Africa’s under-developed infrastructure, non-tariff barriers and finance constraints will limit the potential benefits of a continental free trade agreement, Moody’s Investors Service said in a report.
The African Continental Free Trade Area (AfCFTA), which aims to create a single African market for goods and services, could boost intra-regional trade, which remains far lower than in developing Asian countries, the rating agency stated in the report.
“There is significant potential for further trade integration in Africa, which the AfCFTA could stimulate,” Moody’s Managing Director — Credit Strategy and the report’s co-author, Colin Ellis said.
Ellis added: “This could improve the region’s credit profiles, given the greater stability and sophistication that intra-regional trade could offer compared with traditional commodity exports to the rest of the world.
“That said, countries with larger manufacturing bases and better infrastructure, such as South Africa and Kenya, are most likely to benefit from further integration.
â€œFor others, poor infrastructure and non-tariff barriers will continue to restrict the trade sector’s development and long-term growth potential.”
Intra-African trade has increased in recent years to 15 per cent of total trade, from 11 per cent in 2008. However, overall levels remain lower than those recorded by other developing regions before the global financial crisis.
The report noted that African exports to the rest of the world are largely undiversified and are heavily oriented towards raw materials.
By contrast, exports between African countries contain more value-added products. Manufactured goods accounted for 43 per cent of intra-Africa exports between 2012 and 2016, compared to only around 20 per cent of its exports to the rest of the world.
â€œContinued growth in intra-regional trade could help to reduce growth volatility and develop the region’s local economies, which would in turn increase demand and investment in trading sectors.
â€œDuring the recent commodity downturn, countries with improving intra-Africa trade generally fared relatively well.
â€œOne of the key barriers to the growth in regional trade is the lack of quality infrastructure,â€ the report stated.
It showed that between 2007 and 2016, African countries that made the most improvements to their infrastructure also experienced the highest export growth.
In addition, it stated that non-tariff barriers, such as corruption, ineffective customs documentation and broader procedure, remain problematic in the continent.
The costs for intra-African trade are the highest among developing regions, and around 50 per cent higher than in East Asia, according to World Bank estimates.
A lack of trade finance also limits trade potential in Africa. The continent’s trade finance gap continues to exceed $90 billion annually, the African Development Bank had estimated.
â€œThe end of the commodity price boom could marginally incentivise investment into manufacturing. Countries with larger manufacturing bases are in a better position to tap the benefits of further trade integration. â€œAmong rated countries, South Africa, Kenya and Egypt, are most likely to benefit from further integration thanks to their large manufacturing bases and relatively robust infrastructure, particularly given their access to electricity.
â€œFor similar reasons, Morocco, Namibia, Tunisia, Cote d’Ivoire, Senegal and Cameroon also stand to gain from increased intra-African trade. In addition, Ethiopia, which has made significant progress in developing its industrial sector over the last five years with annual growth in manufacturing value added of around 20 per cent, also has the potential to gain further through rising intra-regional trade,â€ it added.