The African Continental Free Trade Area (AfCFTA) is the continent’s attempt at creating a single market for goods and services.
Its aim is to, among other things, encourage the countries that make up the continent to trade with one another but also to advance the collective economy of the African continent to rival those of the leading economies of the world.
- Banks, in their intermediary function, have a critical role to play in the implementation of AfCFTA
- Banks are largely responsible for the payment mechanism in every economy, and as such, they will be central in facilitating international and intra-African trade through seamless payment solutions
- AfCFTA is the continent’s most ambitious effort to create a common market throughout Africa
The AfCFTA will transform Africa if only it can be implemented. Most of the countries on the continent have signed up to the idea of a common market; however, the initiative requires more than just the signature of ratification by each member state.
Its benefits are immense – among them connecting no less than 1.3 billion people and creating the world’s fourth largest economy. The success of the initiative in as far as its implementation is concerned is that it needs to permeate every sphere of African trade, finance, economics, and investment.
Suppose African shores can successfully become home to a market that is 1.3 billion people strong. In that case, the allure of that will be too attractive to pass up for the biggest of multinational corporations and institutions with significant capital to invest and deploy on the continent.
Taking the case of Nigeria as a microcosm of AfCFTA, the rest of the continent can make reasonable inferences on what they can expect from the wholesale implementation of the initiative. It is essential to note that in its current fragmented state in terms of trade and heterogeneity, Africa, according to UNCTAD’s World Investment Report published in 2022, attracted at least US$83 billion in foreign direct investment in 2021 which represented an increase of no less than 113 per cent from the previous figure of US$39 billion—no mean feat.
One is limited by their imagination alone if they imagine what kind of money would cross continents to arrive on African shores if the continent became a single market.
West Africa, where the country of illustration Nigeria is situated, attracted a total of US$14 billion, which was 48 per cent higher than the US$9 billion achieved the previous year. Nigeria is the continent’s most populous nation and the most appropriate sample of what Africa will be like when AfCFTA is implemented.
The country has a population of 209 million according to World Bank statistics. Nigeria saw its flows double to $4.8 billion, mainly because of the resurgence in oil investment and expansion in gas. That is no mean feat as well. It may seem somewhat insignificant that a country attracted nearly US$5 billion in fresh foreign capital in 2021, which is less than half of the US$14 billion the regional block attracted.
However, for perspective, it will help readers to appreciate that West Africa is made up of 17 countries meaning that on average, each country attracted at least US$823 million in foreign direct investment in 2021.
So, for a single country to attract more than five times its nearest neighbour in investment is very telling of how attractive that country’s investment prospects are relative to its neighbours.
It is not an exaggeration to make the claim that Nigeria is disproportionately attractive to investment dollars due in part to its size in terms of population and on account of its resources. The wider continent is the same as Africa and will be the same way if it can harness the sheer size of its population which is the most youthful in the world and perhaps more importantly, if it can also harness the immense natural resources it has.
The African continent will attract a disproportionate amount of investment capital relative to the rest of the world should this become a reality. As it is there is a significant appetite by global capital to deploy funds on the continent; however, its fragmentation economically makes it generally attractive with pockets of the continent enjoying the most of liquidity sloshing around in the form of foreign direct investment.
Southern Africa had a phenomenal showing in terms of foreign direct investment in 2021. The regional block enjoyed foreign inward flows of US$42 billion, representing an increase of more than 895 per cent from the US$4 billion that flowed into the block in 2020. The attractiveness of this region as in the case of Nigeria and West Africa owes itself to the sheer size of the population of the region and the vast mineral resources that investors are looking to exploit and monetize.
The implementation of AfCFTA is an attempt to merge the comparative advantages of countries that make up the continent into a single homogenous market that can meaningfully compete on the global stage.
In the case of southern Africa, investment dollars have been driven like in the rest of the world by mining activity which has proven to be especially resurgent and resilient in recent years. UNCTAD also reports that foreign direct investment in southern Africa was driven by what it describes as “a share exchange between Naspers and Prosus in the third quarter of 2021. New project announcements included a $4.6 billion clean energy project finance deal sponsored by Hive Energy (United Kingdom) and a $1 billion greenfield project by Vantage Data Centers (United States), with its first African campus.”
- Banks, through ISO 20022, which is a new SWIFT standard, will be able to make instant cross-border payments critical for the smooth flow of international trade
- AfCFTA will be a game changer for the African continent if successfully implemented, resulting in an economy roughly the size of Germany. However, for this to be a reality, it needs enablers like the banking sector
AfCFTA will be a game changer for Africa, but its success depends on certain enablers being present. The first and most obvious impediment and an obstacle to the initiative will be mustering the political will of the signatories to implement the necessary reforms to enable its success. This may not always be politically feasible or possible.
The less obvious enablers and the financial institutions on the African continent. Their presence and activities have a direct and strong bearing on the success of AfCFTA. One of the foremost bankers on the African continent, Sim Tshabalala, the chief executive of the continent’s largest banking institution by assets, is fond of saying that banking is a derived business. This means that banks butter their bread from the activities of economic agents.
If AfCFTA is to succeed in its quest to merge the various comparative advantages of the countries that constitute Africa it will need champion banks to support the intra and intercontinental trade activity from there being a single market and all participants, both local and foreign looking to make money. Africa will need champion banks to facilitate the flow of capital to worthwhile projects and ensure that the capital deployed into various activities earns the best returns for its providers. They will achieve this by their financial intermediation activities. There are already initiatives in the banking sector to make the support of international trade by banks more seamless especially in an era where AfCFTA becomes fully operational.
The Society for Worldwide Interbank Financial Telecommunication or SWIFT is an organization that was established in Belgium in 1973 and establishes common processes and creates standards for financial transactions. It is the result of banks around the world coming together to create consistent universal solutions for moving money between countries. SWIFT provides a secure network that allows more than 11,000 financial institutions in over 200 different countries to send and receive information about financial transactions to each other. One of the key services SWIFT provides is global financial messaging, carrying over five billion secure financial messages a year, to make sure that payments moving between banks on different sides of the globe arrive safely.
SWIFT is key to the way most traditional banks process international transfers, as they know they can rely on the standards and security used within the SWIFT payment and messaging network.
Recently, SWIFT has pioneered a new standard that will change how international payments are made. This will happen through the promulgation and implementation of ISO 20022. It is an open global standard for financial information that provides consistent, rich and structured data that can be used for every financial business transaction. Starting in November 2022, the way the SWIFT community exchanges payments messages will be transformed with ISO 20022. This will unlock huge opportunities for financial institutions, such as boosting operational efficiency, enhancing customer experience, and enabling innovative new services. A global and open standard, ISO 20022 creates a common language for payments worldwide. Its higher quality data means better payments for all. This is according to the SWIFT website.
The greatest advantage of this new standard is that it has enabled banks that have implemented it to optimize efficiency in the manner international payments are made. Banks can create autonomous international payment ecosystems by relying on data and digitisation. It will henceforth be possible to make instant international payments. This aspect is the most important role that banks can play when it comes to enabling AfCFTA.
Intracontinental and intercontinental trade between African countries within the continent and with countries outside of the continent will need to be supported by a robust payment mechanism to ensure that trade is seamless. The adoption of ISO 20022 by banks in Africa is most advantageous to the successful implementation in the sense that it offers a platform from which countries can begin to trade with one another and the rest of the world.
A world-class financial system and a world-class payment mechanism will go a long way toward boosting the confidence of foreign business organizations and governments in trade on the continent.