This is a keynote address by H.E. Wamkele Mene, Secretary General of the AfCFTA Secretariat, on occasion of the 2021 Nation Brand Forum held on 28 September 2021 in Johannesburg under the theme – “Believe in South Africa: Reflect, Rebuild and Reassure”.
Distinguished guests, ladies and gentlemen
It is an honour to be here today to talk about the African Continental Free Trade Area (AfCFTA), and what it means for the South African Economy.
In doing so, I will proceed from two perspectives: first, the implementation process – what has already been agreed and what is outstanding for commercially meaningful trading under the AfCFTA preferential regime; and second, how the AfCFTA will generate new opportunities for increased business for South Africa.
Ladies and gentlemen
We all know the Covid-19 pandemic has weakened the economic conditions in South Africa, as has been the case in so many other countries. In 2020, the real GDP contracted sharply, declining from 0.2 percent in 2019 to negative 8.2 percent; public finances suffered severely, with the budget deficit and public debt increasing significantly owing to the recession and pandemic-related expenses; employment losses were significant, with about 2.6 million people losing their jobs since March 2020, bringing the unemployment rate to 30.8 percent in September 2020 from 23.3 percent in December 2019. And, this was despite the timely actions of the authorities to support the most vulnerable groups and affected businesses.
Undoubtedly, to support the country’s recovery from the severe adverse impacts of the Covid-19 pandemic and build back better, there is need for a united domestic spirit and international goodwill to work together to build confidence in the country, accelerate economic reforms, re-industrialise the economy, and create jobs for the unemployed, leaving no one behind.
Occasions such as this, therefore, present a unique opportunity for various stakeholders from government, organised business, media, civil society, and nation branding to interact and engage with issues and opportunities that are catalytic to the future of South Africa.
Distinguished ladies and gentlemen
The “Pancession”, the Covid-19 pandemic induced economic recession, experienced last year, and alluded to earlier, affects the attractiveness of South Africa as an investment destination.
Significantly, South Africa’s growth is projected to rebound in 2021 and the IMF, in July upgraded the growth outlook from 3.1 percent to 4 percent, on the back of the “strong positive surprise” in the first quarter of the year, when the economy expanded 4.6 percent on a quarter-on-quarter seasonally adjusted basis.
Such positive developments/news, and the potential for further improvement over the next couple of years, due to greater policy predictability, structural reforms, enhanced regional and continental integration, as well asimproving business and investor confidence, augur well for the attractiveness of South Africa as an investment destination, and hence Nation Branding.
It is against this background that I find this event timely and very significant. This is the time for South Africa to showcase the potentials it has and the ability to rise up and be responsive to the socio-economic challenges,exacerbated by the Covid-19 crisis. There is need to work toward reviving the nation’s hopes and dreams in order for the country and its people to thrive.
Distinguished ladies and gentlemen
I hope you will indulge me to repeat a point I have often made. In the scenario Africa finds itself, having been severely impacted by the pandemic, with lack of monetary and fiscal policies space to provide significant economic relief packages, if we are looking at a post Covid-19 world, really the only tool at our disposal that can boost such a recovery is implementing the AfCFTA and doing so in such a way that would significantly boost intra-Africa trade and enhance our investor profile. We have to implement the trade and investment rules that we have agreed on to become a much more attractive investment destination than we have ever been.
By facilitating the movement of goods and services among African countries, AfCFTA will create opportunities to accelerate intra-Africa trade, grow local businesses, create jobs and increase infrastructure development on the continent. The AfCFTA agreement will create opportunities and benefits for all the member states. It will enable companies to expand their markets by exporting goods and services across the continent.
As you may well know, based on progress made since the start of the AfCFTA negotiations in 2016, to the signing of the Agreement in March 2018, and the launch of the operational phase in July 2019, the AU Summit in December 2020 chaired by President Ramaphosa, provided the legal basis for the commencement of preferential trading under the AfCFTA on 1 January, 2021.
To date, there are 54 signatories to the AfCFTA Agreement, with Eritrea being the only hold out. Ratifications stand at 40, with 38 State Parties, including South Africa, and these are countries that have ratified the agreement and deposited their instrument of ratification with the AUC.
With regard to the current status of the negotiations, substantial progress has been made with respect to the negotiation on the AfCFTA Rules of Origin (RoO), with agreement reached on 86.03% of product lines. The main challenge to concluding the negotiation on the RoO has to do with the differences in productive capacities of Member States. Thus, while some countries favour a low local content, using products with significant imported content from outside the continent, with minimal assembly on the continent, others prefer higher local content.
Also, 42 and 35 State Parties and non-State Parties have submitted their initial tariff and services offers respectively to the AfCFTA Secretariat. These numbers also include submissions from four (4) Customs Unions: the East African Community (EAC); the Economic and Monetary Community of Central Africa (CEMAC); the Economic Community of West African States (ECOWAS) plus Mauritania and the Southern African Customs Union (SACU).
It may be recalled that Article 20 of the AfCFTA Agreement establishes a dispute settlement mechanism to be administered by a Dispute Settlement Body (DSB) established under Article 5 of the Protocol on Rules and Procedures for the Settlement of Disputes. The activation and operationalization of the DSB became urgent following the official launch of the start of trading under the AfCFTA in January this year.
The inauguration of the DSB in April 2021, therefore, signals the readiness of the AfCFTA dispute settlement infrastructure to take up any disputes that may arise in the course of trading among the State Parties. Disputes are inevitable in any free trade area and when any such disputes arise under the AfCFTA, the resolution is to be in line with the Protocol on Rules and Procedures on the Settlement of Disputes which forms part of Phase I negotiations.
Negotiations on the Phase II, covering Competition Policy; Investment; Intellectual Property Rights; Digital Trade; and Women and Youth in Trade are at different stages. Preliminary work has commenced, and we expect that all these will be completed by December 2022.
Distinguished ladies and gentlemen
Intra-African trade is estimated at 16 percent in 2020, lower than the average of 18 percent recorded over the 2015 – 2019 period; a situation attributed largely to the Covid-19 induced disruptions in supply chains.
The Continental Trade Agreement will expand intra-African trade through better harmonisation and coordination of trade liberalisation and facilitation instruments across the countries and regional economic communities on the continent.
Instructively, the export potential for intra-African trade is very significant, estimated to exceed US$84 billion. This is projected to significantly raise the current level of intra-African trade to more than US$231 billion, potentially accounting for more than 22 percent of total African trade, all other conditions remaining the same. The 10 identified products with the greatest export potential are mineral products, machinery, food products, motor vehicles and parts, beauty and cosmetic products, fish and shell-fish, plastics and rubber, chemicals, fertilisers, and ferrous metals, which collectively account for 57 percent of the total intra-African export potential.
South Africa as the second largest economy after Nigeria with a GDP of about US$302 billion in 2020, and the most diversified economy is bound to be a major contributor to increased intra-African trade and the success of the AfCFTA.
With a share of 32 percent of all intra-African exports and 12 percent of all intra-African imports, thus accounting for most of intra-African trade in 2020, South Africa’s exports to the rest of Africa are fairly diverse including, Processed foods and beverages, Refined oil, Electric Energy, Automotive vehicles and components, and Iron and steel. Imports from other African countries are, however, dominated by crude oil and Petroleum Gas.
And, with 80 percent of South Africa’s exports to the rest of Africa destined to SADC countries, characteristic of intra-African trade wherein over three-quarters of trade takes place within regional trading blocs, the market penetration potential in African economies remains largely untapped.
The AfCFTA, therefore, opens up an opportunity to South Africa to expand its intra-African trade beyond the SADC to East, Central, West and North Africa; accessing the wider African market to export its goods and services without the worry of tariffs thus bringing about more revenue for much needed development in the country.
In this regard, it is worthy of note that studies have showed that beyond the SADC region, East Africa presents the highest potential, estimated at US$9 billion for products from Southern Africa. The products with greatest export potential are pharmaceutical components, machinery, motor vehicles, and ferrous metals. West Africa is next with an estimated potential of US$7.3 billion, followed by North Africa, at US$7 billion. Central Africa has the lowest export potential, estimated at US$1.1 billion. Key imports of other African countries from outside the continent also represent growth areas for South Africa.
Distinguished ladies and gentlemen
There are also opportunities for development of regional value chains in Africa to spur industrialisation and create quality jobs. Recent studies show that Africa imports approximately 40 cents in inputs from outside the continent for every dollar of manufactured product – higher than most other regions in the world (McKinsey 2020). This exposed Africa’s over reliance on global supply chains particularly when the Covid-19 pandemic struck. It also raises costs for African businesses and affects export competitiveness.
Significantly, a double down to reduce reliance on global supply chains, over five years, could add an initial US$10–20 billion to the continent’s manufacturing output if 5–10 percent of imported intermediate goods can be produced within the region (McKinsey 2020).
The crisis, and now with the AfCFTA in place, creates an opportunity for African countries to build value chains for medical equipment, pharmaceuticals, and personal protective equipment. The clothing and textile sector could also be restructured to meet the needs of the health care sector while taking advantage of the breakdown in supply chains from China and Europe.
Consolidating Africa into one trade area provides great opportunities for businesses and consumers across the continent, unlocking trade and manufacturing potential and further enhancing industrialization in Africa. The introduction of a continental simplified trade regime should provide small and informal businesses with greater protection, and support their participation in the new export opportunities created by the AfCFTA.
The protocol on intellectual property rights (IPRs), will create a strong enabling environment for IP creation, protection, administration and enforcement which will stimulate innovation and competitiveness of the business sector. IPRs provide incentives to inventors to develop new knowledge and the right to obtain a patent for an invention, for example, it encourages the investment of money and effort in research and development. Therefore, an effective IP regime across the continent will facilitate the growth of SMEs and will lead to increased job creation, especially for women and the youth.
The AfCFTA can also help to promote greater investment into Africa. Foreign direct investment into Africa seems to have plateaued in recent years, with investment across the continent falling from $47.1 billion in 2019to $39.8 billion in 2020, a level last seen 15 years ago. Greenfield project announcements, an indication of investor sentiment and future FDI trends, dropped by 62 per cent to $29 billion, while international project finance, especially relevant for large infrastructure projects dropped by 74 per cent to $32 billion.
In the past, most investors were hesitant to invest in Africa because the markets were too small and they were not easily able to export their goods owing to the poor transportation and communication links and tariff and non-tariff barriers. The AfCFTA addresses all this and is complemented by protocols on investment, property rights, digital trade, besides others, and will facilitate deeper integration.
The ability of African countries to leverage AfCFTA to continue attracting FDI is key. FDI is still an essential cornerstone of sustainable economic development. Africa countries will, therefore, need to urgently address any hindrances to such foreign investment and do their utmost to create a more investor-friendly environment.
An important point of entry for FDI in Africa is Special Economic Zones (SEZs). According to a recent UNCTAD survey of SEZ stakeholders in Africa carried out in collaboration with the African Economic Zones Organization (AEZO), FDI in SEZs is expected to increase by 15 per cent from other members of AfCFTA and by 30 per cent from outside Africa. The survey revealed that the vast majority of African SEZs view the AfCFTA with optimism: over 85 percent of respondents expect FDI from Africa to increase or significantly increase, while almost all the respondents (95 per cent) expect investment from outside Africa to do so. International investors are likely to increasingly pursue regional market-seeking investments, considering African SEZs as points of entry into the whole continental market, therefore, scaling up FDI towards the most competitive zones.
South Africa will need to drive the effort to attract this investment, backed by commitment to policy certainty and nation branding.
To conclude, Africa’s time for economic transformation and industrialisation is now. Without such a transition from commodities to value addition including tradeable services, as well as embracing the rapidly evolving digital technologies, African economies will have limited room to accelerate economic growth, and create employment opportunities.
It is in the interest of all of us, as Africans, that we grow the African economy by creating jobs, providing basic services and ensuring equal access to opportunities.
The AfCFTA opens up many opportunities to South Africa, as the other AU member states, to see what it could contribute to the economic growth of the whole continent, and the opportunities for South African companies to take part in this Agreement.
We must encourage a spirit of entrepreneurship and ensure more people take up opportunities created by a single market of goods and services.
The AfCFTA agreement has the potential to reduce vulnerabilities to Covid-19-related trade and market disruptions while mitigating the impact of the pandemic on the poor. The success of the AfCFTA may require complementing trade policies with national policies that make the gains from trade more inclusive.
South Africa remains the largest exporting and importing country in Africa, and the 36th largest export economy in the world, 36 in total exports, 39 in total imports, and 57 most complex economy globally. Increased industrial opportunity across the continent will spur investment in key “gateway” economies like South Africa.
Finally, realising these outcomes will depend on putting in place facilities to ease the AfCFTA’s short-term disruptions as well as significant trade facilitation measures.
Strengthening intra-African trade and supply chains could create a stepping-stone for export-oriented growth. As companies globally rethink their supply chains, Africa could have access to new export opportunities, particularly to geographically proximate regions.
Let me end with a quote from Thebe Ikalafeng, leading brand authority and founder of the Brand Africa initiative, “The Africa story, like its history, has always been left to the world to interpret and shape. This initiative is about Africa shaping its own destiny”.
I wish you a successful Nation Branding.