africa. 

“It comes at a price, of course, but the point is that Africa trades with the rest of the world more than it does with itself. And when you live in an environment like that, you know that, as an African, you are missing out on an immense opportunity.”

The hope is that trade liberalization will spearhead industrialization and manufacturing, create jobs, develop capital markets and drive economic growth, says Pongweni. 

“If it works, it will take Africa to the next level.”

Stakeholders argue that this is a defining moment in Africa’s history – the point at which Africa begins to engage with its neighbours for its own development instead of relying on outdated colonial ties that have driven trade in the past.

“Africa’s borders are rigid, straight lines that were carved out by colonial hands, and colonial ties are still strong – these are the ties that continue to drive African trade patterns,” says Pongweni. “AfCFTA aims to change this.”

Redirecting old trade routes could help ease the continent’s ever-increasing dependency on China, which threatens debt sustainability in many sub-Saharan African countries. 

According to Standard Chartered, new contracted projects between China and Africa amounted to $76.5 billion in 2017. From roads to railways, China is helping Africa close its infrastructure gap – essential to boost regional trade.

But could the debt burden be too much? 

Data compiled by the IMF shows that Chad, Eritrea, Mozambique, the Republic of Congo, South Sudan and Zimbabwe were considered to be in debt distress at the end of 2017, while Zambia and Ethiopia were considered to have a high risk of debt distress. All have taken on very big loans from China.

Looking to boost trade internally may help the continent alleviate some of the pressures relating to foreign debt, while still helping the region meet its infrastructure needs.

Dollar overreliance

Inevitably, cross-border financial transactions will increase with cross-border trade. But some argue that AfCFTA probably won’t have a large impact on the way intra-African payments are made because, for the most part, this type of trade is denominated in global foreign currencies – mainly the dollar.

Asase at the AFC says: “Settlements will continue to happen in the same way, through foreign correspondent banks, and cross-border transactions would likely become easier if and when the objective of a single currency under the AfCFTA is achieved.” 

For now, there are not any technical or regulatory obstacles to cross-border transfers except for the fact that they are needlessly expensive, says Dimieari Von Kemedi, co-founder and managing director of Alluvial Agriculture, a diversified commodities business based in the Niger Delta. “In some instances, it can cost $25 to transfer $10. But once the demand rises, someone will find a way to make it cheaper. There is a fintech opportunity right there.” 

But Africa’s overreliance on the dollar is an unnecessary burden and obstacle to African trade, says Ade Ayeyemi, group chief executive at Ecobank Transactional Incorporated. 

“What you actually need is more visibility, more information on the needs of manufacturers and importers across Africa,” he says. “If we are able to create this visibility – match up what a buyer in Nigeria and a seller in Ghana want to achieve – then Africa’s reliance on the greenback will fall away.

“Informal trade that occurs across borders all use local currency, not dollars. We need to develop the infrastructure to reduce our overreliance on the dollar.” 

Pan-African banks such as Ecobank hope to fill this gap, using their on-the-ground experience and large branch network to facilitate trade and the use of local currencies over the dollar. 

However, banks now must grapple with the complex financial regulations of each country as cross-border trade increases; there are as yet no plans for financial alignment across the continent to coincide with the free trade agreement. 

Kevin Holmes,
Standard Bank“Banks and other financial institutions will need to consider domestic regulations that fall outside of the agreement,” says Holmes. “There will be myriad issues to contend with – central bank regulations, state regulations, foreign exchange risks, Basel II among others. The free movement of goods and services is an admirable goal, but the reality is it’s complicated.”

Asase says: “Regulators across countries will have to increase their collaboration in order to better manage these potential risks.

“Global and regional banks that already have experience conducting business across multiple countries will be in a better position to manage aspects to do with cross-border risk, however local banks will need to monitor their portfolios to ensure that external risks as a result of the integration are properly monitored and controlled.”

Compliance will also be a big issue. 

“It goes without saying that anti-money laundering, anti-bribery, corruption, sanctions, terrorism financing will remain key themes that banks – especially local banks – should continue to manage,” says Asase.


Many other obstacles exist. A big one is the ease of aligning Africa’s widely disparate markets under one trading union and eventually a common market – especially at a time when developed-market equivalents, such as the European Union, appear to be fracturing. 

Pongweni takes the example of equity markets

“Look at equity capital markets in Africa,” he says. “The Johannesburg Stock Exchange trades between $1.2 billion to $1.5 billion a day – that’s 60 times more than the daily average volume in Nigeria, which is the second biggest equity market in sub-Saharan Africa.

“When markets are so vastly different, aligning them under one system will be difficult and will take some time.” 

Because each African country is at its own stage of development, governments across the continent are keen to keep protectionist policies in place. Indeed, Nigeria is missing from the list of AfCFTA signatories precisely for this reason. 

In July, the country’s president, Muhammadu Buhari, argued that the free-trade agreement would undermine the country’s manufacturers and entrepreneurs and could force some of Nigeria’s small and medium-sized enterprises (SMEs) to close down. 

In addition, Nigeria’s youth need to be protected, said Buhari. According to the Nigerian Bureau of Statistics, 40.6% of Nigerians aged between 15 and 34 are unemployed and 58.6% are under-employed. 

“In trying to guarantee employment, goods and services in our country, we have to be careful with agreements that will compete maybe successfully against our upcoming industries,” said Buhari.

Nigeria’s government has not said that it will not sign, but says that it needs more time to discuss the agreement with stakeholders in the country, including the Nigerian Labour Congress, the umbrella organization for trade unions, the Manufacturing Association of Nigeria and private businesses.

Losing the competitive edge in Nigeria is largely an issue of access to electric power. 

While Nigeria has the fourth most diversified economy in Africa, more than half its population of 180 million people has no access to power. Those that do suffer regular power outages. The use of diesel or petrol generators is a huge cost on business profitability. 

Lobbyists in Nigeria worry that the free-trade agreement will cut profits further as they become unable to compete with companies that have leaner (and cleaner) business models.

“Nigeria will eventually sign – they’ll have to – but will their heart be in it? I doubt it,” says one investment banker based in Ghana. “Look at it this way, Aliko Dangote, Africa’s richest man, makes huge margins from his cement business in Nigeria. Do you think he will be willing to give up his profits and join the free-trade area? He’ll have something to say if the government signs up to the free-trade agreement without listening to his concerns.” 

Ade Ayeyemi, group chief executive at Ecobank Transactional Incorporated

Ayeyemi at Ecobank argues: “Some countries that are reluctant to sign do so because they take a short-term view, but aiming for the free movement of goods, services and capital is essential for Africa to thrive. Surely it would be better for Nigeria to create business opportunities in nearby Ghana than in China, by trading with them rather than countries in the continent. 

“In fact, Nigeria has a lot to gain from joining AfCFTA precisely because of the size of the economy,” he adds.

Protectionist policies threaten to derail the AfCFTA and continue to affect the regional economic communities that already exist in Africa. To the west is the Economic Community of West African States (Ecowas); in the east, the East African Community (EAC); and in the south, the Southern African Development Community (SADC) and the Common Market for Eastern and Southern Africa (Comesa). 

In east Africa, for example, nationalist tendencies still hinder cross-border trade. In 2010, when Burundi, Kenya, Rwanda, South Sudan, Tanzania and Uganda signed up for the establishment of a common market, it was agreed that customs duties would be eliminated, non-tariff barriers to trade between partner states would be removed and a common external tariff in respect of all goods imported into the community would be streamlined. 

Trade rebalanced. Tanzania and Rwanda saw an increase in their total trade with the region while Kenya saw a fall. Despite the fact that trade was increasing in absolute terms, non-tariff barriers continue to hinder trade in the region. 

The creation of an African free-trade agreement is an admirable but daunting task. Combining 54 disparate countries into a single market for the free movement of goods, services, people and investments will take decades. 

“Things take time,” says Enti. “Breaking down barriers – cultural, political, language and financial – across the entire continent for the mutual benefit of everyone will take time. We are not saying that it will be a perfect system from the start, but we have to start from somewhere.”

Holmes says: “It’s an ambitious task to say the least. But it has the potential to completely transform the continent.”

Making Nigeria great again

Bose Ayeni, co-founder and chief executive of Tantalizers PLC, remembers when her company was just starting out. The fast-food chain opened its first branch in Lagos in 1997, but it wasn’t easy. 

“We were able to get a small loan from a bank – not because they liked our business model but because they knew us personally,” says Ayeni. “The interest rate was still painfully high. Around 20% in those days. For a small business trying to get on its feet, it was difficult for us to maintain these payments.”

Tantalizers persevered. Repayments were made on time and in full. Now the firm employs 1,000 people in Nigeria in over 50 branches throughout the country. 

“Once we showed that we can make the payments and we demonstrated our ability to grow, we were able to access more bank financing,” says Ayeni.

It is a similar story today. Interest rates are still around 20% for small and medium-sized enterprises hoping to borrow from commercial banks. Some SMEs access finance from microfinance institutions as an alternative – but in those cases it is not uncommon to hear of interest rates of 5% a month. 


Bankers on the ground blame the fact that many of these SMEs still do not have accurate financial records or collateral to back the loan. The risk, they say, is just too high. 

“When president [Muhammadu] Buhari argues that a continental free-trade agreement will hinder Nigeria’s growth and SME development, what he has conveniently chosen to ignore is the fact that local businesses don’t have the capacity to grow because they can’t get the capital to do so,” says a Ghanaian banker. “And why would Nigerian banks choose to invest in risky SMEs when they can safely put their money in government securities? The government has crowded SMEs out in Nigeria.” 

Change is afoot. Nigeria’s Bank of Industry, the country’s development finance institution, has a number of funds dedicated to supporting Nigeria’s burgeoning sugar, cassava and cement industries at interest rates as low as 7%. 

Earlier this year, the bank signed service agreements with 122 consultants to help them identify appropriate SMEs for funding at the more affordable interest rates. 

The central bank has also taken some steps to support Nigeria’s SMEs. 

“Under the direction of the central bank of Nigeria, all banks in the country are required to dedicate 5% of all profit after tax to fund SMEs at low interest rates,” says Peter Bamkole, director at the Enterprise Development Centre at the Pan-Atlantic University in Lekke, Nigeria. The Enterprise Development Centre was set up 16 years ago to identify the needs of Nigeria’s SMEs and to support them.

“We are also introducing a unique identification number for people in Nigeria opening bank accounts so we can start keeping a record of payments and debts,” says Bamkole. “This could hopefully be used in place of collateral, making lending easier.”

Perhaps Nigeria’s businesses will begin to grow.

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