Afke Zeilstra, Author at Global Trade Magazine

The African continent is on the cusp of long-term economic opportunity thanks to the inception of the African Continental Free Trade Area (AfCFTA), which came into effect in January 2021. The AfCFTA could boost Africa’s growth potential as the agreement intends to liberalize trade across Africa over the next few years. It provides optimism for a region that has been hit hard by the pandemic.

The impact of the pandemic has been uneven across African economies, with some suffering from severe economic contractions, while others managed to record small growth rates. The post-pandemic outlook differs from country-to-country, but most are subject to high uncertainty due to the rise in infections and the slow vaccination process. In the long run, the AfCFTA could be pivotal in Africa’s growth potential as the agreement foresees fundamental freedom of trade in Africa in the next few years.

The agreement has the potential to accelerate African growth rates after the negative impact of the COVID-19 pandemic, according to a recent economic outlook report for the Sub-Saharan Africa (SSA) region from trade credit insurer Atradius.

Early optics reveal uneven results

While long-term results of the implementation of the AfCFTA, the immediate optics are not looking promising for most countries. Some challenges have to be overcome before the AfCFTA is successfully implemented and countries can reap the benefits. In the short run, protectionist tendencies, insufficient capacity to expand cross-border infrastructure, political instability and weak government finances, among other things hinder a full implementation of the agreement.

The AfCFTA’s full implementation has a long way to go, with several countries needing to first establish the necessary customs infrastructure and required procedures to trade. Countries that already have action plans and customs procedures in place, as well as relatively low barriers to trade with other African countries, will likely see success early on. So far, only Egypt, Ghana and South Africa have accomplished the necessary customs infrastructure. Countries that are likely to benefit the most are those with relatively open and diversified economies and well-established trade links, like South Africa. This also applies to other regional trading hubs such as Kenya, Senegal and Cote d’Ivoire.

Economies emerge from harsh COVID effects

Last year’s economic contraction of 1% was the lowest ever witnessed in the region and was stark in comparison to average annual growth of 4.3% since 2010. COVID-19 hit African countries with a drop in trade, lower commodity prices, fewer tourist arrivals, lower remittances and lower foreign investments. Additionally, many countries introduced strict lockdowns in the beginning of the pandemic that hurt domestic economic activity.

Thankfully, 2021 has seen a recovery in the global economy and higher commodity prices, supporting the economic recovery in Africa. Economic growth is expected to reach 1.3% this year. A recovery that is quite moderate, especially in comparison to other regions in the world. Reasons for this are the limited room for government support and the slow vaccine distribution. Similar to other parts of the world, many African governments supported their economies resulting in high budget deficits and an increase in public debt. Now, many face high debt levels that will limit further support and even constrain public investments over the next few years. Therefore, many countries are not expected to return to their pre-pandemic growth figures. The economic outlook is also uncertain due the continued spread of COVID-19 coupled with the slow vaccination process.

Uneven recovery underway for Sub-Saharan Africa

While there is an economic recovery underway for SSA, it will be slow and mostly uneven throughout the region. Oil exporting countries, hit hard by the pandemic, like Nigeria and Angola, will see a particularly slow recovery. Small island economies dependent on tourism, like Mauritius, which recorded deep recessions last year will likely see one of the highest economic growth figures in Africa this year. However, this is still uncertain, as it depends on the expected gradual recovery in tourism.

The more diversified economies fared relatively well through the pandemic and will have a strong economic recovery. Countries such as Kenya, Ghana and Côte d’Ivoire recorded a small contraction or even a positive economic growth last year and are among the top performers.

Opportunities for the region could be on the horizon in the form of the African Continental Free Trade Area (AfCFTA). Although in the short term there is much to overcome, once it reaches full implementation on the longer term, it is set to benefit several African economies.

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Afke Zeilstra is a senior economist for Atradius

Like many regions, Sub-Saharan Africa (SSA) has been severely hit by the coronavirus, posing significant challenges to businesses there. As the pandemic continues to disrupt the economy and debt levels rise, Atradius analysts predict an economic contraction of 4.6% in 2020 due to the disruption in trade, a drop in commodity demand, and worldwide travel restrictions.

This development is especially troubling for vulnerable economies heavily dependent on oil exports, such as the Republic of Congo and Angola, and countries dependent on tourism like Cabo Verde, Mauritius, and Tanzania. However, diversified economies like, Ghana, Uganda and Senegal will see a stronger recovery because they had a better starting point before entering the recession.

The Pandemic Rages On

At the onset of the pandemic, African governments acted decisively and restrictive measures were taken across the region as borders closed and partial lockdowns began. In SSA, the number of infections and fatalities is relatively low compared to other regions. Of the five countries accounting for more than 75% of all confirmed cases, South Africa has the most confirmed cases, followed by Ethiopia and Nigeria.

The challenge with SSA is that the virus spreads faster in impoverished and densely populated areas because social-distancing measures cannot be adhered to easily.

Although government actions averted a massive health crisis in the region, the economy has paid a price. In countries where many people work in the informal sector, pandemic-related restrictions had the most severe economic impact.

Debt Levels Continue to Worsen

In 2020, the composition of the region’s debt has shifted toward more commercial and foreign currency-denominated debt, a dramatic change from previous years. Rising fiscal deficits throughout the region are making for a worrisome situation. Zambia, Angola, Ghana, and other countries had concerns about debt sustainability even prior to the Covid-19 pandemic. In addition, many countries, especially commodity (particularly oil) exporting countries, have seen currency depreciation.

Sub-Saharan African countries that have previously relied on foreign borrowing are struggling to finance their deficits. That said, there are some plans to bring these countries relief in the form of the Debt Service Suspension Initiative from the G20. This initiative allows the poorest countries to suspend debt service payments to official bilateral creditors and has been extended to mid-2021, giving some African countries breathing room in this economic crisis. Additionally, the region is calling on commercial creditors to participate in the initiative to help countries like Zambia and Angola that have high commercial foreign currency debt.

Opportunity Ahead in 2021?

The extent and duration of the economic impact of the global pandemic remain uncertain, but post-Covid-19, governments in SSA are prepared to step up their efforts to make countries more resilient in the face of external shocks.

Opportunities exist on the other side of 2020 in the form of renewable energy in solar and wind. This will not only help the region achieve climate goals, but it also creates economic opportunities for bigger countries like Kenya and South Africa.

Another opportunity for SSA lies in manufacturing, which is still low across SSA exempting Ethiopia and South Africa. The implementation of the African Continental Free Trade Area, introduced in early 2020, will provide significant opportunities for manufacturing companies across the region. Due to Covid-19, however, the expected implementation in July 2020 was delayed. Once it is implemented, which will likely be in January of 2021, SSA will be one of the largest free trade areas in the world.

For businesses operating in SSA, one of the risks presented during the global pandemic is the exchange rate risk, especially since the currencies of commodity exporters have depreciated. Businesses can mitigate these risks by minimizing currency mismatch. Paying attention to contracts with public buyers will also be important moving through SSA’s economic recovery because government finances have deteriorated for many countries throughout the region.

The SSA region is headed into a challenging year filled with uncertainty and economic vulnerabilities. The most affected countries – those reliant on tourism and oil exports – will see a particularly slow recovery over the course of 2021. Cote d’Ivoire and Uganda, which have been recording high growth rates before Covid-19 hit, will see a strong recovery after the pandemic.

Covid-19 has had a tremendous impact on short-term economic growth and as long as governments expenditures throughout the region can be prioritized and used towards much-needed infrastructure, there is a silver lining for the region. Still, vulnerabilities remain and the pace and strength of any recovery is dependent on the containment and end of Covid-19.

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Afke Zeilstra is a Senior Economist at Atradius, a global trade credit insurer. She is responsible for country risk analysis and advice on countries in Africa. She holds an M.A. in Economics.

African Free Trade Area Presents Opportunity and Obstacles Ahead

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