Facilitating the transformational agenda of AfCFTA

Facilitating the transformational agenda of AfCFTA

Tools for eliminating bottlenecks

By Benedict Okey Oramah

Africa was on the cusp of a revolutionary economic transformation before the COVID-19 pandemic struck, and the ensuing crisis just underlined the urgency of that process. Right now, countries across Africa are overcoming years of colonial division through the African Continental Free Trade Agreement (AfCFTA). The AfCFTA is, in many ways, a treaty that will transform Africa from a fractured, commodity-dependent group of economies into a vibrant, integrated market of over 1.2 billion people. Trading under the agreement, delayed by the pandemic, commenced on January 1, 2021. 

The African Export-Import Bank has already disbursed close to $20 billion for intra-African trade during the last four years, and will double this amount in the coming years as it seeks to close the annual trade finance gap in Africa estimated by the International Chamber of Commerce at $110 billion to $120 billion.

It is estimated that the fiscal losses associated with the removal of trade tariffs amounts to over $4.1 billion in the short term. Afreximbank is working with the AU to introduce a $5 billion AfCFTA Adjustment Facility—a compensation mechanism—to help AfCFTA member countries better adjust to the fiscal and other impacts of the trade agreement. 

The Facility will cover the short-term fiscal losses and support medium-to-long term adjustments of production activities in African countries to enable them take advantage of the opportunities arising from the AfCFTA. The implementation of the AfCFTA will extend beyond financing, and Afreximbank is creating tools to eliminate bottlenecks and facilitate the full realization of the deal’s potential. 

For example, Afreximbank’s African Trade Gateway, an agglomeration of interrelated digital platforms, will eliminate some of the challenges to intra-African trade, particularly around the complexities of payments transfers within Africa, currently-low access to trade and investment information, and costs associated with conducting Know-Your-Customer checks on African entities. 

Afreximbank’s Pan-African Payment and Settlement System will allow payments for intra-African trade in local currencies and save the continent several billion dollars in transfer and settlement charges, thus further boosting intra-continental trade. The Trade Information Portal will improve access to trade information and use artificial intelligence to predict supply chains across Africa by helping businesses easily identify potential suppliers of inputs or distributors of their products in other parts of the continent. 

The African Customer Due Diligence Repository Platform will ease the cost of conducting Know-Your-Customer checks for African corporates. The Trade Regulations Platform will aggregate all trade, finance, and investment regulations to reduce search costs for traders and investors. Already, Afreximbank has invested over $1.7 billion recently in supporting the development of regional value chains to accelerate the process of industrialization and lift the supply-side constraints that have undermined the growth of African trade. COVID-19 has highlighted the risk of excessive dependency on non-African partners; Afreximbank is working to reverse that standard. 

No country in Africa has been spared by the COVID-19 pandemic, and the hard-fought economic gains of recent years are under threat everywhere. In fact, in 2020, the region’s GDP could contract by as much as 3.4 percent, down by over 7 percentage points from pre-crisis estimates. Improved infrastructure has rightly been among the countermeasures proposed and should be a major component of any stimulus plan, both for responding to the pandemic and for building resilience over the long term. 

And it should not just be any infrastructure, but projects that stimulate economic activity, create employment, bolster supply chains, and expand access to health care, sanitation, and education. Thus, with the continent’s long-term future in mind, at Africa50, while we are still focused on traditional sectors such as transport and power generation, we are looking for opportunities in health and sanitation and redoubling our efforts in information and communications technology (ICT).

Although ICT has been one of Africa’s success stories, the pandemic has exposed the region’s lingering digital divide.

Health infrastructure has historically suffered from constrained public sector budgets and underfunding. For many years, since African residents that could afford modern care opted to go overseas and financial returns for mass provision were low, the sector did not attract many private investors. 

With the growth of Africa’s middle classes, growing purchasing power, increased employer-provided health insurance, and rising health awareness, the sector is becoming more attractive to investors. Helped by public funding, impact investors, and blended finance, where focus is more on development impact than on financial returns, this emerging trend of increased investment in health care can also spill over into the mass market. 

Although ICT has been one of Africa’s success stories, the pandemic has exposed the region’s lingering digital divide. In fact, to achieve universal broadband internet access in Africa—which could help the continent leapfrog infrastructure constraints in a number of sectors, much like cellphones did with landlines 20 years ago—an estimated $100 billion in investment is needed over the next decade, with a third of it in infrastructure. 

Africa also urgently needs regional infrastructure to speed up implementation of the African Continental Free Trade Area, since many of Africa’s development challenges require cross-border solutions. However, the Infrastructure Consortium for Africa found that in 2018, of a total of about $100 billion invested in African infrastructure, only 2 percent was for regional projects120–simply not enough. Unfortunately, financing becomes scarcer during crises, so what can leaders do? 

One strategy for securing financing is for lenders to forgive or restructure public debts to give governments fiscal space. Another is asset recycling, which enables governments to unlock the capital they invested in profitable infrastructure, such as toll roads, power plants, airports, and fiber optic networks, by offering them to private sector investors under a concession model. The freed-up capital can then be redeployed to fund stimulus plans and new infrastructure for the recovery phase, including in the health sector. 

We must also reverse the capital flight brought on by the pandemic by better developing infrastructure projects in the early stages to make them ready to receive investments and offer attractive risk-adjusted returns. Investors want to be sure that they will be paid a fair price, can freely operate infrastructure assets and meet service level targets, and can repatriate their profits when due. Development finance institutions can help by providing risk-hedging instruments and credit enhancements, as well as supporting local currency financing to strengthen local capital markets. 

Through such measures we can underline that infrastructure is an investable asset class, including for international and domestic institutional investors looking for steady returns coupled with development impact. Assets under management by African institutional investors alone are expected to rise to $1.8 trillion by 2020,121 so if we can tap even a fraction of this, we could substantially close the infrastructure gap. When the crisis dies down, investors will once again be looking for opportunities, and Africa must be ready. 

By focusing on opportunities rather than problems and creating the enabling environment investors seek, we must dispel the myth that our continent is too risky. ( 

Author is President, African Export-Import Bank

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