AfCFTA able to spur extra-continental investment, but what about intra-continental ones?

In October 2022 a study from the Kiel Institute argued that the AfCFTA offers an opportunity also to third countries for expanding their trade and investments in Africa. The study noted that already the EU is conducting studies on how to improve its connectivity with Africa by identifying a series of Strategic Corridors in the continent where to concentrate funding, so to facilitate its trade links with the continent. At the same time, the study warned that a condition which is necessary for foreign exporters to benefit from the AfCFTA is the reduction of the current level of Non-tariff Barriers, that are amongst the highest in the world, as described in the latest UNCTAD "Key Statistics and Trends in Trade Policy” report. In fact, removing such barriers would mean that also exporters from Europe and third countries will be able to move their products from one African country to another with less hindrances, and therefore at a lower cost. The special assistant to the US President, during a press conference in Washington on 31 July, raised also the need to harmonise investment regulations between African countries as a condition for expanding investments of US companies to Africa.

This is exactly the purpose of the AfCFTA Protocol on Investments, adopted in February 2023, but not yet opened for ratification by African countries (it must be remembered that a minimum number of 22 ratifications is needed for this Protocol to enter into force). Such harmonization, according to the special assistant to the US president, will encourage American companies to invest in multiple countries in the continent.

Despite that, some economists also warn that harmonizing regulations among African countries in order to attract more investments is not sufficient. If other conditions are not put in place, the risk is that investments coming from countries outside the continent will be directed mainly to the most industrialised countries in Africa or towards the biggest companies (e.g., by virtue of mergers and acquisitions), excluding those countries that do not offer a favorable business environment, or small and medium companies from these operations.

This sounds as a warning for Africa, and as a risk to accentuate the gap between the poorest and the richest economies in the continent. In addition to the attraction of extra-continental investment, Africa should therefore look at creating the conditions for promoting intra-continental investments (between African countries) as well.

A study from OECD, although dated, pointed out some of the main constraints for this type of investment to develop. Many of these conditions are still actual. The report noted that access to finance is one of the key challenges for most Africans businesses and that overcoming this bottleneck is critical if Africa wants to increase its investment rate and its growth potential, as financial intermediation is the key to channeling resources into productive activities. The study confirms that in order to make African financial markets working for investment and development, it is not sufficient to harmonise regulation. Bold actions need to be introduced by African governments and the banking sector to improve the efficiency and reduce the costs of banking and financial markets. Some of the actions that are recommended are the following:

1) reducing costs and the high interest rates which currently make credit and bank transactions very expensive (an example are the excise duties that many banks in the continent apply to financial transactions).

2) encourage deposits from small savers through adequately remunerated interests.

3) developing innovative financial instruments, notably those geared towards Small and Medium Enterprises, which constitute a majority of the businesses on the continent, and that unfortunately remain too often confined to the informal sector due to inadequate financial services.

4) Develop capital markets and particularly bond markets for long-term financing needs.