African Continental Free Trade Agreement can boost the South African economy

South Africa’s participation in the African Continental Free Trade Agreement (AfCFTA) is expected to significantly boost its economy and cement its dominant position as the continent’s largest exporter. 

The country began trading under the new AfCFTA on 31 January 2024, enabling South African companies to export certain products duty-free or with reduced charges to twelve African states. 

In a report on Africa’s export competitiveness, the Institute for Competitiveness said the AfCFTA represents a significant milestone in the continent’s efforts to enhance trade, foster economic growth, and reduce poverty.

The agreement was officially launched in May 2019 and saw its operational phase commence on 1 January 2021. 

It is the world’s largest free trade agreement, behind the World Trade Organization, and its implementation occurs over two phases. 

For decades, African countries have traded with states outside of the continent far more than with each other. 

This is partly due to the similarities between the exports of many countries, resulting in hefty import tariffs being applied to protect local industry. 

The AfCTFA aims to resolve these challenges by eliminating tariffs on intra-Africa trade and enhancing local infrastructure. 

Research from the International Monetary Fund (IMF) indicates that the AfCTFA can result in an intra-African trade surge, possibly leading to a real per capita income rise of over 10% for most nations. Such changes can also deepen Africa’s integration into global value chains.

However, the IMF said that to truly capitalise on these opportunities, concurrently strengthening social safety nets, offering vocational training, and ensuring macroeconomic stability is crucial.

For South Africa in particular, the AfCFTA will enable its big corporates, already dominant on the continent, to export certain products duty-free or with reduced charges to 12 African states. 

As the continent’s largest exporter, the agreement is set to boost exports from South Africa and translate into improved economic growth. 

This decision may also inspire global corporations to invest and produce goods in South Africa, enhancing its position as a gateway into Africa. 

The graph below shows Africa’s share of global exports from 2012 to 2022. The AfCTFA is expected to significantly boost this.

Things are looking up for South Africa

The expected boost from South Africa’s participation in the AfCTFA will come when the country’s economic fortunes appear to be turning around. 

After a decade of stagnant growth, the formation of the Government of National Unity (GNU) has reinvigorated confidence in the economy. 

This, coupled with over 150 days of no load-shedding, has the potential to significantly boost the local economy. 

Recently, the Deputy Governor of the Reserve Bank, Rashad Cassim, revealed how much of an effect these two factors can have on the South African economy. 

He explained that an end to load-shedding would lead to an upward revision to economic growth forecasts and bring down inflation. 

“There’s a growth side, and there’s an inflation side; there may be a double whammy, there may be a good story here,” Bloomberg reported him as saying.

“Let’s hope that for the first time, given the fact that load-shedding or the lack of it post the election, there will be an upward revision of the forecast, which will be very good for the economy.”

“If we deal with these structural constraints, we can lift our GDP growth potential to 3.5%, which would basically mean that we can continue to accelerate our growth at least until we hit that 3.5%,” Governor Lesetja Kganyago said.

“By solving those structural constraints, you are providing the space for monetary policy to provide support for the economy.”

In an interview with Daily Investor, Standard Bank CEO Sim Tshabalala said the bank is very optimistic about South Africa’s future and has seen a noticeable increase in interest from foreign investors. 

Tshabalala explained that things are already improving in South Africa, with reform processes in the electricity and logistics sectors already underway. 

This has resulted in over 150 days without load-shedding and positive signs at Transnet regarding the export of minerals and its rail network. 

Tshabalala also explained the findings of a survey regarding the opinions of foreign investors done by Standard Bank’s macroeconomic research department. 

Over 80% of foreign investors surveyed said they were either positive or very positive about the outcome of South Africa’s election. 

More importantly, 95% of respondents suggested they are planning to or considering increasing their investments in South Africa in the next few years.