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Dar ratification of AFCFTA implications to financial markets

Dar ratification of AFCFTA implications to financial markets

TANZANIA recently ratified the African Continental Free Trade Area (AFCFTA), but what is this AFCFTA? This is a free trade area founded in 2018, with trade commencing as of 1st January 2021.

It was created by the African Continental Free Trade Agreement among 54 of the 55 African Union nations.

The free-trade the area is the largest in the world in terms of the number of participating countries to remove tariff barriers and non-tariff barriers to aid the movement of capital and people facilitating investment to create a single market, deepening theconomic integration of the continent.

The AfCFTA comes at a time when intra-regional trade in Africa is facing bottlenecks and questions are being raised about the importance of continental integration processes, the AfCFTA is welcomed with optimism.

By seeking to deepen economic integration of the African continent by creating a single continental market with free movement of business, people and investments, the AfCFTA is a testament to the power of cooperation and a shared vision, this will in part be a foundation to build on to Agenda 2063 as Africa’s blueprint and master plan for transforming Africa into the global powerhouse of the future.

On Thursday 9th of September 2021, the Parliament of the United Republic of Tanzania as a sign of commitment towards a unified Africa, ratified the agreement establishing the African Continental Free Trade Area (AfCFTA) which could ultimately transform the continent’s economic prospects as it aims to be a model of crossborder cooperation.

Benefits for the establishment of the AFCFTA

Prioritizing intra-African trade between African countries is at 15.51per cent very low relative to other regional blocks such as Europe and Asia. Two provisions of the agreement aim to ensure that intra-African trade is prioritized; relative to external (to the continent) trading partners and could have important implications for the sourcing of value-added goods and key inputs into production. In the end, benefiting small and medium scale enterprises.

Encouraging Industrialization

The AfCFTA fosters competitive manufacturing. With a successful implementation of this new trade initiative, there is potential for Africa’s manufacturing sector to double in size from $500 billion in 2015 to $1 trillion in 2025, creating 14 million stable jobs.

Contributing to Sustainable Growth

The United Nations 2030 Agenda for Sustainable Development includes goals that the AfCFTA contributes to sustainable development. For example, Goal 8 of the Agenda is decent work and economic growth and Goal 9 is the promotion of industry. The AfCFTA initiative also contributes to Goal 17 of the Agenda as it reduces the continent’s reliance on external resources, encouraging independent financing and development.

Growing Small and Medium-Sized Businesses

The elimination of import duties also opens up trading activities to small businesses in the regional markets. Small and medium-sized businesses make up 80per cent of the region’s businesses. Increased trading also facilitates small business products to be traded as inputs for larger enterprises in the region. Africa ranks near the bottom when it comes to competing in the global economy, held back by fragmented markets that inhibit efficiency and constrain economic growth.

The implication to the financial markets

As Africa is moving towards augmented continental integration in the run-up to the implementation of the Afcfta this process includes acceleration of intra-regional financial integration through the liberation of financial markets. Currently, African stock exchanges remain small compared to their counterparts in Europe, Asia or Latin America.

The market capitalization of Africa’s 30 stock exchanges exceeded USD 1.5 trillion as of 2018 according to the World Exchange Federation.

The Johannesburg Stock Exchange (JSE) in South Africa dominates the region and the five largest exchanges (South Africa, Morocco, Egypt, Nigeria, and Kenya) accounts for about 90 per cent of this total. Regional financial markets will contribute to encouraging liquidity and access to cheaper finance.

This integration process will receive a major impulse with the interconnection of major stock exchanges in the continent to further improve depth and liquidity on Africa’s capital markets by facilitating both cross-border trading of securities in Africa and cross-listing in multiple exchanges.

In Tanzania, there are currently 5 crosslisted companies in the Dar es Salaam Stock Exchange (DSE) out of the 27 companies listed.

Today finance in Africa remains relatively insufficient in scale, too expensive and heavily geared towards short term finance, crowding out much-needed finance for long term business establishment. Banking systems are relatively small and concentrated, with low levels of savings mobilization to finance productive activities in the economy.

Market limitations such as information asymmetry and inefficient operations lead to a high cost of borrowing, excluding large parts of the population.

Insufficient depth, liquidity and market infrastructure inhibit the ability of capital markets to play their role as intermediators of finance.

Financial markets integration brought about by the establishment of the free trade area could be the impetus to avail the bottlenecks facing financial markets in Africa, both through the expansion of private-public collaboration as well as the interconnection of markets which will ultimately lead to the adaptation and improvement of regulation and supervision on a continental scale.

This integration, together with the significant advance of financial innovation and the adoption of communication technologies, is the the main factor that will contribute to solving the fragmentation of what will foreseeably be one of the main world markets in the most populated continent as of 2050.

In addition to increasing market efficiency and reducing the cost of doing business by offering opportunities for economies of scale, the AfCFTA could ease trade and investment flows and shift the composition and direction of foreign direct investment flow into Africa.

The Weekly Market Wrap-Ups Equities

The DSE equity market dropped by 20 per cent compared to the preceding week, recording a turnover of TZS 250.55 million. CRDB counter was this week’s top mover dominating the market share by 59.04 per cent, followed by TWIGA cement and JATU at 13.61 per cent and 8.06 per cent, respectively.

Price movement was recorded on four domestic traded equities. JATU continues to appreciate for the second consecutive week, up by 43.06 per cent to end the week at 1,030/- per share. TWIGA gained 9.18 per cent and closed at 535/- per share and TOL went up by 6 per cent to close off the week at 530/-per share.

Alternatively, CRDB price per share depreciated by 1.92 per cent to end the week at 255/-. Total market capitalization decreased by 0.19 per cent to 16,458.83bn/- and Domestic market capitalization went down by 0.02 per cent to close at 9,578.04bn/-.

The key benchmark indices closed as follows; -

• Tanzania share index (TSI) closed at 3,622.57 points a decrease of 0.02 per cent.

• All Share Index (DSEI) decreased by 0.19 per cent to close at 1,974.65 points.

Sector Indices closed as follows; -

• Industrial & Allied Index (IA) closed at 5,011.84 points, up by 0.19 per cent.

• Bank, Finance & Investment Index closed at 2,521.45 points, down by 0.65 per cent • Commercial Services Index closed at 2,138.49 points, the same as the preceding week.

Outlook

Domestic investors were the driving force for this week’s turnover, as retail investors took advantage of the equity market. We also noticed the continuous share price appreciation for JATU, as the counter has doubled in value in less than two weeks. We anticipate the appreciation momentum to carry on this coming week.

Authored by Zan Securities is a Capital Markets and Securities Authority licensed dealer and a member of the Dar es Stock Exchange. It is currently one of the leading stock market dealers in terms of modern ICT infrastructure and branch network from Zanzibar and Tanzania mainland.

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