AfCFTA and the Prospects for African Tech Ecosystem

Proem

Imagine that you run an e-commerce business established in Nigeria. Let’s call the platform Buymore. Buymore records about 100,000 trades daily. In Nigeria, Buymore has about 100 warehouses from where it stores, packages and delivers goods to customers.

You decide to establish similar structures in Ghana, Kenya and South Africa. You also decide that you want Buymore to be able to receive orders from and deliver goods to every other African country. The expansion will require heavy capital. You will need to spend money purchasing, leasing, and building similar warehouses and outlets; labour cost will also increase. You will experience trade restrictions on certain goods and also spend significant amount on custom duties moving these goods between countries. You will also spend significant sums complying with the regulatory requirements of each African country. Now, imagine that you don’t need to do all these—that you can expand to even more African countries and you wouldn’t have to spend so much money setting up and running your business. This is the future that the African Continental Free Trade Area (“AfCFTA”) seeks to bring.

With trade officially commencing on 1 January 2021 under the AfCFTA, following the resolution of the 13th Extraordinary Session of the Assembly of the African Union on 5 December 2020, the world watches as Africa drives the wheel of the largest single market on the planet.

For the past two decades, focus on investments in Africa has shifted from more traditional areas of enterprise and trade—for example, the extractives industry—to investments in technology and tech-enabled products. With the AfCFTA fashioned similarly to the World Trade Organisation model, I argue in this article that investment in technology and tech-enabled structures under the AfCFTA system will not only encourage the seamless movement of goods and services across supply chains, it will also lead to increased payments efficiency across borders. This will consequently improve the range of goods and services exchanged by reason of the removal of trade barriers, improve money transfer and financial markets security and efficiency, enhance cross-border cooperation amongst financial institutions in Africa, and stimulate technology transfer and talent exchange across the continent. But first, let us consider the meaning of the AfCFTA and its objectives.

What is the AfCFTA?

Member countries of the African Union (AU) took a major step to boost regional trade and economic integration by establishing the African Continental Free Trade Area after the signing of the Agreement Establishing the African Continental Free Trade Area (“the Agreement”). Under the Agreement, they agreed to eliminate tariffs on most goods, liberalise the procedures for trade of key services and rules of origin, address non-tariff obstacles to intra-regional trade, and eventually create a single continental market with free movement of labour and capital. In addition, the AfCFTA is designed to enable cooperation in all trade-related areas, customs matters and the implementation of trade facilitation measures. The Agreement sets out the institutional arrangements for managing the AfCFTA and provides a mechanism for the settlement of disputes.[1]

Based on Article 23 of the AfCFTA[2], the Agreement came into force on 30 May 2019 for the 24 countries that had deposited their instruments of ratification. As at 10 February 2021, 54 of 55 AU member states are signatories to the Agreement[3] while 36 countries have ratified the Agreement. With the overarching aim of creating a borderless Africa and deepening economic integration in Africa, the Agreement contains the protocols on Trade in Goods, Trade in Services, Investment, Intellectual Property Rights and Competition Policy, and Rules and Procedure on the Settlement of Disputes.

The AfCFTA establishes a single market of about 1.2 billion people with a combined GDP of US$2.5 trillion. Obviously, the AfCFTA holds great promises—the United Nations Economic Commission for Africa estimates that the Agreement will boost inter-African trade by 52% in 2022.

The AfCFTA Objectives

The AfCFTA seeks to create a liberalised single market for goods and services, facilitating the movement of people and capital with the consequence of growth in investments, socio-economic and industrial development in different sectors across Africa. This has partly been achieved through successive rounds of negotiations with the outlook of creating a continental customs union thereby expediting regional and continental integration. The AfCFTA also aims to enhance the competitiveness of state parties within the continental and global market.[4]

The AfCTA objectives will be achieved through progressive elimination of tariffs and non-tariff barriers to trade in goods, liberalisation of trade in services, cooperation on investment, intellectual property and competition policy and all trade related areas, custom matters and the implementation of trade facilitation measures. This also involves the establishment of a dispute settlement mechanism, and the maintenance of an institutional framework for the implementation of the AfCFTA.[5]

AfCFTA and the Tech Ecosystem in Africa

Trade liberalisation across the world is already being driven by technology. Global spending on tech is projected to increase to $2.3 trillion by 2023. The impact of tech on attaining the objectives of the Agreement is not to be contested. AfCFTA will be driven by tech and tech based solutions. This cuts across value chains in all sectors. It also highlights why the third protocol of the AfCFTA is dedicated to competition, investments and intellectual property- the terms of which were greatly contested by state parties during the negotiation rounds.

Tech and tech based products are anchored and can only be profitably exploited when there is a solid framework for the protection of intellectual property rights. The AfCFTA protocol on intellectual property creates a beneficial arrangement among state parties on the registration, transfer, licensing, recognition and enforcement of intellectual property rights. With the potential impact of the AfCFTA across industries and sectors, there is no doubt on the relevance of the AfCFTA to the development of the tech ecosystem in Africa. I will highlight some of the improvements and impact in tech that is expected to be enabled by the AfCFTA below.

1.    Growth of e-Commerce

E-commerce also known as electronic commerce has become a mainstay in today’s world. It enables the purchase of goods and services over the internet, regardless of location or time. The continental market created under the Agreement is predicted to be driven majorly by technology. This will also be done through e-commerce platforms and systems. Today, there are successful e-commerce platforms, such as Amazon, Jumia, Alibaba and several other global e-commerce companies and brands that have created value for billions of people. Even though the AfCFTA will drive the growth of e-commerce, the success of e-commerce will be a critical factor and yardstick for measuring and determining the success and effectiveness of the implementation of the AfCFTA Agreement. It is, therefore, not difficult to imagine that there will be a growth of e-commerce companies and platforms- in number, size and quality of service- with the establishment of the AfCFTA.

2.    Growth of Electronic Payment Systems and Money Transfer

Since the dawn of commerce, people have thought it necessary to improve how value is stored and exchanged. This necessitated the invention of money as a store of value and as a means of exchange. Today, the exchange of money from hand-to-hand has improved drastically since the arrival of the computer age. Now, it is done at the click of a button or at the swipe of a card. The advancement of payment systems came as a corollary to the advanced complexity of modern commerce. The last decade saw an African-led global disruption in the payments space with unicorns like Fawry, Interswitch and Flutterwave driving change through innovative application of existing technologies. Financial technology (“FinTech”) has evolved as a result of necessity and the need for individuals to transact easily, bypassing the bureaucracy of the banking system while also improving access to financial products and services for the banked and unbanked.

The AfCFTA is bound lead to an improvement in payment systems. The Agreement restricts state parties from applying restrictions on international transfers and payments for current transactions relating to specific commitments.[6] As counterparties will be looking at exploring more efficient means of making payments while making sure that they will take delivery of their goods and services in the right quantity, quality and on time, the market created by AfCFTA will lead to the improvement of FinTech.

This will also lead to the improvement of tech solutions that will enable real-time foreign exchange transfer and conversion through tech-enabled products and services. This will solve the problem of having to go through BDCs and other third-parties, and will fill the gap with regards to foreign exchange risks experienced by traders and businesses when looking at making payments for goods and services across Africa. This means that users of our hypothetical company, Buymore, in Ghana, for instance, will be able to pay for goods ordered in Nigeria in their local currency, Cedi, and Buymore as a Nigerian company will receive payment in Naira or any other currency it chooses to receive payment in at real time exchange rate. This will also pave the way for regulatory improvements as FinTech companies offering this service will need to apply for a license to become authorized dealers in foreign exchange.

3.    Cross-Border Expansion and Growth of Tech Companies

With the removal of trade barriers, the AfCFTA will also encourage the expansion of African tech companies into other African countries. One of the goals of the AfCFTA is to eliminate tariff on goods for up to 90% of product categories. This presents an opportunity for the expansion and growth of e-commerce companies and platforms across African countries.

Today, several African tech startups are expanding into other African countries and one constraint to expansion is the regulatory difficulty faced when starting in those countries. This is coupled with poor understanding of some African markets together with certain security and political risks. The AfCFTA operates on acceptable principles that will offer tech companies the opportunity to be able to move into other African markets and be treated fairly in those markets. Some countries like Nigeria go further to provide specific guarantees and protection. The AfCFTA also affords African countries a common ground and opportunity to renegotiate and renew bi-lateral and multilateral trade agreements on a state-by-state basis and at a continental level.

Today, there are several African-led tech startups expanding to other African countries with prop-tech startup Spleet planning to expand from Lagos into Ghana, Rwanda and Kenya, and retail and logistics startup TradeDepot expanding from Lagos into South Africa and Ghana. The AfCFTA, if properly implemented, will make the expansion of businesses into other African countries easier. There are even ongoing talks on a single visa policy and a single currency for African countries. An agreement on these policies will further bolster trade and business expansion across Africa.

4.    Increase in Technology and Talent Transfer

The AfCFTA makes provision for technical assistance, capacity building and cooperation among state parties.[7] As cross-border trade increases and as the movement of goods and services improve within Africa by Africans, there will also be a corresponding increase in technology transfer. This will bolster Africa’s economic performance on a continent-wide basis and also on a country-by-country basis as countries that currently lack certain technological infrastructure will have access to them by reason of improved trade and cooperation. This also means that these countries will be encouraged to build systems, regulations and economic policies that will accommodate the technology that will be coming into their territories.

There will also be an exchange of talent and skilled personnel amongst African countries. This will ensure the building of a culture of seamless exchange of knowledge and skill, and an atmosphere of continuous learning and improvement. The impact of countries exchanging talents and the movement of skilled workforce from one country to another cannot be overemphasized. It will encourage knowledge and data sharing leading to the building of a more efficient African tech ecosystem.

The AfCFTA will also encourage the development of sustainable solutions and technology that will serve the next generation of Africans and the world. As the willingness by African founders and businesses to share data and experience, especially with regards to their business operations in certain African regions or countries, improves, there will be a ready playbook which will arm businesses and investors with necessary market knowledge and information to build market strategies and products so as to get the best results from each individual market. That atmosphere of cooperation and willingness to share information is encouraged by the AfCFTA which is also necessary for the growth of tech in Africa.

5.    African-Led Financing for Tech Companies

Cooperation among financial institutions will lead to better funding of African startups especially by local investors. The participation of local investors in funding African startups has been abysmal. However, investors are beginning to take an interest in investing in African businesses, especially in tech. One of the high hopes that the AfCFTA has produced is the potential to encourage African investors to invest in other African businesses and startups which need not necessarily be in their home country. This is not only limited to individual investors or HNIs but banks and other financial institutions will also be encouraged to provide not just local but offshore credit facilities to African ventures in tech cutting-across various sectors and industries. This will lead to the strengthening of inter-African economic cooperation and trade, thus, leading to a drop in reliance on foreign capital.

6.    Creation of Market-fit products and services

Africa today suffers from the scourge of the consumption of low-quality goods and products that are generally unfit for purpose. Many of the products imported into the continent are not made with Africans in mind. One of the impacts that the AfCFTA will have on the African market is that Africans will be able to make and exchange seamlessly amongst themselves market-fit product and services across all sectors and industries. With the AfCFTA, manufacturing will improve in Africa; products of the highest quality will be made with the African consumer in mind; there will be no discrimination on quality; and the products will be made to best serve the needs of the people in Africa. There is presently a drive among tech entrepreneurs in Africa to innovate and create products that best serve consumers and users in the African market. This cuts across different sectors from lending and finance to property, transportation, health, energy and power, payroll and employee management etc. all targeted to meet the peculiar needs of the consumer in Africa.

7.    Tech-driven Expansion and Integration of Financial Markets in Africa

There will also be an improvement in the securities market across Africa. With the role of technology today, there is now increased cross-border capital market participation. Tech platforms like Invest Bamboo, Free Trade etc. now make it possible for retail investors from Africa to be able to trade on select stock exchanges around the world- stock exchanges like the NYSE, LSE, NASDAQ etc. This has led to increased participation of retail investors who are getting increasingly sophisticated. Nigeria, for example, is experiencing growth in its capital market with unique offerings as seen in its equities, derivatives and commodities market. The Nigerian Stock Exchange was recently ranked as one of the best performing stock exchanges in the world for the year 2020.[8] Technology will make it possible for investors anywhere in the world to be able to be able to invest in African markets without being physically present and without the need for stock brokers and other middle men.

Furthermore, the AfCFTA will make the development of regional and continent-wide capital market participation mechanisms and technology possible. Through tech, nationals of other African countries, or any other country for that matter, will be able to trade and invest in the securities market of other African countries. An appreciation of the AfCFTA protocols on trade in goods, trade in services, intellectual property, competition and investment shows that it encourages securities trading in other African markets within the single market area. There may even be a central exchange for AfCFTA member states. This will have very positive economic effect on those African countries with existing stock exchanges as it will increase the availability of capital for businesses and will also increase market capitalization. It will also encourage those countries without an existing stock exchange to establish some. The resultant effect will be the possibility for companies, including technology companies, to be able to pool funds through public offerings within and outside their original country of establishment.

8.    Increased Foreign Participation in the African Tech Space

Though there are considerable foreign investments coming in to the African tech market targeting specific countries, many of these investments are portfolio investment. One impact the AfCFTA will have is to encourage the flow of FDI into African tech. This will leave so much room for growth, innovation and improvement— considering the level of capital, knowledge and expertise that will be coming in. For instance, social media giants Facebook and Twitter have announced that they will be setting up offices in Nigeria and Ghana respectively, with Twitter specifically citing the AfCFTA as an important factor for them establishing their presence in Africa.[9]

9.    Creation of an African-wide Tech Ecosystem

One of the goals of the AfCFTA is to encourage and create an integrated African market. In the tech space, the Agreement with its single market goal will further lead to the creation of a continent-wide tech ecosystem— from the harmonisation of government and regulatory policies among member states and the formulation of new ones that best meet the needs and demands of the single market, it is easy to imagine the creation of continent-wide incubators and accelerators within the AfCFTA framework. There is also no difficulty imagining, for instance, the creation of regulatory sandbox operations within the single market. Integrating the African tech ecosystem encourages the aggregation of opportunities, providing wider access to market, market data and investors.

Conclusion

It has become clear that in formulating their long-term strategy and goals, tech companies should have the AfCFTA in mind. If properly implemented, the AfCFTA will establish the foundation for the running and growth of the African economic machine—and this will mark the beginning of the next phase of world economic history. With the global drive towards the development of sustainable solutions to many of the world’s problems, Africa could well be the next frontier for sustainable development. With dynamic startups already existing in many African countries, Africa should prepare itself to lead the world in the development and deployment of technologies that help facilitate trade and commerce across borders.

With the operationalisation of the AfCFTA, it is pertinent that players in the tech industry understand the role they play in the implementation phase of the Agreement, including, but not limited to, liaising with policymakers at the national, regional and continental level. This provides African tech with great opportunity to implement forward-looking business decisions so they can maximize the benefits from the AfCFTA and integrate seamlessly with regional and global value chains. They must also ensure that they take up the mantle of putting the industry at the forefront through business advocacy and public-private dialogue.

AfCFTA member countries most also position themselves locally to take advantage of the benefits from the operation of the AfCFTA by facilitating the development of local infrastructure, a favourable legal and regulatory environment and also improving security by safeguarding the safety of the lives and properties.

Emmanuel Inyada

[1] International Trade Centre (2018). A business guide to the African Continental Free Trade Area Agreement. ITC, Geneva.

[2] Article 23 provides to the effect that the AfCFTA will come into force 30 days after the 22nd instrument of ratification is deposited with the Chairperson of the African Union Commission.

[3] Eritrea is yet to sign the AfCFTA Agreement.

[4] Article 3 of the AfCFTA Agreement

[5] Article 4 of the AfCFTA Agreement

[6] Article 13 of the Protocol on Trade in Services of the Agreement Establishing the African Continental Free Trade Area.

[7] Article 27 of the Protocol on Trade in Services of the Agreement Establishing the African Continental Free Trade Area.

[8] Nairametrics, Nigerian stocks ranked world’s best-performing stock market accessed https://nairametrics.com/2020/12/29/nigerian-stocks-ranked-worlds-best-performing-stock-market/

[9] Twitter, Establishing Twitter’s Presence in Africa, https://blog.twitter.com/en_us/topic/company/2021/establishing-twitter-s-presence-in-africa.html