How the continental free trade area is changing Africa

As a whole, Africa is halfway to achieving the a fully fledged free trade zone. North Africa has positioned itself as the second-fastest-growing sub-region on the continent with an estimated GDP increase of 3.4% in 2019. However, growth remains volatile, due to dependence on sectors, sensitive to exogenous shocks (primary sector and natural resources). Unemployment, particularly among youth and women, remains a major challenge. The unemployment rate is structurally high, averaging over 10% between 2015 and 2018.

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North Africa as a middle-income country

North Africa is currently confined to the position of “middle-income” countries and needs to address countless important issues in order to improve its positioning in the global value chain. Among other major concerns, better integration in trade, both regionally and globally need to be addressed. The resgion uffers from very low integration vis-à-vis its African neighbors, while regional exports account for less than 5% of the subregions total exports.

The African Continental Free Trade Area (ACFTA), offers a golden opportunity for North Africa to strengthen regional integration and create hundreds of thousands of new job opportunities. The positive growth prospects of the African continent can indeed turn the FTAA into an exceptional opportunity for North Africa to increase its exports of manufactured goods.

The potential to increase the GDP

Regional integration has the potential to increase the GDP of member countries by about 2-3%. As intra-African trade is projected to increase by nearly $70 billion in 2020, North African exporters could receive up to 20% of this gain. 53% of this expansion would be attributable to an increase in intra-North African trade alone and the rest to an increase in exports from North African countries to the rest of Africa.

North African countries should coordinate their policies to promote the sub-regions capacity to benefit from a free trade area. Policies should facilitate trade, finance, and investment within and across borders, particularly to build regional value chains in sectors such as textiles, food processing, and automobiles as prime examples.

Among others, these policies, should eliminate formal and informal tariff barriers, improve the regional road network, and strengthen port services that suffer from inefficiencies, bureaucratic delays and the lack of a well-defined regulatory environment.

Private sector development is key to seizing the opportunities offered by the FTAA. The private sectors in Egypt, Morocco and Tunisia are active and quite diversified but have limited financial resources. The financing gap for small and medium-sized enterprises in North Africa is estimated at around $90 billion.

Financial sector needs to focus on banks

Regional financial sector integration could contribute to strengthening competitiveness in the countries. North African countries need to focus on bank consolidation, which accounts for about 85% of total financial sector assets, strengthen financial infrastructure, harmonize regulatory policies, and remove market barriers to cross-border activities, especially exchange controls prior launching financial integration.

Once banking consolidation is on track, countries are encouraged to launch a regional financial integration initiative that includes regional payment systems to reduce the costs of cross-border transactions, and manage the risks associated with greater integration. This may also involve the creation of a fund to facilitate the financing of cross-border activities.

Financial market integration should be accompanied by a “business simplification shock” to facilitate business and investment within and across borders. Among 123 countries, Egypt, Algeria, Morocco, and Tunisia are among those with the lowest density of entry into the formal sector, suggesting that young firms may have difficulties entering markets and expanding.

The energy sector as another potential area

Another area with high potential for integration among North African countries is the energy sector. The development of an integrated energy market would help unlock the full potential of the region by filling intra-regional gaps and needs, as well as linking the sub-region to an integrated Mediterranean energy market. The developing an integrated energy market will make it possible to meet electricity demand, utilize the diversity of energy resources in the subregion and benefit from the emergence of new energy technologies.

The free trade area can play a key role in moving North African countries towards the MDGs of 2030, but it requires good policy coordination across the sub-region in order to reap the full benefits.__

(Featured image by Mike Benna via Unsplash)

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First published in LesEco.ma, a third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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