Four-step plan to get Africa out of a rut
The continent should focus on these basic priorities to attract investment and narrow its trade finance deficit
For Africa to narrow a trade finance gap nearing $120bn (about R2.2-trillion) a year, we need stakeholders to take a more nuanced approach to risk and partnerships in 2024. Prior to the pandemic and lockdowns, Africa was making progress in reducing the trade finance gap as emerging markets attracted capital.
A combination of geopolitical risk factors, a liquidity challenge as a result of a stronger dollar and weaker local currencies, as well as the cost of living crisis and higher interest rates, have combined to create an environment where banks are more riskaverse — limiting emerging market investments by sovereigns in transformative projects. Strategic trade routes have also been impacted by conflicts in Ukraine and the Middle East. As domestic supply chains are being reconfigured, we can see increased urgency around the rollout of the African Continental Free Trade Area. Unfortunately, just as the African continent begins to build momentum, it is negatively impacted by external factors beyond its control.
Whether it was the global financial crisis in 2007/2008, the pandemic or more recent events, we see African countries establishing some confidence, taking on debt for key projects to support long-term, sustainable and resilient growth objectives
… and then a crisis hits, and interventions are often aggressively applied.
For Africa to break this stop-start situation, we need to identify practical steps to unlock affordable funding.
The first and most practical step is to ensure that the necessary structural reforms are prioritised in the continent’s economies, and then enforce a narrative that Africa is an attractive investment destination for patient capital. There is often a perception that African capital markets are not a destination of choice for foreign direct investment; however, Absa, as the largest funder of renewable energy projects on the continent, disagrees. If we look at the current currency crisis in Nigeria, we see many international banks still invested. While there is still uncertainty and lots of moving pieces in this crisis, many international, regional and local banks continue to provide support to facilitate international trade for strategic services and goods as the authorities implement the necessary, overdue reforms that are expected to drive Africa’s largest economy forward. This is a recognition that Nigeria is a key economic player in Africa and will remain so for the foreseeable future. While there is short-term pain, there is a widespread acknowledgment that the structural policy reforms implemented by the central bank should result in a more resilient financial system and economy.
From country to country in Africa, we continue to see many international banks taking a more nuanced approach and optimistic stance than before. This patient approach may be the best way to ride multiple crises as Africa continues its journey of economic development.
While global banking groups enjoy deeper funding pockets, it is imperative that there is a co-ordinated focus on local capital pools. This segues into our second practical step — partnerships.
In recent years we have seen far more collaboration between the banks, development finance institutions and insurers — particularly as environmental, social and governance (ESG) funding frameworks are maturing. It is clear funding pools here are expanding. As a result, there is a renewed focus on extending this funding to focus on the social side of the equation, with a special interest in projects that prioritise the economic participation of women and youth. It is imperative for African financial institutions, such as Absa, to be at the forefront of the global efforts to define and inform policies and frameworks around the “S” in ESG. If we fail to lead these, the tendency is a huge bias towards the global north’s agenda and priorities.
Further, African economies should — individually or through the regional collective — be bold in driving those ESG priorities that align best with their own developmental agenda. After all, Africa is on the cusp of huge industrialisation which, learning from the mistakes of the global north, should be deeply grounded in sustainability and inclusion.
Third, we need to focus on pushing infrastructure projects over the line. While we all recognise the important role these projects play in reducing friction in the economy, too often they are put on hold when financial “shocks” or disruptions fracture local funding models.
The Lobito Corridor Trade Facilitation Project, which aims to connect trade routes in Zambia, the Democratic Republic of Congo and Angola, is proof that getting infrastructure projects over the line is essential. Not only will this boost one of the key mining areas on the continent, it will also establish a mechanism for harmonising trade in retail and agriculture.
As this trade corridor becomes more influential, it will encourage the likes of Mozambique and South Africa to modernise systems and harmonise activities with the rest of Africa in an attempt to drive competitiveness. At the core of driving Africa’s industrialisation is the focus on integration of the regions from all fronts of infrastructure technology, logistics, and so on.
Last, increased digitisation and the adoption of technology must become a priority. The African fintech sector has been able to attract both international and local funding, being a beacon of success for early-stage capital in Africa. Despite these successes, small business funding remains expensive, and entrepreneurs are exposed to friction throughout the process. A focus on digitisation, especially in supplier onboarding processes, will make it easier for businesses to introduce SMEs into their ecosystem and expand their local supplier base. SME integration into mainstream economic activity needs affordable, secure, “fit for purpose” technology. Technology and digitisation are essential in unlocking SME potential in Africa’s industrialisation.
For Africa to effectively tackle the trade finance gap, it can no longer be business as usual. Role players must spend more time understanding the nuances around supply chains. Ultimately, we need to build resilience and sustainability.
As one of the leading pan-African banking groups, we recognise these challenges and continue to invest in our deep knowledge and understanding of supply chains to reduce the disruptions created by external shocks and events.
Through partnerships with like-minded teams, we look forward to a solutionoriented focus in 2024.