AfCFTA: Djibouti obstinacy threatens to undermine African free trade and investment

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Djibouti obstinacy threatens to undermine African free trade and investment

While the British and European media might be preoccupied with the death rattles of Brexit, an even more momentous trade deal is unfolding in Africa. The African Continental Free Trade Area (AfCFTA), an accord between all but one of Africa’s 54 countries to reduce or remove tariffs on goods, encourage greater freedom of movement, and promote investment within the bloc, officially came into effect on January 1st.

The AfCFTA deal looks set to make Africa the biggest free trade zone in the world, comprising 1.2 billion people with a cumulative GDP of $2.5 trillion. If it lives up to its billing, the deal will not only help intracontinental trade reach as much as $231 billion, but will also encourage foreign direct investment (FDI), significantly boosting the ability of cash-strapped African governments to overcome the economic crisis caused by coronavirus.

However, some African countries are implementing policies that actively undermine the continent’s ability to attract that all-important investment. A particularly egregious example is Djibouti, which unilaterally terminated a contract with Dubai-based port operator DP World in 2018, renationalised the facility, and handed 25% of it over to a Chinese company. This type of behaviour, if left unaddressed, will alienate potential investors and put the anticipated gains of the AfCFTA deal in jeopardy.

A landmark accord

The AfCFTA builds upon the platform created by eight regional economic communities (RECs) already in existence across Africa. These RECs have been instrumental in consolidating relations and increasing trade between neighbouring countries, with their ability to enhance food security during the current pandemic a strong demonstration of their value.

As a continent-wide upgrade on the RECs, the AfCFTA promises to magnify those benefits on a much larger scale. At present, intracontinental commerce only accounts for 14.5% of Africa’s overall trading portfolio; the AfCFTA could boost that percentage by 50% by 2030 – a far cry from the 52% and 72% proportions enjoyed by Asia and Europe, respectively, but a step in the right direction nonetheless.

Of equal importance is the pact’s ability to boost FDI. Inbound investment across Africa is currently far lower than other parts of the globe. Despite being home to 16% of the world’s population, the African continent currently accounts for just 3% of the world’s GDP and an even smaller percentage of global FDI. That difficult situation has been compounded by a disastrous 2020, in which Covid-19 precipitated a dramatic drop from $1.5 trillion in global FDI in 2019 to levels falling below even those of the 2007/08 economic crisis.

That context means African political leaders and economic officials (mostly) welcome anything that can bolster incoming FDI with open arms. Even before Covid-19, leaders including the Chadian chair of the African Union (AU), Moussa Faki Mahamat, implored industrialised economies to expand investment. If successful, the AfCFTA could replicate the results of the US’s Prosper Africa program on a continent-wide scale. That initiative has already given rise to over 280 deals worth in excess of $22 billion, benefiting over 30 countries since 2019.

Djibouti’s intransigence is counter-productive

Of course, the whole ethos behind the AfCFTA is that the continent is stronger when all 54 countries are pulling in the same direction. Unfortunately, some governments seem not to have received the memo, despite having put pen to paper on the deal itself. Djibouti is one prominent case in point, thanks to a self-serving and legally dubious approach to foreign investment and international commercial law.

Djibouti’s approach is typified by the ongoing legal wrangling between the Port of Djibouti (an extension of the government) and DP World, an Emirati logistics company based in Dubai. In 2004, the two parties signed a 30-year agreement on the Doraleh Container Terminal (DCT) located just outside the nation’s capital. Under the terms of the deal, Djibouti would own 66.6% of the DCT, with DP World maintaining ownership of the remaining third.

In 2018, however, Djibouti decided to wash its hands of the agreement and appropriate DP World’s share of the terminal, gifting a quarter of it to a Hong Kong port operator named China Merchants against the backdrop of extensive Chinese investment and the opening of China’s first-ever overseas military base in the country. In response, DP World have taken their case to the UK High Court and the London Court of International Arbitration (LCIA), both of which have favoured their cause on no less than six occasions.

Following the most recent of those rulings last year, Djibouti’s long-time President Ismail Omar Guelleh explicitly rejected the judge’s decision – as he has done with all other verdicts, including one in which the country was ordered to pay DP World over $500 million in damages.

Spoiling Africa’s chance for a leg up?

Such a state of affairs is, clearly, unsustainable. Not only does Djibouti’s decision to pander to the Chinese place the country in peril of falling into a debt trap, but it also tarnishes the credibility the country may once have had in the eyes of international investors. After all, who would want to enter into a business arrangement with a country that has shown itself so willing to tear up the rulebook halfway through a contract?

Episodes such as the eviction of DP World undermine the work done by the AU to court foreign investment on the continent. After the events of the past year, external capital will be more crucial than ever in helping the continent recover from the difficult times brought on by Covid-19. That makes addressing the lack of cooperation from certain AfCFTA member countries, like Djibouti, an imperative for the AU, lest other global companies find themselves asking whether their African investments, and their rights in African markets under international legal frameworks, are safe.

Featured image: By Skilla1st – Own work, CC BY-SA 4.0, https://commons.wikimedia.org/wiki/File:An_aerial_view_of_Djibouti_City.jpg