This is the moment for the African continent. A free trade area for Africa is going to be like a flood. A flood that is going to lift all the boats. It is not about South Africa. It is more about all of us. All countries of Africa participating – big and small. Cyril Ramaphosa, President of South Africa
On March 21st, 2018, 44 African heads of state gathered in Kigali signed an agreement called the African Continental Free Trade Area (CFTA). The CFTA is big and ambitious. It seeks to create a single continental market for goods and services, as well as free movement of capital and people. Its primary goal is to boost intra-African trade and spur industrialisation by fostering a more competitive industrial sector, increased economic activity between African states and giving African companies a large market in which they can scale and become globally competitive (see figure 1 below).
Figure 1: Source UNCTAD http://unctad.org/en/PublicationsLibrary/presspb2018d4_en.pdf
In global trade Africa is a commodities exporter, selling raw materials and agricultural goods, while importing finished manufactured goods. Making the continent susceptible to swings in global commodity prices and perennially large trade deficits. Meanwhile intra-African trade is frustratingly small in comparison to Africa’s international trade (see Figure 2). The CFTA is potentially a first step towards rectifying that.
Figure 2: Source https://www.brookings.edu/blog/africa-in-focus/2018/03/29/figures-of-the-week-africas-intra-and-extra-regional-trade/
My goal in this post is not to talk about the big policy actions needed to make the CFTA a reality. Such as comprehensive ratification, regulatory alignment and the need for connecting infrastructure. That is well covered by the AU itself and numerous other commentators, institutions and policy documents. Instead I want to talk about policies actions that governments can to take to enable African SME’s and entrepreneurs to take advantage of a pan-African free trade area. SME’s are the lifeblood of the African economy, they are one of the continents biggest employers and sources of wealth. And entrepreneurs and investors willing to take risks are critically important to the continents future growth. If SME’s and entrepreneurs can succeed then Africa will succeed, and if the CFTA is to be a success it must serve not only big business but SME’s and entrepreneurs as well.
1- Creating awareness and links
Trade does not happen in a vacuum. People and businesses must be aware of the opportunities and how to take advantage of them. The first policy initiative that the AU and African governments should take is an awareness and education campaign targeting SME’s and entrepreneurs across the continent. Explaining what the CFTA is, which countries are a part of it and the key steps they need to take to be able to take advantage of it.
Secondly it is not enough to know there are opportunities in other markets. You must be in a position to take advantage of them, you need to have knowledge of and develop relationships in those markets. African governments are in a unique position to facilitate this. With embassies around the continent they can be clearing houses for information and networking hubs. Doing research on local regulations, market conditions building a database of local businesses which can be made available to businesses and entrepreneurs in their home countries. They can organise networking opportunities allowing businesses and entrepreneurs to connect both in the real world and virtually online for those unable to travel. Crucially this can work both ways not just to the benefit of the home country of the embassy but for those who are looking for opportunities in the other direction. European countries such as Germany and Holland provide similar services globally to businesses, African governments can start by doing so on the continent.
Creating awareness and links within and between African business communities is crucial to improving intra-African trade. The CFTA is of little good if people are not aware of it and if they have no entry points, networking opportunities and access to information in other African markets. African governments can fill this gap.
2- Allow tech to move the money
Anyone who has travelled across Africa or done any cross-border business on the continent knows how much of a pain it can be to move money between countries. The laws vary, some countries have foreign exchange controls, others have currencies that can be difficult to convert, and the relative value of these currencies is always changing. All of these are significant barriers to intra-African trade especially for SME’s who unlike their larger corporate counterparts do not have legal and finance departments to navigate through the mess.
What’s needed is a simple way for business to acquire foreign currencies as and when needed. Thankfully the Fintech (financial technology) sector is already growing across the continent and can fill this gap. African governments should allow Fintech services to enter the currency market and allow SME’s and traders to buy and sell other African currencies and transfer payments to their suppliers and customers in whatever country they may be in. Many African countries now have mobile payments, mobile banking and mobile lending, there is no reason why these services should not be allowed to operate across countries.
The second area where Fintech can make a difference is in trade finance. Much of global trade is done on credit. Companies will borrow or access lines of credit, usually from banks, to buy goods and transport them to another market and repay the loan when the goods are delivered and paid for. Few SME’s or traders will have access to lines of credit with banks, but many do use mobile banking and lending for exactly this purpose. To fund the purchase of goods and pay it back when they are sold. If fintech firms were allowed to play this role on a continental level it could give SME’s and traders, the ability to fund cross-border business where traditional banks would regard the amounts of money being lent as too small and SME’s and traders too risky.
Fintech could play valuable role in intra-African trade. Providing SME’s and traders the means to fund their activities and the ability to conduct business in foreign currencies with reliable platforms with which to pay people. Trade needs money and a reliable means of payment. Fintech could play that role for the businesses and traders who are not on the radar of banks. What is needed is for African governments to come up with the right regulatory framework giving Fintech services the ability to operate across borders and mobile networks and the protect their customers from unscrupulous lenders.
Trade for all
Intra-African trade has the potential to be a game changer on the continent. Giving African investors, entrepreneurs, businesses and the wider economy access to new markets and new growth. More importantly it could change lives, not just through new jobs and opportunities, but through simple trade. In 2017 Nigeria experienced a tomato shortage, Kenya experienced a maize shortage both countries resorted to importing these foodstuffs from markets like Mexico and Europe. However, around the continent there were tomatoes and maize in plentiful supply in other countries. With a continental free trade area, these all to frequent shortages and price spikes need not happen. Retailers in Kenya or Nigeria noticing that their local suppliers are unable to meet demand and prices are going up could buy from other suppliers around the continent with little difference in price and consumers wouldn’t have to deal with the shock to their wallets.
There has been a lot hype and hope around the CFTA. However, it still has some way to go, only 3 countries having fully ratified the treaty, 22 are needed for it to come into effect. In the meantime, African governments need to ensure that it is not just a treaty for big business but is one that SME’s and entrepreneurs can also take advantage of. If that is done, it will help provide a shot in the arm to intra-African trade and make it so that all African’s can have a stake in and benefit from a new pan-African economy.
Also published on Medium.