The African Continental Free Trade Area (AfCFTA) agreement, launched on 1 January 2021, connects 1.3 billion people across 55 countries with a combined gross domestic product valued at $3.4 trillion.
The agreement aims to reduce all trade costs and enable Africa to integrate further into global supply chains – it will eliminate 90% of tariffs, focus on outstanding non-tariff barriers, and create a single market with free movement of goods and services.
Cutting red tape and simplifying customs procedures will bring significant income gains. Beyond trade, the pact also addresses the movement of persons and labour, competition, investment, and intellectual property.
Wamkele Keabetswe Mene, Secretary-General of the African Continental Free Trade Area Secretariat, who will be speaking at the Africa Oil Week in Dubai in November, said: “AfCFTA has the potential to be a catalyst for industrial development, placing Africa on a path to exporting value-added products and improving Africa’s competitiveness both in its own markets and globally. It also sends a strong signal to the international investor community that Africa is open for business, based on a single rulebook for trade and investment.
“The global economy is on the brink of a new industrial revolution, driven by new-generation information technologies such as the Internet of Things, cloud computing, big data and data analytics, robotics and additive manufacturing. All of this presents challenges and opportunities for the AfCFTA.”
Oil and gas market to gain leverage through AfCFTA
One of the industries that can benefit from AfCFTA is the energy sector, both the traditional oil and gas operators as well as the growing number of renewable enterprises.
Oil and gas and mineral resources account for more than 75% of the continent’s exports and with the high growth potential in oil and gas, it will still have a role to play in the short and mid-term. Estimations vary but recent figures put Africa’s proven gas reserves at 487.7 tcf with proven oil reserves in the region of 125 billion bbl.
However, trade barriers such as high import tariffs have left many African countries vulnerable to the international market, which resells its resources at higher prices.
The AfCFTA will potentially end this practice as oil and gas producing countries will benefit from global markets as well as the domestic market. Focusing more on growing intracontinental oil and gas trade will give countries autonomy to govern their international trade agreements, which have often left African countries on the losing end.
Analysis indicates that the AfCFTA will make room for the generation of GDPs that can positively impact African economies, create employment, and impact infrastructural development. While this is a necessary benefit that will positively impact Africa, it is already a continent plagued by corruption, which has resulted in the delayed development of essential infrastructure required to facilitate the ease of trade through the AfCFTA.
Delivering on the energy transformation
In its policy brief ‘Accelerating Green Energy Transition in Africa Through Regional Integration’ the SAIIA states that individually, most African countries lack the financial, technical, and human capacities needed to fully implement a green energy transition.
This indicates an important role for some collaboration, both between African countries and with external partners, to enable Africa to address its energy deficit. While many modalities for financing African green energy transition have been highlighted in the policy discourse, two recent trends seem promising in fast-tracking the transition process.
First is the AfCFTA, which promises to build regional markets for goods and services, with free movement of persons and investment. By consolidating small, poor, and fragmented African countries into one strong market, the agreement can change the dynamics in terms of access to funding, human capital, and technology for the green energy sector. The second important trend is the evolving Europe-Africa relationship.
A regional approach to addressing the African energy deficit is not new, as regional power pools already exist, through which African countries manage power generation and distribution. The AfCFTA, directly and indirectly, addresses these challenges, which will both improve the prospect of regional power pools succeeding, as well as a greater acceleration towards green energy.
First, the AfCFTA intends to scale investment in regional infrastructural projects and given that renewable energy is a significant component of regional power pools, this can accelerate the transition to green energy. The second phase of negotiations is centred on protocols for cooperation on investment, intellectual property rights and competition policy.
This protocol provides for national and continental investment as well as support for existing investment promotion agencies like the Programme for Infrastructure Development in Africa (PIDA).