Agri-Africa update 2020 – Trade deals offer boost for agricultural sector

While 2020 will be largely remembered for the global battle against Covid-19, it has the potential to also be the year when international and intra-continental trade started to gain real momentum after a long period of missed opportunities.

The International Food Policy Research Institute (IFPRI) notes that Africa has a long history of regional trade agreements (RTA) dating back 40 years.

However, overlapping country memberships of different regional economic communities has made the task of harmonizing and coordinating policies and regulations more complex while the cost of trading remains relatively high.

IFPRI also points out that as Regional Trade Agreements (RTAs) have proliferated around the world, Africa’s gains from multilateral trade liberalization have been at a standstill.

Trade preferences for Least Developed Countries, such as the Everything but Arms (EBA) agreement and AGOA, have not succeeded in transforming Africa’s contribution to global trade, which has remained stubbornly at 3% for the past decade.

Although delayed due to the pandemic, trading under the African Continental Free Trade Agreement (AfCFTA), which will really help to remove trade barriers across the continent, had been scheduled to start in July 2020.

The adoption of a single currency by Western African nations will also create a more helpful trading environment.

Internationally, the UK has been keen to secure better trading relationships with Africa in the aftermath of Brexit through the UK-Africa summit, while Kenya’s independent negotiations with the United States for a free trade agreement ahead of the lapse of the African Growth and Opportunity Act (AGOA) in 2025 are a sign of greater global ambition.

The current structure of agricultural exports, which is mainly limited to unprocessed and semi-processed products, from African countries illustrates the lack of progress along value chains.

Of the US$62 billion in agricultural products exported by Africa in 2017, only US$12 billion were classified as processed goods. While total exports increased between 2005 and 2017, the relative ratio of processed and unprocessed products has not improved.

Implementation of AfCFTA should also encourage more agricultural processing and product diversification via increasing investment in agro-industrialization.

It will also increase the size of markets that are accessible to competitive producers, harmonize standards and reduce the price of imported goods, particularly essential goods, by increasing competition.

Record gains

Under AfCFTA, Africa is predicted to record income gains of up to $134 billion per year creating the world’s largest free trade area worth $3 trillion with over $6.7trillion of consumer and business spending.

This push for deeper trade integration across Africa could not have been conceived at a better time.

As a consequence of Covid-19, well-established global value chains have been disrupted. Air cargo prices, for example, have increased by 60% on major routes, delivery times have doubled, and over 50 countries have either closed ports or increased examination requirements.

With an over 50% dependence on global value chains, these disruptions combined with the recent devaluation of several African currencies and a decline in oil prices have hit African economies hard.

But these pressures have provided an opportunity for African countries to audit their systemic vulnerabilities in anticipation to trading under AfCFTA.

Through the proposed reduction of import goods tariffs by up to 90%, the implementation of AfCFTA could potentially soften the impact on African economies in the wake of the pandemic, leading to a greater reliance on regional value chains.

Trading partners

Overall the outlook on agricultural investments remains positive. UNCTAD’S 2020 investment flows report observes that agriculture continued to rank amongst the top five industries attracting foreign directive investment (FDI) in Africa, accounting for 6.4% of the continent’s GDP.

The value of announced agricultural greenfield projects increased by 18% in Q1 2020, compared with the sharp declines recorded in the extractive commodity sectors.

These have been distributed across a range of countries with the FDI coming from a diverse selection of source countries.

India and China have continued to be the continent’s leading trading partner in agriculture, while Gulf States have recorded increasing interests in the region. Kuwait, Qatar, Saudi Arabia and the UAE are all involved in significant agricultural investments across Africa.

As a result of these engagements, diversification in agriculture products from traditional exports such as maize is already underway.

Avocado farming in Tanzania as a result of China’s influence has grown from zero five years ago to a US$12 million annual income. Malawi is set to start exporting cotton made linen this year.

Kenya has also reported an increase in avocado exports to countries such as Spain, UAE, Russia, France and Belgium, with the Netherlands importing of up to 16.3 million kg by June 2020. This is at a time when the fresh produce exporters association of Kenya estimated that Kenya was losing about $1 million a day in horticulture exports.

Increasing Africa’s agricultural competitiveness, therefore, remains an attainable milestone. Through continued agricultural innovation and sustainable farming practices, Africa can firm up its position as a global trading partner in the long term and weather the pandemic in the short term.