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The Path Forward: African Continental Free Trade Area and the Continent's Ambitious Integration Initiative

The African Continental Free Trade Area (AFCFTA), established in the late 2010s by member states of the African Union (AU), stands as a monumental agreement uniting the continent's vast economy, encompassing 1.3 billion people. Through numerous rounds of negotiations, this landmark deal has garnered support from 54 signatories, with 47 having officially ratified it as of February 2024. The AFCFTA represents a significant opportunity not only to enhance intra African trade but also to advance the economic development agenda, particularly in terms of employment.

By fostering greater connectivity and cooperation among African nations, the AFCFTA holds immense potential for job creation and value generation within the region. This prospect not only signals the dawn of a new era of industrialization and business expansion but also aligns with the overarching goals outlined in the African Union's Agenda 2063. Beyond its economic implications, the AFCFTA serves as a symbol of solidarity and unity among the diverse peoples of Africa, aiming to break down barriers and facilitate more efficient movement of goods across borders.

The scope of the AFCFTA is comprehensive, addressing various aspects of trade policy, including tariffs, trade facilitation measures, regulatory standards such as sanitary and phytosanitary standards, technical barriers to trade, intellectual property rights, and competition policy. Moreover, the project has been instrumental in assisting AU member states in developing national strategies tailored to their unique market characteristics, ensuring effective implementation of the AFCFTA.

For instance, Zambia has taken proactive steps by drafting its national implementation strategy and conducting validation workshops with key stakeholders. This strategic approach exemplifies the commitment of individual countries to fully embrace and leverage the opportunities presented by the AFCFTA. It underscores the significance of equipping nations with the necessary tools and resources to navigate the complexities of ratifying and implementing such a transformative agreement.

In essence, the AFCFTA represents a monumental leap forward for Africa, promising to unlock new avenues for economic growth, job creation, and sustainable development. By fostering greater integration and cooperation, the agreement not only seeks to enhance trade dynamics but also to foster a sense of unity and solidarity among African nations. Through strategic planning and collective action, countries like Zambia are paving the way for a future characterized by shared prosperity and mutual benefit within the African continent.

Factual Background
The African Continental Free Trade Area (AfCFTA) was ratified in Kigali during a March 2018 African Union Summit and began its operational phase in June 2019. Scheduled for a review in 2024, this agreement signals a departure from the global trend of declining confidence in regional integration and underscores African nations' commitment to addressing the longstanding issue of economic fragmentation dating back to colonial times. AfCFTA is viewed as a pivotal step towards achieving Africa's developmental goals, with no viable long-term strategic alternative in sight. While the implementation phase officially began on January 1, 2021, there has been limited evidence of a substantial increase in trade volume under the new rules.

The Guided Trade Initiative, initiated in October 2022 with seven participating countries, served as a pilot project, showcasing the feasibility of intra-African trade under AfCFTA procedures. However, it also revealed several challenges, including customs officials' unfamiliarity with tariff schedules, extended delivery times of up to six months, and high freight costs. These obstacles are understandable for several reasons: regional agreements typically require time for full implementation, as evidenced by the lengthy process in the European Union; the AfCFTA's gradual tariff elimination extends until 2034, and non-tariff barriers are considered more significant obstacles to intra-African trade than tariffs, necessitating time for resolution.

It's worth noting that with 55 member countries, AfCFTA constitutes the largest trading bloc globally. While negotiations were anticipated to be complex and time-consuming, considerable progress has been made in establishing the legislative framework for AfCFTA. Phase 1 negotiations covering goods, services, and dispute settlement mechanisms have concluded, oversight committees have been established, and work programs adopted.

Nearly all African member states have signed the agreement, with the majority having ratified it by December 2023. Tariff reduction schedules and services schedules have been adopted, alongside rules of origin, except for vehicles and textiles and clothing. Negotiations on key associated protocols, including investment, intellectual property, and competition, have also been finalized and adopted. Nonetheless, there is growing impatience for rapid trade growth under AfCFTA rules.

Battling Global Economic Headwind AFCFTA
AFCFTA serves as a homegrown solution to bolster industrial development, create new business opportunities, generate employment, and alleviate poverty in Africa. Since the beginning of 2019, the United Nations Economic Commission for Africa, along with partners such as the African Union Commission, the International Trade Centre, UNCTAD, and independent trade experts, has been collaborating on a project funded by the European Union.

This project has been active in over 35 countries, engaging with various stakeholders including the private sector, government entities, media, civil society, and academia to facilitate discussions on AFCFTA at both national and regional levels. External factors beyond Africa's borders have been influencing policy-making and economic outcomes, with export revenues, diaspora transfers, and foreign investments serving as significant channels through which global forces impact the African economy.

However, despite these efforts, the African economy has been facing challenges with increasing illiquidity, instability, and stagnation since 2013/14, exacerbated by recent global headwinds. While the ongoing conflict in Ukraine has posed challenges for Nigeria, domestic policy responses in various countries have also contributed to adverse economic impacts.

Option For Resolving Global Headwind
The primary recommendation is to accelerate industrialization at a rapid pace. Manufacturing has historically proven to be a crucial driver of economic development. In sub-Saharan Africa, a significant portion (almost 47) of economic activity is attributed to the services sector, which typically exhibits low productivity and has limited impact on per capita incomes. Manufacturing stands out as the sector capable of efficiently transforming unskilled informal labor into productive formal employment.

Currently, a substantial portion (60%) of African imports consists of manufactured goods. By localizing some of this production, Africa can retain a larger share of the value domestically and generate new employment opportunities.

As manufacturing expands, there will also be increased demand for more sophisticated services. However, Africa must adapt its approach to industrialization, as relying solely on wage differentials may become less effective with the advancement of robotics and AI technologies, potentially eroding any cost advantages. With shifting supply chains and evolving global trade dynamics, AFCFTA presents significant prospects for investment across the African continent.

The next recommendation is to reduce dependence on external financing and instead focus on mobilizing domestic capital. The strength of the U.S. dollar and high interest rates pose challenges for debt servicing, making it imprudent to continue relying on international creditors. Africa should leverage its own wealth, starting with the $2.3 trillion of investment funds, pension funds, and sovereign wealth funds currently held overseas. Repatriating these funds could be facilitated by deepening domestic capital markets, which have remained underdeveloped and hindered industrialization in Africa.

AFCFTA plays a role in catalyzing capital formation by enabling the aggregation of small savings into larger investments. Increased participation in capital markets by citizens reduces the need for foreign borrowing, signaling competitiveness to investors. A well-regulated and robust financial market functions like a smoothly operating combustion engine, efficiently directing capital to where it's needed. The success of the Pan-African Payment and Settlement System, facilitating instant cross border payments in local currency, could not only facilitate intra-African trade but also reduce reliance on hard currencies like the U.S. dollar and third-party banks in the U.S. or Europe.

Role Of AFCFTA In Entrepreneurial Development

African countries have a considerable portion of their population excluded from traditional banking services, creating space for the emergence of local financial innovators. Fintech startups, empowered by the digital revolution at the core of AFCFTA, are taking center stage in this domain. The ascent of fintech in Africa is a recent and significant phenomenon, with startups offering diverse financial services like savings, loans, insurance, and other digital financial products to the general public.

Moreover, fintech ventures are expanding into realms intersecting climate and finance, providing offerings such as sustainable banking, climate insurance, impact investing, and ESG (Environmental, Social, and Governance) reporting.

To bolster the fintech sector, it's crucial to establish supportive policies involving financial regulatory bodies and promote inclusive digitalization. The demographic outlook is promising, with projections indicating that over 40% of the global youth population by 2030 will be African, and the African youth population is expected to reach 830 million by 2050.

This demographic shift presents an exciting opportunity for young individuals to contribute to economic development and positively influence millions of lives through entrepreneurship. Africa already exhibits some of the highest rates of entrepreneurial activity globally, with more than one in five working-age Africans initiating new businesses, and a significant majority of young people planning to do so within the next five years. Entrepreneurship in Africa is often plagued with problems including but not limited to:
  • Lack of access to appropriate funding instruments required to start, maintain, and grow a business.
  • High cost of operations due to inadequate infrastructure.
  • Poor macroeconomic conditions.
  • Government policies unsupportive to business.
Combining these challenges with sluggish economic growth and inadequate social protection programs, African economies are anticipated to face fewer economic hurdles in the future. AFCFTA will bolster existing entrepreneurial models in Africa, ensuring that young individuals are not misled by unrealistic expectations of future prosperity and stability. It is imperative for academic institutions, governments, donors, and financial backers to actively foster a conducive environment for entrepreneurship to flourish, with the aim of generating substantial employment opportunities across Africa.

The Role Of AFCFTA In African Internal Policies
Accelerating domestic resource mobilization (DRM) is a key objective of the AFCFTA, which aims to achieve this through expedited reforms of tax systems. This includes enhancing DRM through improved audits and compliance measures, addressing leakages, and broadening the tax base. Additionally, the agreement seeks to promote financial innovation and inclusion within African economies.

While the financial systems in Africa have expanded in recent years, there remains a significant gap in financial inclusion. The AFCFTA aims to empower marginalized groups such as youth, women, small farmers, and SMEs by fostering an environment conducive to their participation in the financial sector. This entails the development of innovative business models that cater to the needs of underserved populations, thereby ensuring sustainable profits while promoting social inclusion.

Another critical aspect addressed by the AFCFTA is the integration and consolidation of disparate capital markets across the continent. With the exception of South Africa, African financial systems are characterized by thin and dysfunctional markets, as evidenced by the underdeveloped nature of stock exchanges. These markets suffer from low capitalization and trading activity compared to similar markets in other low-income countries outside Africa.

It is imperative to consolidate these markets through regional cooperation initiatives, which may involve harmonizing trading laws, standardizing accounting practices, and promoting currency convertibility. Furthermore, the development of skilled financial manpower is essential to support the growth and stability of African financial systems. As finance and financial innovation become increasingly complex, there is a growing need for talent capable of managing and controlling risk within these systems.

This entails developing a deeper understanding of risk management among African financial regulators and institutions. Collaboration between local and international knowledge institutions can play a crucial role in producing competent financial professionals and regulators who can effectively navigate the complexities of modern financial systems.

In summary, the AFCFTA aims to accelerate domestic resource mobilization, promote financial innovation and inclusion, integrate and consolidate capital markets, and develop talented financial manpower across Africa. These efforts are essential for fostering economic growth, stability, and inclusivity within the continent's financial systems.

By addressing these challenges and harnessing the potential of African financial markets, the AFCFTA has the potential to drive sustainable development and prosperity across the continent.

Conclusion
Over the past six decades, Africa has undergone significant transformation, with its demographic landscape poised to double its population in the next 25 years. Embracing a reformist approach that responds to this demand will unlock higher growth prospects. Regional integration emerges as a crucial strategy for enlarging African markets. Intra-African trade currently stands at a global low of approximately 15%, contrasting sharply with figures such as 54% in the North American Free Trade Area, 70% within the European Union, and 60% in Asia.

There is a palpable momentum for integration across various sectors and societal levels, as people actively seek to strengthen connections with one another. AFCFTA is aiming at integrating the market of 55 Countries of Africa which has a combined GDP of 3.4 trillion. This is a big market aiming African on taking advantage of the Market. Investors from Africa Should be the first to benefit from this Market.

It is the mobilizing factor for African governments who have really worked on consolidating a relationship between two countries with the purpose of bringing people together. Hence, the AFCFTA will be a game changer for global trade agreements.

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