Covid-19 and AfCFTA: Africa’s path out of recession?

Economy

Economic News

14 Oct 2020
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With a view to stimulating an economic recovery from the coronavirus pandemic, African governments are pushing ahead with plans to implement a continent-wide free trade zone, with a particular emphasis on e-commerce and digital payments.

In late September Wamkele Mene, the secretary-general of the African Continental Free Trade Area (AfCFTA) Secretariat, told a business conference in South Africa that AfCFTA negotiations over e-commerce and digital trade would be fast-tracked, with Covid-19 heightening the need for an adequate legal and governance framework.

These talks – initially planned for phase three of the trade zone – will now take place early next year as part of phase two, alongside competition policy, intellectual property rights and investment protocols.

The focus on digital trade will include efforts to speed up Customs clearance procedures between countries, with border delays currently slowing down regional trade. International media also reported that the 54 AfCFTA signatories were moving forward with talks on the taxation of e-commerce platforms.

Digital boost

E-commerce and the use of digital payment systems have taken on greater importance following the outbreak of Covid-19.

For example, shortly after the pandemic began, the Kenyan government encouraged citizens to use online or mobile payment methods instead of cash when making transactions, with the central bank announcing in March that banks would waive fees for financial transfers completed via mobile banking.

Similar trends have been noted all over the world, with analytics software company Statistica estimating that global digital payments will increase by 14.2% this year despite the economic slowdown. 

The Covid-19 pandemic will encourage more people to move away from cash transactions to the extent that they have a choice,” Juliet Anammah, chairwoman of online marketplace Jumia Nigeria, told OBG in an interview in June.

“This choice is based on multiple factors, such as access to devices with digital payments, the cost of the transaction and payment solutions. It is important to break down all these elements to make sure the cost of digital transactions is low to encourage more people to go digital.”

Naturally, the shift towards digital payments has also had an impact on businesses, with many updating their online offerings.

“For those who did not believe in electronic banking or e-commerce, the pandemic has demonstrated that having those options is now a necessity,” John Addo, managing director of Prudential Bank, told OBG. “Most banks had already begun the process of digitalisation, and Covid-19 has provided a clear sense of urgency.”

However, beyond simply providing alternative payment options, the development of digital platforms is also impacting the way companies do business.

“In light of travel restrictions, people are finding different solutions for their businesses, such as digital payment platforms that don’t require people to travel from one place to another, and that allow them to receive their goods and hopefully pay in their local currency,” Solomon Asamoah, CEO of the Ghana Infrastructure Investment Fund, told OBG.

“This new way of conducting trade should be developed a lot faster than previously expected.”

AfCFTA: key to Covid rebound?

The economic recovery from Covid-19 in Africa will also require the boosting of trade, which suffered from coronavirus-related border closures and restrictions on production and mobility. 

The African Development Bank anticipated in July that the continent’s GDP would contract by 1.7% this year, some 5.6 percentage points below the pre-Covid-19 projection.

In light of this, AfCFTA is seen as a valuable tool for stimulating economic activity when it becomes operational in January 2021.  

Its implementation was postponed from July this year to allow governments to focus on tackling the pandemic.

Initially agreed in March 2018 and subsequently signed by 54 of the 55 member countries of the African Union – Eritrea being only country that did not participate – the deal aims to create a single market across Africa.

AfCFTA requires members to remove 90% of tariffs on goods, facilitate the movement of capital and people, and take steps towards creating an Africa-wide Customs union, which proponents say would significantly boost regional trade.

According to US research group the Brookings Institute, in 2017 intra-African trade accounted for just 17% of all business activity on the continent, far below comparative levels in Europe (69%), Asia (59%) and North America (31%).

When fully operational by 2030, AfCFTA is expected to cover a market of 1.2bn people, with a combined GDP of $2.5trn.

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