Africa ‘must focus on cross-border trade’
Africa continues to trade primarily with other continents, rather than focusing on intraAfrican trade.
For its part SA conducts more trade with Brics and other developed nations than it does with African countries. There are a multitude of reasons for this, some of the most significant being the tariff environment and lack of internal infrastructure, like rail, says William Artingstall, treasury and trade solutions (TTS) head for Citi South Africa.
The premise of the African Continental Free Trade Area (AfCFTA), due to come into effect on July 1 this year, is that it will lower these barriers to entry and make intra-African trade easier. AfCFTA aims to create the largest free trade area globally with the purpose of expanding intra-African trade across the continent and creating a single continental market for goods and services.
OPPORTUNITIES
“There is no question that AfCFTA offers amazing opportunities but there are still a number of hurdles to overcome,” says Artingstall. “While it’s encouraging that Nigeria has now joined the agreement, proof of AfCFTA’s success will be whether it can create the right tax and tariff environment, support infrastructure improvements and sufficient sustainable opportunities around the manufacture of and the products themselves.”
What will be important, he says, is encouraging African nations to produce products and services the continent needs, including agricultural and IT products. “While it’s too early to tell if the continent will ever produce tractors in sufficient quantities, for example, we need to look at creating opportunities for the manufacture of items at scale that are actually needed on the continent, such as fertilisers. Africa is a big consumer of cellphones but currently there is no, or very limited, cellphone manufacturing in Africa. In many instances, the continent is not able to offer substitute products. This is a big challenge but also a huge opportunity.”
While a free trade area is all well and good, road and transport infrastructure across the continent is currently extremely challenging in many regions. And as Artingstall points out, an efficient transport infrastructure is critical to enable intra-African crossborder trade that can compete with shipping.
“Rail is almost nonexistent in many parts of Africa and much of the continent’s road infrastructure is inadequate. While a number of road and rail projects have been started, there is still a long way to go before we can claim to have the required road and rail infrastructure across the continent. Coupled with this are inefficient ports and customs which add to the complexity and cost of trading in Africa.”
For AfCFTA to be successful it requires the political will of all African leaders to reduce trade barriers. “The trade agreement is a great first step but we need to remember that it’s only a first step,” cautions Artingstall. “The great enabler will be about reciprocity and ensuring that we have products that other African nations want to import.”
Although foreign currency liquidity levels on the continent were improved in 2019, they will continue to be a challenge when it comes to intra-African trade, he predicts. “African economies have yet to recover from the oil and commodity slumps. At the same time they continue to rely on exports to generate much needed forex. A number of African countries are only able to generate forex from the export of one or two products or commodities. The question then is who provides access to the required liquidity to support AfCFTA?”
Banks, he believes, will need to think strategically about how to provide liquidity. In the past year Citi — which offers a full range of trade solutions from simple trade loans to more structured trade finance solutions — has seen uptake in two of its products. These include a digital, automated supply chain solution which provides a full view of the supply chain and allows for greater efficiencies in supply chain management.
“The more efficient you can make your supply chain, the better the likely returns in general business operation,” says Artingstall.
BETTER SOLUTIONS
In the past 18 to 24 months he reports renewed interest in trade loans. “Trade loans have long been considered a ‘vanilla’ solution but we’re starting to see them being constructed in new and innovative ways as more data becomes available and the requirements of banks start to be lowered on the back of more data flow around our clients’ businesses. Risk acceptance criteria are becoming more flexible with the result that we are able to provide better solutions that are more tailored to specific client needs.”
Added to this is growing interest in accounts receivable solutions. Artingstall concedes that accounts receivable solutions are typically not straightforward solutions but says there are a host of different ways of approaching them including portfolio-based approach and some versions of insured accounts receivable.
“As technology plays an increasingly greater role in trade finance, we are seeing historical solutions being leveraged in new ways. Allinclusive financing costs that include the cost of FX conversions are becoming more prevalent, which offers an interesting opportunity to mitigate currency risks.”
WHAT WILL BE IMPORTANT IS ENCOURAGING AFRICAN NATIONS TO PRODUCE PRODUCTS AND SERVICES THE CONTINENT NEEDS