How the AfCFTA Will Boost Investment and Development in Africa

The growth prospects of African economies continue to rise through ongoing Investment efforts to create inclusive platforms to foster economic stability among African countries.

The African Continental Free Trade Area (AfCFTA) is the African Union’s flagship project of Agenda 2063, a master plan for transforming Africa into the global powerhouse of the future, with an aspiration to create a prosperous continent that is inclusive and sustainable. Bringing together 54 member states of the African Union and a market of 1.3 billion people with a combined GDP of more than USD 3.4 trillion, this initiative is a big step towards Africa’s development.

AfCFTA came into force on May 30, 2019 and as of January 1, 2021, when trading began, 54 AU member nations had signed the agreement, ratified the treaty, and submitted their instruments of ratification.

When the idea for the free trade area was born, the goal was clear – to create a single continental market for goods and services, allow free movement of people and investments, and encourage the growth of intra-African trade, which currently lags behind intra-continental trade taking place in other continents. Despite cultural and language differences that could hinder the sustenance of a single continental market, the political will behind the free trade zone has been impressive: African countries are united in this bold and promising move.

The formation and implementation of a single market can change the economic game for African countries, providing solutions and improving socio-economic outlook on the continent. The initiative is focused on establishing a free market to influence the economy and foster prosperity. African countries can import and export goods without tariff and non-tariff barriers. This will enhance imports and exports, ensure benefits of economies of scale, and enable a wide array of commodity exchange and revenue generation. The United Nations Economic Commission for Africa (UNECA) estimates that the AfCFTA agreement will benefit Africa by increasing intra-African trade by 52.3% if import duties and non-tariff barriers are eliminated. It will also cover a GDP of $2.5 trillion of the market.

The World Bank also notes that the African free trade agreement is a major opportunity for African countries to reduce poverty and raise the incomes of 68 million people who live on less than $5.50 per day. Trade facilitation measures that cut red tape and simplified customs procedures would drive $292 billion of the $450 billion in potential income gains. In addition to this, the implementation of the AfCFTA will see the increase of continental and foreign investments in Africa.

This is because investors are typically attracted to factors such as population size, favorable policies, market openness, and predicted economic growth. While Africa has the numbers in population (1.341 billion as of 2020), the AfCFTA now ensures that other factors attractive to investors are met, including reduction and/or elimination of tariffs, zero and/or limited barriers to trade, market and economic integration, favorable trade, and investment policies.

Whilst AfCFTA positions the continent to maximize benefits through collaboration, it is important to point out that certain aspects of the treaty, notably the investment protocol of the AfCFTA, are still in the process of negotiation. In a recent article, Thomas Kendra, a partner at global law firm Hogan Lovells, wrote on AfCFTA’s impact on investment and summarised that the AfCFTA investment protocol, even though it is in “great part to encourage confidence in investors and therefore have a significant impact on intra-African trade” it still had some way to go before its enactment. This is because “phase 1 negotiations will not conclude until July 2021 and phase II negotiations, which includes the investment protocol, will be delayed to the end of the year.”

The AfCFTA investment protocol entails an international legal instrument on investment, which will constitute a binding international agreement for the AU Member States involved. Under an investment agreement on cooperation, individual state parties will adopt national laws or adjust to existing investment-related legislation to enhance obligations accepted under the AfCFTA Investment Protocol. This will also help in protecting the rights of investors. While there may be general guidelines on domestic compliance, individual States can make decisions on promotion, facilitation, and regulation of investments and investors.

This will not be a stand-alone agreement; rather it means that the AfCFTA protocol is a vital part of the AfCFTA agreement. Kendra notes that while this is significant in the light of boosting confidence for investors, more needs to be done. He opined that the inclusion of an investor state dispute settlement system into the AfCFTA’s investment protocol could be perceived as bringing predictability and consistency for investments and dispute resolution. This may tie in with the general objectives of the AfCFTA, namely, ‘foreseeability’ and ‘uniformity’. The expected increase in intra-African trade, encouraged by the protocol, may also lead to increased use of arbitration centres in Africa, which in turn may enable a push towards standardisation regarding the enforcement of intra-African arbitral awards, through the creation of a legal regime for the free movement of arbitral awards across the continent.

Despite the delay in Phase one negotiations, African governments can begin to look into investment policies that can attract interests in their growth sectors. If well managed, these policies should strengthen the link between domestic and foreign investors. It is important to establish clear and transparent legal frameworks that are efficient and support cooperation, remove or limit barriers to market entry, and reduce the time and costs of investment approvals.

An investor-state dispute settlement system, which allows investors to lodge complaints and/or resolve disputes if their rights are impacted by the host government, can also encourage investor confidence. Investments can support growth, empowerment and innovation on the continent, addressing challenges such as unemployment, industrialisation, and the skills gap.

As the most populated country in sub-Saharan Africa and one of the top three economies in Africa, Nigeria’s involvement in AfCFTA is very significant. Although Nigeria took its time in signing the treaty, the opportunities for its economy are enormous as the country can now trade freely with its neighbours. There is also the chance to improve Foreign Direct Investment, thereby expanding industrialisation. AfCFTA is expected to be the world’s largest free trade area since the formation of the World Trade Organization. For years, there have been conversations around creating “the Africa we want”. With the AfCFTA, Africa is ready to shape its future.