In last week’s edition of Herald Guest, we presented responses from Dr Melaku on how the African Trade Policy Center (ATPC) is helping African countries to develop sound trade policies in general and how they can reorient their trade policies in line with the AfCFTA.
In this edition, we have Carrried his explanation on how Africa can address some of the major challenges to AfCFTA implementation, including transportation infrastructure and currency convertibility issues. He also discusses how the AfCFTA would help landlocked countries like Ethiopia to overcome the challenges as a result of landlocked status on their trade and development prospects. Have a nice read!
For the last 6-plus years, African countries, under the leadership of the AU and with technical support from ECA, have launched the AfCFTA and are currently working hard to ensure its implementation. Can you explain if AfCFTA is worth all these relentless efforts?
First, let us look back to history briefly. When western powers sat down in Berlin between 1884 and 1885 in what was known as the Scramble for Africa, they divided the African continent between themselves as they saw fit, reflecting only the prevailing balance of power amongst themselves on who would get what. When Africa gained its independence in the late 1950s and early 1960s, the borders that had been artificially drawn by those powers became the boundaries of newly emerging states under international law.
The resulting inheritance was a large number of mostly small countries and economies, each too small to support large-scale investment and to pursue meaningful industrialization, critical ingredients for a successful modern economy. In other words, even after direct colonialism ended, most of our countries were left in a situation where they would often be dependent on the charity of their former colonial powers for economic survival, unable to build viable economies of their own.
For Africa to grow, and for the political independence that we gained after so much sacrifice to lead to full sovereignty, the strength of the economic base is critical. Political sovereignty without economic sovereignty would be incomplete. This is where regional economic integration becomes vital. Already in 1963 when OAU was created, economic integration was identified as a fundamental principle, a fundamental objective for the OAU.
The 2002 AU Constitutive Act also recognizes economic integration of the continent as one of its core objectives. You trace the period between 1963 and the New Millennium, from the OAU to the AU, and you will see a series of landmark initiatives, decisions, agreements, and institutions that were designed to bring about Africa’s integration. In this sense, the AfCFTA is only the latest manifestation of Africa’s age-old desire to integrate economically not because we wanted integration for its own sake, but because integration is critical for the continent to build a viable economy.
Economic integration, at the regional and continental levels, was long believed to be a tool with which Africa would overcome the constraints imposed by the small sizes of national markets, progressively replacing them with a large single market made up of over 1.5 billion people with a collective GDP in excess of 3 trillion dollars. That is a huge and untapped market. The AfCFTA is here to help all of us benefit from the economy of scale that emerges from integration.
At ECA, our economists have done rigorous economic analyses on the potential impact of the AfCFTA. The findings are clear – that the AfCFTA would be transformational in many senses. Intra Africa trade, which is quite small today, will be transformed significantly as we implement the AfCFTA.
Africa’s GDP would also grow as a result of AfCFTA implementation while the continent’s industrialisation agenda would receive a boost. Similar research conducted by other institutions, including the World Bank, also show similarly positive results. The only difference between the different studies is in the magnitude of the change that will follow from AfCFTA implementation. ECA findings comes out on the more conservative side.
At the same time, I need to underline that all these positive projections are dependent on the full implementation of the commitments contained in the AfCFTA package of legal obligations. Otherwise, the Agreement alone does not enforce itself; it has to be enforced by national governments. That is the next frontier – supporting each and every African country with AfCFTA implementation.
What about the issue of having a common currency?
Africa has over 40 different national currencies. If I am exporting a particular product from Ethiopia to, say, Kenya, my Kenyan buyer, who has his Kenyan Shilling, would naturally be happy to pay me in Shillings. However, the legal tender in Ethiopia is the Birr, which is how I would like to be paid.
At this point, my client would first have to convert his Shillings to the USD or another hard currency, which I can later easily convert to Birr. In other words, there are multiple conversions and re-conversions involved in this scenario. And the conversion does not happen for free; we are both paying fees for the conversion. Afrexim Bank did the calculation.
Even for the limited intra- African trade that we have today, because of the conversion and reconversion process alone, Africa loses over 5 billion USD. AfCFTA implementation is expected to lead to an increase in trade, which means, unless something changes, the total cost we incur through the conversion and reconversion process will increase with it. The solution, we all know, would be a currency union or monetary union. But we are not there yet; that will take a very long time.
For now, the AfCFTA Secretariat, working together with Afrexim Bank, has come up with what is called the Pan-African Payment and Settlement System (PAPSS). PAPSS is designed to allow trade between countries without having to convert their currencies to a common currency, e.g. the USD. Instead, under PAPSS, traders would use a clearinghouse, Afrexim Bank so that, in my earlier example, the Kenyan Buyer would pay in Shillings while the Ethiopian buyer would get paid in Birr. And many National or Central Banks in the continent, and even commercial banks in some cases, are subscribing to this arrangement to make it happen. So, I think we are going in the right direction.
Infrastructure is an integral element of effective trade between countries. Are there any efforts to improve infrastructure connectivity between the signatories of the AfCFTA?
Absolutely! In 2012 the AU assembly adopted a policy document called, the Boosting Intra Africa Trade (BIAT) Action Plan. If you look at this Action Plan, the key enablers for intra-African trade and integration, such as infrastructure, payment arrangements, trade finance schemes, and trade information, and the like are addressed.
AfCFTA is about exchange of goods and services across borders. Both require some form of infrastructure connectivity, physical, digital, institutional, and the like. For example, trade information or intelligence is critical. We produce very good leather products in this country. A lot of African countries buy leather shoes, bags, etc. here in Addis. But do our producers and traders have information about export market opportunities in other African countries? The answer is typically in the negative. For each of these important areas, there are different strategies at the AU level.
To mention just a few examples, we have the Programme for Infrastructure Development for Africa (PIDA) initiative at the continental level covering four main sectors – energy, transport, transboundary water resources, and information and communication technology. Many neighbouring countries are working together to put in place the infrastructure necessary to facilitate cross-border trade. But, infrastructure is expensive and takes time, but again, we are going in the right direction.
What makes AfCFTA special to Ethiopia? Or what special benefits can AfCFTA bring to Ethiopia?
The AfCFTA carries a lot of promise for Ethiopia. Firstly, the AfCFTA is the first proper Free Trade Area (FTA) that Ethiopia is a part of. Ethiopia is a member of COMESA, but not part of the COMESA FTA really. IGAD is another Regional Economic Community recognized by the AU and in which Ethiopia is active, but IGAD does not do anything meaningful on trade, focusing instead on issues of security, etc. Indeed, Ethiopia is not yet a member of WTO; it is still in the process of accession. So, for Ethiopia, AfCFTA ratification represents a landmark.
I don’t think this decision was taken very easily. I still remember that before the Ethiopian government decided to ratify the AfCFTA it asked the ECA to assess the likely impact of doing so for the Ethiopian economy. We did the study and the findings showed that, on balance, Ethiopia would benefit from implementing the AfCFTA, that the overall impact for Ethiopia would be positive.
And I think it’s important to realize that our trade in goods with Africa is quite limited, and largely concentrated in the Horn. But Ethiopia has substantial surplus today in terms of services trade with the rest of Africa mainly because of our strength in air transport services. In short, the AfCFTA can open opportunities for Ethiopian businesses.
There are Africans who buy flowers on Valentine’s Day that come from Holland. But those flowers are actually exported from Ethiopia or Kenya to Holland in the first place, and reimported back to Africa. So the opportunities are there. If you look at our own market here, you find so many products that come from Asia while there are so many African producers who can produce the same products, in some cases at cheaper prices. So, the opportunities that emerge from the AfCFTA are not limited to Ethiopian business who can export to the rest of Africa but also to Ethiopian consumers.
Ethiopia is currently a landlocked country. How does membership in a free trade area help alleviate the pressure on its economic activity?
I have always been baffled by the fact that, for a long time, the Ethiopian Government did not make regional integration as a priority precisely because being part of a regional FTA involving transit states can alleviate a big part of the burdens resulting from the fact of being a landlocked country. Think about it. What does regional integration mean? It means the political border between two countries will become less of an obstacle to the movement of goods and services through an agreed mechanism like a bilateral or regional agreement to that effect.
In technical terms, when we talk about a Free Trade Area, or if we go to the next level and talk about a customs union, we define a custom union to mean the substitution of two or more custom territories with one customs territory. If COMESA becomes a customs union, it means there will be no Ethiopian Market, there will be no Kenyan Market, etc.; there will be a single COMESA market. If there is an African customs union, your domestic market is not the Ethiopian market; Africa becomes your domestic market.
Whatever comes through the port of Djibouti, Berbera, or Lamu, it will be considered to have come into the single market from the point it clears from those ports. If there are any price differences between here and the market of the transit country, it will be mainly because of the transport cost. For a land-locked country, regional integration, I believe, should be a key part of the development strategy for such a country. The AfCFTA Agreement has provisions on transit rights, on trade facilitation, on fees to be paid at the ports, etc. So, will that help Ethiopia as a landlocked country or will it harm Ethiopia? The answer must be very clear. It will help Ethiopia.
How do you see the role and commitment of Ethiopia in the implementation of AfCFTA so far?
On trade issues, we always took the back seat traditionally. On the AfCFTA we played a very important role even from the beginning, in the negotiation of the text of the Agreement as well as during the adoption of the AfCFTA agreement. In March 2018 when the AfCFTA Agreement was adopted by an extraordinary session of the AU Assembly of Heads of State and Government in Kigali, Rwanda, Ethiopia was going through a very difficult political transition. It was a time when the former Prime Minister had resigned and acting in a care-taker capacity while the current Prime Minister had not yet taken office.
Yet, Ethiopia was one of the 44 countries that signed the Agreement on the day of its adoption. And, within a year of its adoption, the Ethiopian Parliament ratified the AfCFTA Agreement. This is to say that, when it comes to the AfCFTA, Ethiopia has been at the forefront despite the internal political issues that had gripped the country at critical moments. And this is the right thing to do.
Even politically speaking, the AfCFTA it is one of the most prominent Flagship Projects of the African Union under Agenda 2063. As the seat of the African Union and a founding member of both the OAU and the AU, Ethiopia cannot afford to be seen to be dragging its feet on such a landmark continental initiative. What Ethiopia is doing now is very encouraging.
And I believe Ethiopia would also benefit from enhancing its participation, indeed from playing a leading role, within the subregion to integrate its economy closely with its neighbours. It goes back to the nature of the status of the country as landlocked. Regional integration can only help Ethiopia reduce the adverse economic impact of its landlockedness, and through an international treaty and in a peaceful manner.
Do you have any special message to our press and readers?
We can talk about what the Government can do in this area, but the AfCFTA will not go anywhere until and unless the private sector understands it, recognizes its opportunities, seizes these opportunities, and drives the AfCFTA.
In Ethiopia and in many other countries, we are trying to work directly with the chambers of commerce right now to make sure that the business community understands what the potential is, and engages with government from a position of information.
After all, government is not a trader. Government negotiates trade agreements so that the private sector can trade freely. As the private businesses trade freely, they will benefit themselves, benefit their own countries by creating employment, by paying more money to the national treasury in taxes, thereby enriching themselves and enriching their countries. That is why the African private sector needs to be supported and mobilized around the AfCFTA. I believe that as we support Governments, we must also support the private sector.
And this is a practice that I encourage you to continue. Sitting in Addis, for a paper like yours, the AfCFTA must be one of your major areas of constant engagement because it is important for Ethiopia and it is important for Africa.
Thank you very much for your elaborate answers!
BY ZEKARIAS WOLDEMARIAM
THE ETHIOPIAN HERALD SATURDAY 5 APRIL 2025
