African leaders pose for a group photograph as they meet to sign a free trade deal that would create a liberalized market for goods and services across the continent, in Kigali, Rwanda March 21, 2018. REUTERS/Jean Bizimana
CAIRO - 16 December 2018: The World Bank estimates that the cost of intra-African trade is 50% higher than that in East Asia. And with only 18% of African countries' exports being exchanged within the continent, efforts must be made to reduce customs and port handling administrative procedures to boost intra-trade across the continent.
In March, 49 out of 55 member states in the African Union signed up to the African Continental Free Trade Area (AfCFTA) that must be ratified by 22 states to come into force. A second phase of negotiations will be held to cover investment, competition policy and intellectual property.
Head of the African Union Division at the Ministry of Foreign Affairs Mohamed Kadah tells Business Today Egypt that 10 countries ratified the agreement and speculates that many more countries than 22 will endorse it before the African Union Summit 2019 that will take place in Niger next summer. Kadah highlights that Nigeria has been the only country facing problems with the ratification of the agreement after workers protested in fear it would have a negative impact on them.
UNCTAD estimates that tariff elimination between African countries would boost intra-African trade by one-third, and increase the continent’s GDP by 1 percent. Manufactured goods make up 20% of Africa’s exports to other continents, and half of intra-trade. Yet, Africa’s exports are predominantly primary goods. Kadah said that industrialization in Africa can be concentrated in the sectors of food processing, textiles, building materials, pharmaceuticals, petrochemicals and renewable energy.
According to Afreximbank’s African Trade Report 2018, African countries involved the most in intra-trade include South Africa, Namibia, Nigeria, Zambia, Cote D’Ivoire, Swaziland, Botswana, Zimbabwe, Democratic Republic of Congo, and Mozambique.Main products traded within Africa include mineral fuels, machinery, vehicles, electrical machinery, ores, slag, and ash, plastics, iron and steel, inorganic chemicals and precious metals, sugars and confectionery, essential oils and cosmetics, and fertilizers.
Opportunities and Obstacles
Consultant at the Arab Union for Industrial Exports Development (AUIED) Ahmed El Dib states that trade within the continent accounted in 2017 for 14% of African trade. "That indicates that economic coalitions have not helped much," El Dib says, explaining that "the main challenges are embodied in developing the infrastructure which will decrease the cost of investment and boost intra-Africa trade. That is in addition to eliminating tariff and non-tariff obstacles, and encouraging the contribution of the services sector and transformative industries in African economies."
Afreximbank estimates that one of the reasons intra-African trade is low is the lack of access to information on trade and markets, El Dib says, which is why it has undertaken several initiatives to fulfill that gap. One of those is the Intra-African Trade Fair (ITAF) that is held every two years. ITAF provides information on trade and markets, and brings together importers and exporters from all over the continent. The first edition took place in 2016, and the second edition is set to take place this month.
ITAF adopts the Afreximbank's strategy called Impact 2021 aiming to boost intra-African trade from $175 billion to $250 billion. That five-year strategy has three main themes: create, connect and deliver. The ‘create’ theme aims at supporting the production of goods and services as well as agricultural production through capacity-building. The ‘connect’ theme is concerned with linking exporters and importers on one hand to institutions and agents on the other hand so they would be acquainted with supply and demand in different African markets. The deliver theme is about ensuring effective distribution channels including transport, logistics, payment systems, warehousing, and finance to participants.
Egypt's trade with the rest of Africa composes just 4% of intra-African trade. That requires setting a strategy to enter African markets, and reviewing the current mechanisms and tools. The trade volume between Egypt and Africa reached in 2017 $5 billion. Exports and imports are worth $3.2 billion and $1.8 billion respectively.
Exports include plastic, aromatic oils, sugar, candy, machinery, electronics, spare parts, natural and cultured pearls, precious and semiprecious stones, precious metals, fossil fuels, mineral oil, distillation products of petroleum, vegetables, fruits, soap, detergents, washing and lubricating devices, iron and steel products, ceramics, medicinal drugs, cigarettes, furniture, footwear, and others.
The African Development Bank (AFDB) estimates that Africa has an unmet demand for trade finance of more than $90 billion annually. One-third of Africa’s trade is intermediated by banks. The value for the years 2013 and 2014 are $430 billion and $362 billion respectively while bank-intermediated intra-African trade stands at 20%. The percentage among North and Central Africa is 5% against 25% in East and Southern Africa.
On the other hand, default rates on trade finance in Africa were 4 and 5% in 2013 and 2014 respectively compared to 9 and 12% Non-Performing Loan (NPL) ratios for all bank asset classes. The trade finance default rates are 2, 3, and 4% for banks in Southern, Eastern, and Northern Africa compared to 9 and 7% in Central and West Africa.
According to a 2014 AFDB report titled “Trade Finance in Africa: Overcoming Challenges”, SMEs representing more than 80% of Africa’s enterprises receive only 28% of banks’ trade finance portfolio as their default rate is 14%. The study reported poor creditworthiness and lack of adequate collateral as the main reasons behind bank’s rejection of trade finance demands. New applicants compose only 15% of banks’ trade finance portfolio, although their default rate is only 3%.
In 2013, AFDB launched its four-year Trade Finance Program (TFP). Worth $1 billion, the program targeted low-income countries, African local banks, small and medium enterprises in critical sectors—including agriculture/agribusiness, light manufacturing and intermediate/capital goods—across regional member countries.
The TFP also provided risk mitigation and liquidity support. It crowded in global banks and worked on strengthening local African financial institutions that are critical to the promotion of trade on the continent.
Afreximbank, AfDB, and insurers such as the African Trade Insurance Agency provide guarantees and credit rating backings for those looking to trade across borders. Earlier this year, AfDB concluded a risk participation agreement with Frankfurt-based Commerzbank AG with a value of $50 million. The target is covering the risk of some small African banks to expand their trade finance portfolio. AFDB aims at supporting $700m of trade on the continent over three years.
In May, Standard Chartered and Africa Finance Corporation (AFC) launched the Risk Participation Programme to generate an estimated incremental trade volume surpassing $350 million over three years.