In this opinion article, Standard Bank head of trade Justin Milo and head of product Nompilo Mtshali write about the importance of the African Continental Free Trade Area (AfCFTA) for South Africa's importers and exporters.

This year marked a key milestone for the African continent, as several countries opened their markets under the African Continental Free Trade Area (AfCFTA) on January 1.

Today, we celebrate the largest global free trade area by countries participating and a new era of Africa’s development journey. As we unlock the continent’s growth potential and draw attention to Africa’s achievements under the agreement, it is important that we take a moment to reflect on where we have come from.

Historically, African markets were described as fragmented and lacking the scale to compete efficiently in the global arena. High tariffs, poor transport infrastructure, excessive border bureaucracy and divergent government regulations designed to protect each market from regional competitors made it extremely difficult and costly for African countries to trade with their neighbours. According to the World Economic Forum, intra-African trade accounts for 17% of African exports, compared with 59% for Asia and 68% for Europe. Increasing intra-African trade is key to Africa’s long-term economic growth.

The AfCFTA agreement symbolises a new dawn for the continent and represents immense growth opportunities for African markets. Through signing the consolidated text of the agreement, 54 States have paved a way towards the defragmentation of African economies and, in so doing, connecting 1.3-billion people across the continent.

Furthermore, the commitment by member States to eliminate 90% of tariff lines over a five-year period and ten years for the ‘least developed countries’, will not only encourage industrial development through diversification, but will also enhance Africa’s competitiveness both regionally and globally.

According to the World Bank, the implementation of AfCFTA could increase Africa’s exports by $560-billion, boost income by $450-billion (a gain of 7%), improve wages for unskilled workers by 10.3% and skilled workers by 9.8% and radically transform women’s wages and access to trade opportunities, by 2035. Women represent up to 80% of informal traders within the African continent and it is vital for them to also experience the benefits of AfCFTA and share in the growth journey.

The most frequent question asked on AfCFTA subsequent to its implementation is whether intra-African trade has actually increased as a result of the agreement. The answer is a complex one, but in truth it is still early days for AfCFTA and we believe that there is still some work to be done in to fully realise the benefits of the agreement. There is a need to upgrade road, rail and port infrastructure to promote intra-African trade (a significant spin off opportunity for the continent in itself) and implement targeted industrial policies in African countries to foster the growth of key export industries.

Another key question often asked is which countries will likely benefit from AfCFTA. In our view, all African countries have the opportunity to benefit from AfCFTA, with regional powerhouses such as South Africa, Nigeria and Kenya leading the way, but the hope is that in time, an increasing number of countries will start to reap the economic and developmental benefits stemming from expanded intra-African trade.

As the most industrialised country on the continent, the South African economy stands to benefit significantly from the implementation of AfCFTA. Trade statistics from the South African Revenue Services as of September, indicate that exports to the rest of Africa account for 20% of South Africa’s total exports - this compares with a 31% contribution by exports to Asia and a 28% contribution by exports to Europe. South Africa’s imports from the rest of the African continent accounts for 9.7% of the countries’ imports, compared to a 48% contribution made by imports from Asia and a 30% contribution made by imports from Europe.

This indicates that South Africa has an established trading relationship with the rest of the African continent, but the quantum of international trade involving other African countries is dwarfed by South Africa’s trading relationship with Europe and Asia – this shows the immense scope for South Africa’s trade with the rest of the continent to increase substantially over time.

We believe there are two distinct opportunities for South African companies arising from the AfCFTA agreement. Firstly, South African exporters will face reduced tariff barriers and experience an increase in demand on their cross-border sales into other African markets. This would be positive for South African exporters of finished goods with key opportunities being the export of machinery and equipment, chemicals, products of iron and steel and vehicles. Secondly, South African importers have the opportunity of accessing regional markets in Africa to source goods closer to where they will be consumed, with positive potential spin offs for shorter transit times and the mitigation of supply chain risks through procurement diversification.

Standard Bank stands ready to assist importers and exporters to leverage the opportunity presented by AfCFTA. Standard Bank is well placed to assist with solutions to mitigate a variety of risks such as payment risk, performance risk and exchange rate risk, as well as working capital solutions to assist importers and exporters with their cash flows.

Exporters face payment risk in their cross-border transactions – in this case, an exporter may request for a letter of credit (LC) to be issued in their favour to mitigate this risk. A letter of credit is an undertaking issued by a bank on behalf of an importer where the issuing bank agrees to make payment under the LC, provided that certain terms and conditions have been met. Standard Bank can assist in adding confirmation to the letter of credit to mitigate the bank and country risk associated with the issuing bank of the letter of credit – this ensures that the exporter gets paid after the terms and conditions of the LC are met, even if the issuing bank of the LC is unable to make payment due to liquidity challenges or defaults on the transaction. The LC also acts as a source of cash flow for the exporter as Standard Bank would be able to discount the proceeds due under a confirmed LC, provided that the terms and conditions of the LC have been met.

Standard Bank has the unique advantage of a presence in over 20 African countries, and a deep understanding of these markets, knowledge of regulatory conditions and the ability to facilitate trade seamlessly on both the import and export side of the same transaction. This, alongside Standard Bank’s immense correspondent banking network, innovative solutions and extensive appetite for African financial institution risk, positions Standard Bank as the “go-to” bank for Intra-Africa trade.