Africa’s Regional Market – The Next Growth Avenue

The AfCFTA - African Continental Free Trade Area - agreement was adopted and opened for signature on 21st March 2018, entering into force in May 2019. At the start of 2021, the agreement proceeded to its implementation stage, having been signed by every AU country (bar Eritrea). Trade under the agreement officially commenced on the 7th of October 2022.

The purpose of the agreement is to promote intra-African trade through the gradual dismantling of regional trade tariffs that account for 90 percent of intra-Africa imports, thereby promoting regional markets as viable destinations for African goods.

Intra-African trade currently accounts for 20 percent of trade in the continent, with the agreement geared to increase this by around 15 percent by 2040. If successfully (and fully) implemented, AfCFTA is poised to boost trade in goods and services, lifting over 30 million people out of extreme poverty and boosting income by more than 7 percent (USD 450bn) in the process. To realise the continent’s full potential for economic growth, signatories of the AfCFTA must enact policies and structural reforms that leverage the full range of opportunities in the agri-food value chain, which includes agri-processing.

One area through which structural reforms can have positive effects on trade is through export diversification.

In a continent where 45 out of the 54 countries still rely on exports of primary products, the need to diversify exports is a key step towards safeguarding local economies from sector-specific shocks that affect growth.

Multiple economies within SSA operate as net agricultural exporters, reflecting a general increase in agricultural production in a region with vast potential for the same. However, with most of these exports being raw materials (unprocessed coffee, cotton, tea, etc), external occurrences such as the lockdowns from the COVID-19 pandemic leave them exposed to volatile commodity pricing and overall shutdowns of export markets. McKinsey notes that the resultant decline in demand from economically developed markets (which make up around 80 percent of Africa’s agricultural exports) had direct repercussions to Africa’s economy, with agri-related exports valued at around USD 35-40bn curtailed by the closure of main export markets in Europe, Asia, and North America.

Thus, the need to diversify agricultural production presents itself across the entire value chain. To this end, agribusinesses in the continent must capitalise on the opportunities for forward linkages (i.e., value addition through processing, retail, etc) to diversify away from dependence on the sale of primary agricultural produce.

We can see this within AATIF’s own portfolio, where the Fund has invested around USD 50m over the past few years into supporting grain milling industries (African Milling Limited, Mount Meru Millers, Amsons, and more) to scale up their processing operations and diversify their product offerings to capture a more diverse market. Diversification into processing opens the market for value added goods.

With the AfCFTA in place, countries can support and leverage their agricultural industries to increase production and export within the regional market. Zambia, for instance, is well positioned to leverage its position as one of Africa’s largest producers of soyabeans, as it already accounts for 14 percent of intra-African soya exports, while Nigeria can utilise its position as one of the continent’s largest producers of maize (behind only South Africa) to capitalise on regional demand for the staple crop.

The agreement can also be a welcome umbrella under which many of Africa’s least developed countries (LDCs) can be protected from the aforementioned trade shocks. With poorly diversified exports, LDCs remain the most reliant on primary commodity trade. Public-private participation is crucial here, by directing resources towards helping their industries increase value addition capacity, and gain access to patient capital for growth.

Our work with the ECOWAS Bank for Investment and Development (EBID) in Western Africa, for example, is directly affiliated with providing this kind of support to LDCs. The bank’s outreach and support for LDCs that rely heavily on agriculture, and the subsequent impact on the agriculture industries in the region, could reasonably stand to benefit from AfCFTA policies to increase trade and investment in Africa.

Ultimately, the AfCFTA agreement is poised to spur the kind of regional and continental economic growth that Africa needs, and frankly, has been slowly marching towards. Whereas the planned reforms to other broader infrastructural and technological sectors remain crucial, the role of agriculture and trade remains no less important to its success. Private sector interventions are just one cornerstone to success under this agreement, and this is what The Africa Agriculture and Trade Investment Fund (AATIF) ’s ongoing investment activity builds on.

Bibliography

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