The African Continental Free Trade Area (AfCFTA) is a game changer for businesses across the continent and around the world. For too long, Africa has been hampered by barriers to trade and competitiveness, which have limited its regional and global value-chain participation and foreign direct investment. The AfCFTA is designed to change all that by creating a single market that is projected to grow to 1.7 billion people and $6.7 trillion in consumer and business spending by 2030.
One of the key benefits of the AfCFTA is that it will increase intra-African trade and international exports, which will unlock tremendous opportunities for local and global businesses to enter into and expand throughout new markets across the continent. To that end, the AfCFTA Private-Sector Engagement Strategy has identified four key sectors that have high potential for local and global business: automotive; agriculture and agro-processing; pharmaceuticals; and transport and logistics. These four sectors represent $130 billion in goods and services imports.
The automotive industry; is a key sector because of characteristics that will accelerate intra-African trade. With domestic demand for motor cars and commercial vehicles rising due to the continent-wide increase in disposable income, growth of the middle class, and rapid urbanization, there is a strong opportunity to apply domestic production to local demand. For example, Volkswagen has recognized the potential and need for new, modern and safe vehicles to be produced in Africa. So far, the company has successfully established local assembly operations in Kenya, Rwanda, and Ghana, and two wholly-owned subsidiaries in Rwanda and Ghana.
Agro-processing; is another key sector with exceptional potential for increasing intra-African trade, meeting local demand, accelerating GDP growth, creating jobs, and improving inclusivity due to its upstream and downstream linkages. The AfCFTA will expand participation in value chains and trade, since countries will no longer have to rely on exporting only agricultural intermediaries with little value added. Currently, the continent imports about $50 billion of agricultural products per year, but, by 2030, intra-African agricultural trade is projected to increase by 574% if import tariffs are eliminated compared to a scenario without the AfCFTA.
Pharmaceuticals; is another high-potential sector due to the feasibility of addressing barriers to trade and production in a short time frame, as well as the strong potential for meeting demand locally. The pharmaceutical industry is projected to grow at 5.13% compound annual growth rate (CAGR) in 2022–2027 in Africa. Total demand for all packaged medicines in Africa is around $18 billion annually, of which 61% is imported and 36% is locally produced and not traded. Only 3% of demand is met by intra-African trade.
Logistics; A majority of intra-African exports are transported over land, so road and maritime freight transportation offer the biggest opportunity as the infrastructure for air and rail transportation is still being developed. The establishment of the AfCFTA is projected to increase intra-African freight demand by 28%, leading to demand for almost 2 million trucks, 100,000 rail wagons, 250 aircraft, and more than 100 vessels by 2030. Large logistics companies have historically been too expensive for African companies to use, but that is changing with the rise of new digital logistics companies.
While the AfCFTA will create significant general and long-term benefits across the continent, there may be some short-term disruptions as tariff revenues are reduced, industrial sectors are disordered, businesses and supply chains are reorganized, and employment is dislocated. The estimated requirement for uninterrupted implementation of the AfCFTA and elimination of the adjustment cost is $7.7 billion over the next 6 to 10 years.
Africa's rising population, increasing incomes, and integrated markets present a vast array of opportunities for businesses to grow and succeed in meeting new levels of demand. Every industry has specific strengths that companies can leverage to their advantage.
For instance, the automotive industry benefits from high product complexity, while agriculture and agro-processing contribute significantly to GDP growth and inclusive job growth. The pharmaceutical industry also has the potential to quickly address barriers, and transport and logistics present irresistible demand and enabling opportunities.
By tapping into these resources, companies can enter or expand into African markets and develop their own strategies to seize the opportunities brought by a more integrated continent. With Africa projected to be home to 32% of the world's youth by 2030, entrepreneurship and innovation will become powerful drivers of growth and success for new businesses as markets become more connected.
Macro trends, operational support, and company testimonies all point to the fact that Africa is the future of commerce. The private sector will play a significant role in helping the continent achieve the goals promised by the African Continental Free Trade Area (AfCFTA). Now is the time for both local and international companies to align their strategies and investment priorities with the fundamental change that will come as economies develop and opportunities abound.
However, businesses looking to enter or expand into African markets must be mindful of the unique challenges that the continent presents. These include inadequate infrastructure, political instability, corruption, and cultural differences. It's important to work with local partners who have a deep understanding of the market and can navigate these challenges effectively.
In conclusion, the opportunities in Africa are vast, and businesses that are willing to invest the time and resources to understand the market and work with local partners will be well-positioned to succeed. As Africa continues to develop and economies become more integrated, the private sector will play a crucial role in driving growth and creating shared prosperity for all.
Source: World Economic Forum / AfCFTA: A New Era for Global Business and Investment in Africa
