The African Continental Free Trade Area (AfCFTA) sets to eliminate up to 90 per cent of tariffs on the continent that has remained economically fragmented inhibiting efficiency and constraining economic growth.
Through the agreement, trade in the region is set to increase by 15 per cent to 25 per cent in the medium term, according to the African Development Bank.
The FTA forms a foundation for Africa to become a competitive continental market that can serve as a hub for global business.
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AfCFTA is set to transform the continent into the world’s largest free trade area since the establishment of the World Trade Organization in 1994. This means that the continent is primed for unprecedented growth with the opening up of the economic and trade boundaries that have for long stymied intra-African trade.
The agreement is set to improve what is already becoming the norm in trade on the continent since over the past few years, intra-African trade has more than doubled. However, even with the opening up, the continent still lags far behind other regions of the world at just 18 per cent of trade within itself.
In comparison, Europe has more than 70 per cent of trade within itself; 55 per cent in North America; 45 per cent in Asia; and 35 per cent in Latin America.
On the brighter side, this trade potential could double if African countries address challenges in infrastructure and corruption which have continually hampered the ‘Africa rising’ narrative.
By making Africa the world’s largest trade area, the AfCFTA is expected to further improve Africa’s bargaining power with the rest of the world. This is with regard to the quality of goods produced as well as market entry of imported goods.
First to tap into the potential that the AfCFTA offers is Egypt, one of Africa’s economic heavyweights.
With the knowledge that the AfCFTA could add at least 32 new trade partners to Egypt and help diversify and upgrade the country’s economy, Egypt is positioning itself to fully benefit from the trade agreement.
The country of 100 million needs to update its policy approach for economic transformation, according to the country’s Production Transformation Policy Review (PTPR) released by the Organisation for Economic Co-operation and Development (OECD) in July 2021.
Egypt is not an economic heavyweight for nothing.
The country that links northeast Africa with the Middle East is the continent’s top manufacturing hub, accounting for 22 per cent of its value-added in this sector. Despite the African continent being a small industrial player globally, accounting for only 2 per cent of world manufacturing, Egypt is a major player which has elevated the continent’s potential in manufacturing.
The fast-growing economy is increasingly attracting international investors, who are choosing Egypt to produce for the African continent and the Middle East.
In the three years between 2017 and 2020, Egypt registered the highest percentage of foreign direct investment (FDI) on the continent. The FDI was in electronics and electrical manufacturing in Africa (21 per cent of the total number of projects), and the second-highest of knowledge-intensive ones (14 per cent ), according to the OECD report.
What remains a limiting aspect to Egypt’s economic growth is that the country still trades little with other African economies. The country has only 15 per cent of its goods exported and traded on the continent.
But, Egypt is not resting easy.
With the country recording the first Covid-19 case on the continent, Egypt has been quick to mitigate the economic effects of the pandemic. In 2020, the recovery package mobilised by the government accounted for 1.9 per cent of Egypt’s GDP. This included tax breaks, loan repayment deferrals and subsidized credit to firms.
Prior to the pandemic and since 2017, Egypt has been reforming its governance and regulatory framework to attract investment, foster trade and digitalisation in firms.
The OECD report notes that among the country’s key reforms carried out, the implementation of an online platform to speed up customs processes—the national single window in 2021—stands out.
Towards improving quality, Egypt established the National Food Safety Authority in 2017 underscoring the country’s commitment to invest in raising excellence.
With technological advancement, the country has become one of Africa’s top hubs for start-ups, accounting for 14 per cent of the continent’s start-ups and 10.5 per cent of its venture capital.
The challenge remains, though, in that Egypt is still relying predominantly on traditional tools towards supporting industrialisation, including special economic zones.
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Way forward
The report notes that Egypt should continue implementing effective reforms for more economic progress. Three actions that could be the game-changers in the current context which has a vast array of agenda are:
- Investing in making AfCFTA a real development driver: in this, the most important step will be implementing effective industrial policies and observing their impact. Setting up monitoring and evaluation systems to track the progress of AfCFTA’s implementation in relation to the country’s Vision 2030 and the National Structural Reform Programme for 2021 to 2024 will help measure progress.
- Egypt should also prioritise engaging the private sector in innovation. The country, as per the report, falls short by international comparison, of the typology of tools and the budget allocated to innovation and research and development. The introduction of fiscal incentives is a step forward. The country should increase public support for innovation to all firms across all sectors, leveraging existing tools, such as the ones managed jointly by the Industrial Modernization Centre and the Science and Technology Development Fund.
- Egypt should also get policymaking ready for the future. The country would benefit by rationalising and strengthening implementation institutions in building their capacities to operate across the whole country and modernizing its infrastructure to operate better in an industry and Agro 4.0 landscape.
The report is the product of a 21-month policy support process requested by the government of Egypt and implemented by the OECD in collaboration with the United Nations Conference on Trade and Development, the United Nations Economic Commission for Africa and the UN Industrial Development Organization.
Malaysia and Italy made peer contributions and the Afreximbank contributed to the process.
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