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Home Economy

Fitch casts doubt over Africa’s big economic growth potential following full implementation of AfCFTA

5 years ago
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Sovereign rating agency, Fitch Ratings, has cast doubt over the enormous economic growth potential embedded in the implementation of the African Continental Free Trade Agreement (AfCFTA).

In Fitch’s view, the AfCFTA is “unlikely to drive a significant change in economic prospects in the near term.”

Admitting that the impact of trade liberalisation on the back of the AfCFTA would be positive for Africa’s economic potential, the international ratings agency however, noted the trade agreement’s positive impact is likely to be small.

Fitch’s assertion is on the back of a 2019 study published by the African Union Commission (AUC) and Organisation for Economic Co-operation and Development (OECD), which estimated that removing all tariffs on intra-African trade could boost GDP by 0.65%, a figure that would rise to 3.15% if all non-tariff barriers were also removed.

With a combined GDP of $3.4 trillion under the AfCFTA, a 0.65% boost would result in some $22.1 billion whereas a 3.15% rise or boost would result in $107 billion.

“We believe the removal of non-tariff barriers to trade under AfCFTA is likely to lag behind the agreement’s ambitions, which may blunt its effect. The impact of the East African Community customs union, for example, has been limited by a lack of integration and removal of non-tariff barriers, despite its 15-year history,” said Fitch.

“Moreover, 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,” added Fitch.

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“Increased trade integration could support manufacturing investment and productivity gains, but we would expect this impact to materialise only in the long term,” stressed Fitch.

Commenting on the AfCFTA driving rating adjustments for sovereigns on the continent, Fitch noted: “The implementation of the African Continental Free Trade Agreement (AfCFTA) on its own is unlikely to be a driver of rating adjustments for regional sovereigns. It could be credit positive in the longer term if successful trade liberalisation leads to an improved business environment more broadly and stronger economic growth in Africa.”

“AfCFTA should not affect sovereign creditworthiness, being unlikely to drive a significant change in economic prospects in the near term. Other factors, including the impact and policy response to Covid-19 and macroeconomic stability more generally, will exert a stronger influence on sovereign ratings,” Fitch stated further.

“Nonetheless, there is the potential in the longer term for AfCTFA to have a positive effect on economic policies and to support growth and creditworthiness indirectly,” Fitch stressed.

AfCFTA, according to the World Bank, is expected to increase trade between African countries to as high as 81 per cent by 2035 with member countries earning as much as $450 billion in real income.

The creation of the AfCFTA, the World Bank also asserts, has the potential to lift over 30 million Africans from extreme poverty.

Source: norvanreports
Via: Snr Fuaad Dodoo
Tags: African Continental Free Trade Agreement (AfCFTA).African Union Commission (AUC)Fitch RatingsOrganisation for Economic Co-operation and Development (OECD)
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