(Ecofin Agency) - The IMF estimates that the significant reduction of tariff and non-tariff barriers should be accompanied by far-reaching reforms of the business environment to maximize the impacts on trade integration.
According to a report published on May 5 by the International Monetary Fund (IMF), the adoption of the African Continental Free Trade Area (AfCFTA) has the potential to not only significantly enhance intra-African trade but also bolster the resilience of member nations to geopolitical and climate shocks.
The report, which is based on empirical analysis, indicates that a 90% reduction in tariffs on goods traded between member countries and a 50% reduction in non-tariff barriers should lead to a 15% increase in intra-African trade, resulting in a 1.25% increase in median GDP per capita.
The positive impacts will be enhanced by significant improvements in the business environment, such as the development of transport and telecommunications infrastructure, improved access to finance, and enhanced internal security. In this scenario, intra-trade flows could increase by 53 percent. At the same time, trade between Africa and the rest of the world would increase by 15 percent. In that case, the median GDP per capita would increase by 10.6%, which could help lift between 30 and 50 million people out of extreme poverty.
The report titled "Trade Integration in Africa: Unleashing the Continent's Potential in a Changing World," also points out that significant reductions in tariff and non-tariff barriers combined with far-reaching reforms in the business environment can change the pattern of intra-African trade and trade between the continent and the rest of the world. It estimates that an improved business environment could boost intra-African services exports by 50%.
Building the Continent's resilience to geopolitical tensions
According to the report, stronger integration of African countries into regional and global value chains would also pave the way for greater development of the continent's manufacturing sector by allowing firms to specialize, obtain cheaper inputs, and benefit from knowledge transfer. It could also allow poor countries to overcome demand-side constraints that affect the development of high-value-added industries.
The IMF notes, however, that further reforms are needed to sustain the gains from trade integration in Africa and to ensure that these benefits are shared as widely as possible among the population. For example, massive investments in education and improving labor force skills are needed to enable the working-age population to take advantage of the opportunities offered by regional trade integration.
The institution explains that a robust macroeconomic framework and a modernized social protection system that supports the most vulnerable during the transition phase are needed to allow full capitalization of the opportunities offered by Zlecaf.
On another note, the IMF says that the implementation of Zlecaf could strengthen the resilience of African countries to geopolitical shocks since it will facilitate the diversification of export destinations, and import sources and the integration of the patterns of those sources and destinations in cross-border value chains. This is notably expected to help African countries reduce the impact of disruptions in specific markets and products and enhance food security, including by improving the availability and affordability of food supplies.
Further continental trade integration can also be a key element in climate adaptation strategies, the report believes. By facilitating cross-border trades, Zlecaf could help African countries diversify climate-vulnerable products’ supply sources. It could also reduce some countries’ overdependence on sectors that are increasingly threatened by climate change.