Africa has huge economic potential. The continent, which is home to just over a billion people, has a wealth of natural resources, the largest share of the world’s uncultivated arable land, and now, also, a rapidly growing middle-class with a new-found penchant for consumer goods. It is, in a number of respects, the final growth frontier in the global economy.
Despite all this potential, Africa’s share of global trade remains very small, and is actually declining. Trade flows offer a convincing explanation as to why this is the case. African countries tend to trade much more with far-away lands such as China, India and Brazil than they do with each other. It is not a new phenomenon, by any means. Weak intra-continental trade has, in fact, hindered growth prospects for most countries in the region ever since independence.
The reasons are well-documented. In Africa, a century and a half of European colonialism had left behind an economic system and infrastructure focused on extracting the continent’s natural resources for export back to Europe. An absence of adequate road and rail connections is only part of the story, however. Trade between African countries is also weighed down by a near impenetrable plethora of bureaucracies, not to mention, the corruption found at border posts.
Trading spaces
Until recently, very little had been done to encourage improved trade relations between the 50-plus individual economies of which Africa is comprised. That changed when the world’s trade ministers met in Bali at the end of last year for the biennial World Trade Organisation (WTO) conference. In a step which will surely have huge implications for the African continent’s future growth prospects, officials signed a trade facilitation agreement with the explicit purpose of cutting back the red tape that holds up the transfer of goods at national borders.
A study of the proposal carried out prior to the conference by the Organisation for Economic Co-operation and Development (OECD) predicted enormous benefits from the deal for African nations. The measures would reduce total trade costs by 10% in advanced economies and by 13-15.5% in developing countries. Just a 1% reduction in global trade costs would increase worldwide income by more than $40 billion, most of which would be accrued by developing countries, the report found.
African countries tend to trade much more with faraway lands such as China, India and Brazil than they do with each other.
Removing barriers to reduce the cost of trade is just the medicine Africa needs, says Jason Barrass, Head of Africa Trade at Barclays. “It’s a basic principle of economics,” Barrass says. “The faster economies can move goods and money around the greater their GDP will be.” Red tape at customs can seriously harm the competitiveness of African companies. The price of a product may be quite competitive at the point in which it leaves the factory gates, but it is often a very different story once it has gone cross-border. “I think there is somewhere in the region of 14 different customs unions on the continent. There’s very little in the way of conformity and it is totally inefficient.”
Tackling these issues will not be easy, however. A 2012 report by the African Development Bank reveals the sheer enormity of the transformation required to bring African trade up to speed. In most African countries, two sets of controls need to be completed on each side of the border post. An average transaction typically involves up to 20-30 different parties, 40 documents and 200 data elements which usually need to be rekeyed at least once.
It’s a bureaucratic nightmare; one which does little to negate Africa’s image as a difficult place for companies to do business in. “A lot of companies are not very enthusiastic about investing in Africa,” says Klaus-Dieter Ruske, PwC’s global leader for the transportation and logistics sector. On a number of occasions in recent years, Ruske has met with corporate executives and spoken of the huge opportunities for growth he sees in the continent. Many of them agreed, but their willingness to seize such opportunities was tempered by the absence of a secure, facilitative business environment. “They would tell me that there are a lack of stable political systems, and if they want to trade on the continent they know they will have to pay black money to customs officials.”
Tackling these problems will require enormous willpower from Africa’s political leaders. Finding it won’t be easy however, when the actions that need to be taken in order to secure improvements in intra-African trade are inevitably going to be very painful in the short term. “African governments with small tax payers are heavily reliant on import duties to make up for the lack of tax base,” notes Jerry Pearce, Head of Product Management & Head of TPS at Standard Bank. It is, Pearce adds, one of the key reasons why economic integration initiatives in Africa across the years have so often failed to deliver. “Given the relative poverty of most African countries, it is difficult for governments to give up the small amounts of revenue they receive, and it is unlikely that they could easily shift the burden elsewhere.”
Fighting back
If anything is to change, businesses in Africa need to highlight the difficulties they encounter when trading with other African countries. In May 2012, a private sector advocacy and education group called the Borderless Alliance was established. The main work of the group is collecting and publishing data on trade inefficiencies throughout the region, to apply pressure on decision-makers to reform their policies and help develop their economies. Some of the figures published in the group’s quarterly reports are eye-opening; it is a litany of illegitimate checkpoints, lengthy delays and bribery, both on the roads and at border posts.
The group has also established a Border Information Centre on the Ghana-Togo border in order to help companies navigate the complex procedures involved in moving goods across West Africa’s borders. According to a recently published case study, 61 businesses – including the likes of Unilever – have already benefited from the service, and there are now plans to open a second branch at the Benin-Nigeria border later this year.
That private sector groups such as Border Alliance are now taking on a more prominent role in regional trade facilitation is evidently a positive step. The message seems to be getting across to Africa’s leaders too. “Change will come eventually,” says PWC’s Ruske. “Sub-Saharan nations in particular are now clearly seeing both the need and opportunity for improved trade with one another.” In February this year, South African President Jacob Zuma announced that talks being held between eastern and southern African nations to establish a tripartite free trade area were progressing well. It is still early days, but if the negotiations do succeed, the result will be the integration of 26 nations into a single market with a population of more than 600 million.
In a step which will surely have huge implications for the African continent’s future growth prospects, officials signed a trade facilitation agreement with the explicit purpose of cutting back the red tape that holds up the transfer of goods at national borders.
Mind the gap
Since the cost of trade is extremely high in Africa, many companies – particularly SMEs – struggle to get the credit they require to get their goods to market. It is partly a product of the continent’s risk profile which, due to the aforementioned infrastructure and governance issues, looks very different from developed regions.
“Banks are not immune to the fact that corporate clients trading within the continent face a lot of difficulties,” says Barclays’ Barrass. But helping a greater number of companies in Africa to secure financing on their receivables would almost certainly provide a huge boost for intraregional trade. For a company trading into a new territory, such as Zambia or Ethiopia it can be difficult, initially, to understand the local requirements and what risks should be taken in those markets. “That is where a bank like Barclays steps in,” he adds. “It is our business to understand risk, to know how to get money out of countries, and to help them with their cash flow.”
Barrass acknowledges that a gap has emerged in the provision of trade finance in recent years. In the wake of the catastrophic events that hit financial markets in 2008, many financiers removed liquidity from peripheral markets, such as Africa, in order to cover positions in core areas. In addition local financial institutions found it difficult to access credit in international markets, and financing for a large number of SMEs began to retrench as a consequence. According to a report published in 2013 by the African Development Bank (AfDB), total unmet demand for credit across Africa now stands at $100 billion, of which $70 – $90 billion emanates from SMEs in Sub-Saharan Africa alone.
Since the cost of trade is extremely high in Africa, many companies – particularly SMEs – struggle to get the credit they require to get their goods to market.
To fully close the gap, the report estimates that the provision of trade finance, along with other forms of credit such as loans, overdrafts and leasing, would need to increase by 270-300%. Even when some financing is available, the cost is usually prohibitive for a significant number of smaller businesses. For about one-third of countries, rates on trade loans offered on a non-sovereign basis exceed 10% and often require cash collateral of up to 50% of the value of the loan.
“I think it is fair to say that there are not enough banks in Africa providing this service,” says Barrass. He draws a comparison with Asia where, due to the region’s more accommodating risk profile, many more banks are willing to take on some risk and get involved in financing deals for companies. “It is clearly different from trading in other continents. It has a different risk profile, there are different on the ground facilities, capabilities and logistics.”
Barclays hopes it can fill some of the gap. Over the past year, the bank has been busy ramping up its trade finance coverage across the continent, focusing particularly on bolstering their strengths in structured commodities finance and developing new products in the receivables finance space. For trade finance in its ‘plain vanilla’ form, this will mean increasing counterparty lines around financial institutions in distant markets where the bank has little or no footprint.
“That will allow us to support more of our exporting clients around the world who are trading with Africa,” Barrass adds. “It is a key part of our strategy, and something you will be seeing a lot more of over the next few months.”
The difficulty is that, for commercial banks, only so much can be done to meet Africa’s rapidly increasing finance needs. Low country ratings and weak local banking systems mean there will often be times when such banks feel unable to justify deploying capital to support imports and exports in certain countries. It is here where multilateral development banks such as AfDB, play a useful role. Since 2009, AfDB has approved over $735m in trade finance facilities, through a combination of risk-sharing with international commercial banks and provision of credit to local financial institutions in order to facilitate their trade finance operations.
The opportunity within
In recent years, there has been much talk of growth opportunities presented by China’s intensifying commercial interest in the African continent. Trade between the two has indeed been growing at a phenomenal rate, expanding from $10 billion in 2000 to an estimated $200 billion in 2013. This has already brought the continent many benefits. Chinese firms have made substantial investments in African infrastructure, particularly in key sectors such as telecommunications, transport and power generation. There is no denying that, given the scale of Africa’s infrastructure deficit, these types of investments could play a crucial role in the continent’s future development.
But stronger intra-African trade might just be an even greater catalyst for growth. Many of Africa’s small, landlocked countries encounter huge challenges when attempting to trade with countries in other continents. Yet through regional integration and the creation of larger markets, Africa might one day find itself able to compete on the same level as other low-cost emerging economies.
Many of Africa’s small, landlocked countries encounter huge challenges when attempting to trade with countries in other continents. Yet through regional integration and the creation of larger markets, Africa might one day find itself able to compete on the same level as other low-cost emerging economies.
What is more, there is a historical precedent for this. Europe’s decision to open its own borders in the years that followed the Second World War helped to rebuild the economic prosperity of a continent that had been all but decimated by six years of conflict. More recently, intra-regional trade has also been seen playing a key role in Asia’s rapid ascendancy. Although Asian economies are often thought of as workshops for the West, the truth is that more than 55% of its trade today is within the region. The fact that in Africa, that same figure currently stands at a mere 7%, reveals the sheer scale of the job that needs to be done to get Africa trading with itself.
It is a worthy goal to work towards, nevertheless. Over the past decade Africa has fared reasonably well economically. Real GDP rose by 4.9% a year from 2000 through to 2008; the point at which contagion from the US subprime mortgage crisis really began to pinch. But the continent’s success during this period was driven, if not wholly then at least in part, by a global boom in commodities that did very little to address structural unemployment. An economic restructuring that focuses on diversification and facilitating greater trade within Africa could well be the key, not only to more sustainable growth, but also to addressing some of Africa’s long-standing social challenges.
