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African lender sees factories benefiting most from trade pact

Largest global free-trade zone expected to boost manufacturing, says African Development Bank.

Africa’s free-trade pact will help shift the continent away from its over-reliance on volatile commodity exports and boost manufacturing, according to the African Development Bank.

Sectors where African products already have a competitive advantage have the most to gain from the deal that joins the markets of more than 50 countries, making it the largest free-trade zone in the world, AfDB President Akinwumi Adesina said in an interview in Niger’s capital, Niamey. This was after Benin and Nigeria signed the African Continental Free-Trade Agreement on the weekend, paving the way for trade with reduced tariffs to start next July.

“Manufacturing, trading in value-added products and strengthening supply chains will allow for markets to grow and for new markets to emerge,” Adesina said. “SMEs that account for 80% of all trade on the continent will benefit, as well as the financial sector, as digital payments will be needed to transact.”

Commodity exports dominate even in Africa’s two biggest economies, with mining production accounting for about half of South Africa’s shipments while crude oil generates 90% of Nigeria’s foreign income.

World’s largest free-trade zone

The mechanics of the deal now has to be negotiated. A digital system for payments converging one country’s currency to another member state’s is the most important mechanism to have in place before trading starts, Adesina said. That’s where the Economic Community of West African States’ plan to adopt a common trade currency will also help because it could reduce foreign-exchange risks, he said.

Infrastructure gap

Access to the continental market and an increased focus on industrialisation are likely to benefit countries with access to ports, railways and airports the most, Adesina said. The continent’s infrastructure funding needs are at $130 billion to 170 billion a year, with a financing gap in the range of $68 billion to $108 billion, according to AfDB estimates.

“Infrastructure is the most critical aspect,” Adesina said. “If costs of doing trade continues to be high because you have an infrastructure deficit, this will be the biggest challenge.”

The AfDB will provide $4.8 million for member states to set up the trade zone’s headquarters in Ghana and has asked its board for a general capital increase to invest in infrastructure and support the free-trade area.

© 2019 Bloomberg L.P.

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