Money and the Trade Liberalization Strategy

Africa’s latest trade liberalization strategy, the African Continental Free Trade Area (AfCFTA) agreement brings together 55 countries of the African Union and 8 regional economic Communities and is to serve a combined population of 1.3 billion people and an approximate GDP of US$3.4 trillion. Having executed its guided trade initiative state with the issuance of a certificate of origin to Ingre Coffee in Rwanda and Exide batteries in Kenya all destined for Ghana, it is clear that the realignment will result in significant disruptions. As a result, fallouts on the continued successful implementation of the agreement are to be expected particularly on the funds needed for supporting member states and private sectors in effectively participating in the framework.

The implementation of the AfCFTA can be expected to result in near-term disruptions as revenues for states reduce, the disordering of industrial sectors, the reorganization of supply chains, and the dislocation of unemployment increases. It is estimated that the disruptions will result in an estimated adjustment cost of $10 billion within six to ten years which necessitates mechanisms for funding such operations. Thus, the AfCFTA secretariat set up an Adjustment Fund as one of its operational tools to facilitate the realization of meaningful trade by supporting states and private sector players.

Structure of the Adjustment Fund

Launched in Kigali on March 10, 2023, and signed between the AFCFTA secretariat and Afreximbank, the fund was hailed as a game-changer in the economic integration of Africa. The adjustment fund consists of three bases, the base fund, a general fund, and a credit fund designed to support African nations and the private sector in the adjustment process. The Base fund builds from a pool of contributions from member states, technical assistance funds, and grants and will be used to address revenue losses from tariffs as they are progressively eliminated across the continent. The base fund will also be utilized in supporting individual countries in the implementation of specific provisions, such as the annexes and the protocols provided for in the AfCFTA agreement. Further, the general fund was established to enhance concessional funding while the Credit Fund with be used to support both private and public sectors. Thus, the adjustment fund is a well-thought remedy in enabling entities to adjust effectively and take advantage of the opportunities that are created by the CFTA. With Afreximbank already committing $1 billion towards the AfCFTA adjustment fund, there is a growing commitment of the member states, the implementation secretariat, and the private sector to enhancing the economic integration and development of the continent.

Critical Considerations in fund establishment

The successful operationalization of the Adjustment Fund for the AfCFTA implementation is a critical aspect in rallying member states and the private sector into collaborating and effectively driving increased success. Designed to help countries manage and mitigate the potential negative impacts of trade liberalization under the AfCFTA and that member states cannot afford to dismiss the potential for failure.

Thus, while the fund has already adopted an adequate structure of the fund, there is a need to increasingly focus on establishing and strengthening a governance approach and structure for the fund. This includes the need to reinforce and occasionally review the roles and responsibilities of the various key stakeholders including the AfCFTA secretariat, member states, and fund management entities in handling the finances. This will therefore require the establishment and regular review and updating of clear guidelines on the allocation and disbursement of funds from the pool to enhance transparency, support accountability, and effective utilization for the benefit of all public and private entities among all member states.

The current partner for the Adjustment Fund, Afreximbank has already committed $1 billion to the pool in aid of the AfCFTA implementation. With a significant deficit for the funding of the estimated $10 billion gap, various sources, including state contributions, donor funding, and revenue from AfCFTA activities are part of the long-term considerations. Thus, increased lobbying and collaboration are required for the successful implementation of the framework. This will ensure that a sustainable funding model is developed to ensure continuous success and long-term viability and availability of resources for the benefit of the continent.

The African continent is extensive while the AfCFTA brings together 55 countries which casts questions on the criteria and assessment process of the fund’s beneficiaries in the long run to enhance balanced development. More critically, the allocation criteria has to focus on ensuring that the funds benefit those that require the most support. Thus, the initiative ought to consider necessary factors such as a country’s development level, sectorial challenges and impacts of AfCFTA-informed changes, and vulnerability. This calls for the establishment of a transparent and highly objective assessment process to ensure that the resource is allocated based on identified and real needs.

“The implementation of the AfCFTA can be expected to result in near-term disruptions as revenues for states reduce, the disordering of industrial sectors, the reorganization of supply chains, and the dislocation of unemployment increases.”

Notably, financial aid in the implementation of the AfCFTA requires significant support in capacity building and technical support. Areas of human resource empowerment, policy reforms, trade facilitation, and improving competitiveness will require increased support for countries and specific sectors to enhance uniform and balanced implementation and benefits for all member states. The inclusion of programs such as knowledge-sharing initiatives, training programs, and targeted support for specific and various sectors or industries will be critical in complementing the adjustment fund.

Ultimately, there is a need for the establishment of a robust monitoring and evaluation framework to track and ensure that the Adjustment Fund is effectively used. Thus, regular assessments have to be conducted to measure the progress of the supported projects and entities, identify arising challenges, and enhance response mechanisms to improve the performance of the fund. Overall, the operationalization of the AfCFTA Adjustment Fund requires careful planning, effective governance, sustainable funding mechanisms, and targeted support to ensure that member states can maximize the benefits of the AfCFTA while managing the adjustment costs and challenges along the way.

Muoki Musila is an Kenyan based economist. These are the writer’s own opinions and do not necessarily reflect the viewpoints of Liberty Sparks. Do you want to publish in this space? Contact our editors at [email protected] for further clarification.