Informal trade has sustained economic ties. Time to bring it into the fold.
After contracting by 2.86% last year, global trade is forecast to slump even further and shrink by between 9.2% in 2020. African trade is expected to contract significantly, reflecting in part the economic costs of containment measures on supply and demand globally and restrictions on movements of persons following the closure of borders and airports. While forecasts concerning COVID-19’s potential impact on African trade for the formal sector are known, those related to informal cross-border trade (ICBT) are not. The latter has been a key contributor to job creation, income growth and household consumption, as well as to the development of competitive cross-border regional value chains. However, in the overwhelming majority of countries, ICBT has not been systematically accounted for in balance of payments and external accounts. Across Africa, attempts to monitor ICBT dynamics have been constrained by a dearth of information and time series data, as well as the lack of a consistent framework for capturing ICBT. The Report is a major step towards estimating the scope of ICBT at the continental level. ICBT is a significant phenomenon across Africa. More than circumventing the regulatory burdens and associated high transaction costs characteristic of its formal counterpart, ICBT has sustained economic ties between border communities unified by the same language and culture but separated by the artificial boundaries that emerged from the colonial era. Over time, ICBT grew beyond these communities to become a major driver of economic growth across Africa. Merchandise traded informally across borders in the continent’s five regions include non-processed goods, manufactured goods and re-export goods. Despite the fact that it accounts for a significant proportion of domestic absorption, its contribution to GDP is hardly recognised due to paucity of data. The AfCFTA could illuminate the path towards ICBT’s formalisation by reducing the costs of formal trade and improving trade related and logistics infrastructure, including through digital payment and settlement systems. Over the last decade, the improving resilience of African economies and trade to global volatility has been driven in large part by the geographical diversification of its trading partners. In 2018, Asia became Africa’s foremost trading partner, overtaking Europe. The Report shows that Asia consolidated its lead last year, accounting for more than 31% of extra-African trade in 2019. In contrast, intra-African trade – which had been rising, accounting for around 15% of total African trade in 2018 – declined to 14.5% in 2019. However, intra-African trade is set to expand considerably during the AfCFTA’s implementation. The agreement has the potential to accelerate industrialisation processes and boost cross-border trade, which is increasingly dominated by manufactured goods. Looking ahead, the Report argues for a stronger commitment to a speedy implementation of the AfCFTA and commencement of trading thereunder. Beyond mitigating the continent’s exposure to recurrent adverse commodities terms of trade and commodity price cycles, the growth of intraAfrican trade associated with the AfCFTA will cushion the region against escalating trade tensions which remains the chief near-term downside risk to global growth and trade. This flagship Report prepared by the Research and International Cooperation Department of Afreximbank in collaboration with the United Nations Economic Commission for Africa (UNECA) is rich and timely. I hope readers will find it as informative and useful as I did.