The International Ratings Agency, Fitch Ratings has said that the implementation of the African Continental Free Trade Area Agreement (AfCFTA) is unlikely to influence rating adjustments for sovereigns in the region. However, in the longer term it could turn credit positive if trade liberalization is successful and thus, improves the business environment more broadly as well as ensures a robust economic growth in Africa.
The AfCFTA, which commenced on 1 January, 2021 is considered as the symbol of hope— Africa’s last chance for rapid transformation, growth and poverty alleviation. It is set to remove trade tariffs and non-tariff barriers between 54 African member states which have signed the Agreement, with the exception of Eritrea.
The agreement commits all signatories to the removal of 90% of goods, and provides a framework for the settlement of trade disputes. It also includes the removal of non-tariff trade barriers, liberalize trade in services, and ensure mutual recognition of standards and intellectual property protection.
According to Fitch Ratings Agency, the impact of free trade should be positive for Africa’s economic potential, albeit the intensity of the impact is likely to be small. A 2019 joint publication between AU Commission and the Organization for Economic Cooperation and Development (OECD) estimated that removing all tariffs on intra-African trade could boost GDP by 0.65%, a figure that is estimated to rise to 3.15% if all non-tariff barriers are removed. And yet, this growth is supposed to materialize in the long term, Fitch suggests.
Already, intra-African trade is low. According to Fitch analysis, the median export share from Fitch-rated sovereigns in Africa to other Africa States is below 19 percent. Nonetheless, smuggling of goods are also known to be pervasive in Africa and all forms of informal trade which are largely operated in many countries are also not captured.
Another concern that surrounds Fitch’s outlook, is that it is not clear as yet, how effective the implementation and the enforcement of the AfCFTA will be. There is the likelihood that, along the way, governments may be unwilling to accept certain limitations on their ability to enact policy, especially where trade liberalization requires governments to make politically unpopular decisions or interferes with domestic subsidies and exchange controls, Fitch says.
“It is notable that Nigeria, the continent’s largest and most populous economy, imposed an effective bar on land-border traffic for goods and persons in August 2019, shortly after signing up to AfCFTA, lifting the restrictions only in December 2020.
“Regional trade growth will continue to face obstacles. Infrastructure shortfalls, including poor roads and port congestion, remain a substantial challenge. More broadly, a lack of reliable power supplies and constraints on access to funding will continue to curb the potential for manufacturing production. Foreign-currency restrictions and bureaucratic impediments further hamper intra-regional trade.”
Taking all of these into consideration, the near term outlook of the impact of the AfCFTA as expressed by Fitch Ratings is that, it is unlikely to drive a positive impact on credit worthiness of Sovereigns in the region.
Other factors including impact of governments’ policy responses to COVID-19 and macro-economic stability more generally, will exert stronger influence on sovereign ratings. However, to reiterate, in the longer term the impact of AfCFTA will indirectly have an effect on credit worthiness of Sovereigns in the region.
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