4 ways Africa’s AfCFTA will benefit the Islamic economy

Africa is at a turning point in its history. The continent has the opportunity to transform itself from a fragmented group of economies dependent on commodities into an integrated global powerhouse under the African Continental Free Trade Area agreement.

Trading under the free trade agreement began in January 2021, and 37 of the 55 African Union nations have ratified the AfCFTA.

With 27 Organization of Islamic Cooperation (OIC) countries also members of the African Union – representing half of all the nations on the continent – the Islamic economy is expected to make significant gains from this landmark deal.

These 27 OIC countries collectively account for more than 60% of total GDP and more than 55% of total trade of African countries, according to the International Islamic Trade Finance Corporation (ITFC).

AfCFTA BENEFITS

If fully leveraged, the free trade agreement has the potential to boost food security, export volumes, and industrial capacities. Its benefits could also ripple across many sectors including Islamic finance and transport infrastructure.

Eng. Hani Salem Sonbol, CEO of the ITFC, told Salaam Gateway the AfCFTA has the potential to spur a greater level of collaboration among participants, which will benefit the global Islamic economy.

Greater collaboration among African countries is also expected to lead to capacity building opportunities, transfer of technologies, and innovation of products and processes that can address the challenges evolving from the free trade agreement.

“At the early stages of implementation, it is likely that the 27 African OIC countries will benefit the most from the AfCFTA by enhancing the existing regional intra-trade,” said Sonbol. 

“South Saharan member countries will have free access to North African countries and vice versa. Other neighboring countries could also benefit from the new free trade area, mainly the Arab countries that share historical economic, social, and cultural relations with Africa.”

As the implementation of the agreement matures, Sonbol expects OIC countries on the African continent will strengthen their partnerships to create comparative advantages that allow them to increase trade among themselves as well as with the rest of the world. 

“Given the historical ties, all 57 OIC countries have a good chance of benefiting from the evolution of the agreement. These countries are collectively part of at least 19 regional economic cooperation arrangements, including custom unions and monetary unions, across five continents,” said Sonbol.

MORE EXPORTS

Prior to the AfCFTA, businesses faced average tariffs of 6.1% when exporting within Africa. This is, ironically, higher than what they’d pay when they exported outside the continent, according to the European Commission.

This is one of the reasons why Africa is one of the least integrated continents, with intra-regional trade accounting for just 17% of its exports. In comparison, Asia’s intra-regional trade is 59% and in Europe it’s 69%, according to the Brookings Institution. 

AfCFTA’s main aim is to remove trade barriers, chief of which is the scrapping of custom duties on at least 97% of tariff lines that account for 90% of intra-Africa trade over five years for developing countries, and 10 years for the least developed nations. 

A new study from the ITFC and SESRIC on the impact of the AfCFTA on six OIC countries – CoÌ‚te d’Ivoire, Egypt, Guinea, Mozambique, Tunisia and Uganda – found that their total trade could grow by 30% with other African countries.

Two additional ITFC studies, scheduled for 2022 and 2023, will look at the free trade area’s impacts on countries along the trans-Saharan road and landlocked countries, according to Sonbol.

TRANSPORT LINKS

For countries to leverage the AfCFTA’s advantages, transport infrastructure needs to radically improve. Weak transport links between African states is a major issue impeding trade throughout the continent.

In this context, Nigeria plans to spend big on its rail network, with $5 billion worth of projects scheduled for this year alone. One of the most important is the 283 km-railway track that will link the country with Niger.

Work on the project started in February this year after a contract was signed with Portuguese construction company Mota-Engil. The railway line is expected to be completed by 2023, according to Nigeria's Ministry of Transportation.

Egypt is also investing billions to upgrade its railway network and improve road links with its African neighbors. The country has plans for 35 infrastructure projects worth almost $1 billion within Africa, Dr. Ahmed Maghawry Diab, head of Egyptian Commercial Service at the Ministry of Trade and Industry, said during the virtual Annual Investment Meeting Africa in June.

One of the projects will see Egypt lead efforts to build the longest road network on the continent, the 10,300-km Cairo Cape Town Road that will interlink nine African nations. The highway will start in Alexandria and go through Cairo, Sudan, Ethiopia, Kenya, Tanzania, Zambia, Zimbabwe and Botswana, ending in South Africa. 

The project will be implemented in phases, starting in Egypt before moving to the other countries. Egypt’s 1,155-km section of the road is expected to reach the Arqin crossing on the Egyptian-Sudanese border by 2024. Once completed, the highway will enable goods to be transported by road in a record time of just four days instead of months by sea, according to Egyptian officials.

“Logistics is very important. Without competitive on-time shipping lines, we will encounter problems. This is an initiative Egypt has taken. Look at the Cairo-Cape Town Road; we have constructed our part and we’re opening talks with Sudan to help out with some of the work that needs to be delivered there,” said Diab.

“We’re also in the process of building an arsenal of shipping companies. This is an initiative that the president is taking care of - to connect Egypt’s ports with ports in Africa to make things easier for businesses,” he said.

ISLAMIC FINANCE

The possibility of losing tariff revenue during the transition is a challenge for AfCTFA member countries as these revenues are an important source of income for some governments.

Fiscal losses associated with the removal of trade tariffs are estimated at more than $4.1 billion in the short-term, according to the United Nations Conference on Trade and Development. 

It is here where Islamic finance can be extended, through banks and multilateral development financial institutions such as ITFC. Since 2008 when it started operating, the Islamic Development Bank Group member has approved trade financing operations worth $22.76 billion across 31 African countries.

Sonbol expects the AfCFTA will create additional opportunities for ITFC to scale up its interventions in Africa, which would lead to the growth of Islamic financial products. 

“[The murabaha] is widely used in trade finance transactions by ITFC, and it is expected that the 27 ITFC-member countries in Africa will take advantage of the AfCFTA to scale up their activities, which will naturally contribute to the growth of the global Islamic economy,” he added.

Banks currently support about a third ($300 billion) of total annual trade in Africa ($1 trillion) and the share of trade finance intermediated by banks devoted solely to intra-African imports and exports is estimated at 20%, according to Sonbol.

He sees “enormous” potential to finance intra-African trade using Islamic financial products.

HALAL FOOD SECURITY

With reduced trade barriers, African countries will be able to increase their imports and exports of agri-food products. This is important for nations to achieve food security.

Over the last decade, the Gulf Cooperation Council (GCC) countries have made considerable investments in African farmlands with the aim of exporting some of the crops back to their domestic markets.

Between 2008 and 201, trade between East Africa and the GCC grew by 42%, while trade with advanced economies dropped by 15%, according to the ITFC. 

“We anticipate this trend to continue and even to accelerate, especially due to regional programs that are designed to strengthen Arab-African cooperation,” said Sonbol. 

Programs such as ITFC’s Arab-Africa Trade Bridges play an important role in this area as they connect exporters and importers in both regions to drive trade and investment flows. Over the last three years, five meetings were held, in Cairo, Abidjan, Dakar, and Dubai in the pharmaceutical and agri-food sectors.

Among West African nations, Nigeria is well-positioned to contribute to food security in the Muslim world, as the largest economy in Africa and a member of both the African Union and the OIC. The country is home to 100 million Muslims, almost half of its population.

However, the country’s exports to Muslim-majoity countries are currently limited as most locally-produced food items are not halal-certified.

To change this, Nigeria recently started to support the development of its halal industry. The Jaiz International Halal Certification Ltd, a new halal certification agency, was set up, and last year the FBN Halal Fund, an open-ended mutual fund regulated by the Securities and Exchange Commission, was launched. 

Additionally, earlier this year, Nigeria Feeds the World Initiative, a government-backed program to empower local smallholder farmers and SMEs, partnered with OneAgrix, a global B2B agriculture and halal marketplace.

 The partnership will allow businesses in Nigeria’s agri-food sector to access markets within the continent and internationally, especially markets that cater to halal consumers.

The World Bank estimates that if fully implemented, the AfCFTA could boost regional income by 7% or $450 billion and lift 30 million people out of extreme poverty by 2035. Most of these income gains are likely to come from measures that cut red tape and simplify customs procedures.

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