As the UK and the EU approach the end of the Brexit transition period, and their relationship as we know it, they enter the inevitably difficult final stages of negotiations regarding their future relationship. We therefore felt it timely to take brief look at the encouraging progress relating to free trade which has been made on the African continent in recent years, in the shape of The African Continental Free Trade Area. Indeed, as both the UK and the EU contemplate life after Brexit, now may be the time to focus on the inward investment and trade opportunities which are likely to be bolstered by AfCFTA.
What is AfCFTA?
The African Continental Free Trade Agreement, which has the huge ambition to create a continental free trade area in Africa (AfCFTA), is a free trade agreement entered into by 54 of the 55 Africa Union member states. This is twice as many members as the EU, making it the world's largest free trade area, measured by number of countries participating. In economic terms, AfCFTA is expected to cover a market of 1.3 billion people with a combined gross domestic product valued at £3.4 trillion – which is set to grow at pace.
Originally signed by 44 members of the African Union in March 2018, 10 further members have since signed the agreement and it became effective last year, on 30 May 2019, with the agreement now in the process of ratification, having already been ratified by the vast majority of the membership. On 17th August this year, the Secretariat of AfCFTA took seat at Accra, the capital of Ghana, which has historical significance as a centre of pan-African and international trade and commerce. The Secretariat will be an independent institution with the responsibility for the implementation of the agreement, working alongside the African Union which was established in 1999 and which essentially replaced the Organisation of African Unity, established in 1963 with a principal aim of encouraging economic cooperation.
The architects and brokers of AfCFTA, the African Union, now have the stated objectives "to create a single continental market for goods and services, with free movement of business, persons and investments, and thus pave the way for accelerating the establishment of the Customs Union".
For those following the intricacies of Brexit, these concepts will sound familiar and it would seem that Africa has been crying out for such an arrangement. With average tariffs of over 5% across the region, African businesses currently experience higher tariffs when they export within Africa than when they export outside the continent. AfCFTA seeks, amongst other things, to remove tariffs from 90% of the goods and services traded between African countries to encourage intra-continental trade, the lack of which is seen as one of the key economic factors halting the development of a number of countries on the continent. By way of comparison, whereas in 2017 intra-EU trade was around 68.1% of GDP trade between members of the African Union has historically been around 16.6% of GDP. Many African nations have to date arguably been too reliant on the West for both imports of essential goods including foodstuffs as well as for export which in many cases is too concentrated around natural resources. It is expected that AfCFTA will allow for more diverse and sustainable economic growth, not only increasing trade between African countries, but facilitating the larger integration of the African market as a whole and, with that, greater economic stability, making investment in Africa more attractive to foreign investors. In turn it is hoped that that investment will lead to more local manufacturing and production and an increase in value-added exports.
Economic growth aside, from a socio-economic standpoint, the African Union hopes that AfCFTA will drive wider economic cooperation and reform across the region. According to a recent World Bank report, the bulk of foreign investment and trade is presently concentrated in a small number of countries including South Africa and Nigeria (which are the two largest economies) alongside Egypt and Kenya. If implemented correctly, AfCFTA could see a rise in foreign direct investment going to less developed African countries like Chad and Sierra Leone, with the potential to lift millions of people out of extreme poverty.
Opportunities for UK investors
We spoke in our last Africa-focussed article about the rapidly growing Rwandan economy and the string of energy-related investment transactions involving our Jersey office which have taken place in the past year. We believe these transactions were spurred by a recently signed double taxation treaty between Jersey and Rwanda, and with the expectation of further cooperation between Jersey and a number of African countries, underpinned by long standing cultural links and an outward looking Jersey Government.
However over the last decade the value of the UK's trade with Africa appears to have declined to almost half of what it was at the start of the previous decade. Post Brexit, the UK has the opportunity to reverse this decline by entering into new trade agreements with African countries with the aim of growing trade and investment between Africa and the UK.
Against this background, Jersey's tax neutrality and close relationship with the UK, particularly its strong ties with the City of London, make it a very suitable jurisdiction to use as a conduit for investment in Africa, through the use of Jersey company or fund structures.
Not only is Jersey an internationally renowned financial centre but it is also a second home to number of African companies, including certain Johannesburg Stock Exchange listed entities and African banks.
Appleby Jersey has advised on a number of Africa-related Jersey transactions and is well placed to assist UK entities to enter the African market by way of using a Jersey structure. Our trust company, Appleby Global Services, is also well placed to assist with the formation of any Jersey structure required as part of a transaction.
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