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African businesses are benefiting from key developments in trade finance

This article was sponsored by Standard Chartered Bank

How does SC see the progress of the AfCFTA now and in the future and which regions are set to benefit the most, and why?

The African Continental Free Trade Area (AfCFTA) has emerged as a critical imperative for delivering cross-continental cooperation, development, and progress since it first entered into force over four years ago. AfCFTA has now been ratified by the majority of African states and, once fully implemented, will enable, and drive intra-Africa trade and accelerate sustainable economic development.

AfCFTA is the world’s largest free-trade area, connecting 1.3 billion with a combined gross domestic product (GDP) of $3 trillion, and its impact could be historic. By 2035, total African exports are expected to reach close to USD1 trillion and a well-implemented AfCFTA can boost this figure even higher by 29 per cent.

Intra-Africa trade is set to grow 3.9 per cent per annum and reach USD 140 billion by 2035. We expect robust intra-regional trade for West Africa, with a projected growth of 13.3 per cent annually over the next decade, driven by a great potential for agricultural products such as shea butter and cocoa beans. East Africa will also be a key beneficiary from AfCFTA, trade and this region is set to grow at 15.1% annually, driven by large-scale cross-border infrastructure developments such as the Lapsset Corridor Project connecting Ethiopia, Kenya, and South Sudan. 

For intercontinental trade, Africa’s corridors to South Asia will be among the fastest growing into 2035, with India as one of the most rapidly growing major economies. The East Africa-South Asia corridor in particular is expected to emerge as the fastest growing major corridor at 7.1 per cent per annum through to 2035. 

How can countries in Africa become more competitive, particularly in an environment of lack of export readiness and manufacturing competence? What should governments be focusing on to drive this? 

Africa has a unique set of challenges that require policy makers to craft trade policies that align with the region’s developmental needs. There are currently a multitude of trade agreements that have created a ‘spaghetti bowl effect’ resulting in overlapping and contradicting objectives. A key objective set out by AfCFTA is to resolve the conflicting and confusing overlapping trade agreements. This could be achieved by implementing common rules of origin, granting all 54 AfCFTA members preferential trade access to each other’s markets, in addition to improving access to information on trade regulations and enhancing the capabilities of the border authorities who enforce trade regulations. 

Governments will play a central role in helping to realise the full potential of AfCFTA. Trade and industrial policies need to be developed to nurture infant industries, such as providing incentives contingent upon a firm’s export performance. Governments should leverage their markets and partner with private enterprises to grow regional value chains. Trade facilitation measures, such as cutting red tape, and greater infrastructure connectivity will be key to increasing cross-border trade. 

How can Africa benefit from greater integration with global value chains and what is needed for it to do so? 

As a continent, Africa has one of the richest natural endowments in the world. However, creating greater value-add from these endowments remains a key challenge. Africa’s economies export commodities across the world for further processing and in return, import finished goods for consumption at many times the price. 

One of AfCFTA’s main objectives is to build-up value chains across the continent which will enable Africa’s markets to internalise value-creating activities, create wealth and quality employment opportunities, as well as reduce the dependency on imports for essentials such as pharmaceutical and agricultural products. Foreign direct investment inflows are vital to achieving this objective as multinationals not only bring in capital and employment opportunities, but also play a key role in introducing technological sophistication into local industries and facilitate knowledge spill-over and tacit learnings.

What are the key developments in trade finance and how will Africa benefit?

A key development in trade finance is growing digitalisation which will strongly benefit SMEs – the backbone of Africa’s economy. According to the African Development Bank, one in six SME exporters fail to meet export sales due to a lack of funding, resulting in a USD 50,000 loss of trade per SME per year. Digital supply chain finance solutions could help democratise access to trade finance by reducing the time and monetary costs associated with obtaining supply chain financing, unlocking greater economic participation of Africa’s businesses, particularly SMEs. Our research shows that greater adoption of digital supply chain finance solutions could have the potential to increase the combined exports of Egypt, Ghana, Kenya, Nigeria and South Africa by USD34 billion by 2035, or 9.1 per cent over the 2035 baseline.

There is also an increasing emphasis on sustainable finance to address global climate change challenges and achieve UN Sustainable Development Goals. Standard Chartered, for example, has launched a sustainable trade loan for financial institutions, enabling them and their clients to play a greater role in driving sustainable outcomes by directing capital to where it is needed most, including Africa. Sustainable trade finance can help African nations achieve their climate goals and strengthen the sustainable economic development of the continent.  

What is the role of technology in driving Africa’s trade future?

Technology will play a pivotal role in helping Africa to leapfrog and propel the continent’s economic growth. Africa’s markets can cut trade costs by digitalising customs and border procedures, reducing the time taken by manual processes, making trade more efficient. For Africa’s businesses, digitised information can increase transparency and lead to a smoother flow of information, boosting cross-border vendor-buyer connectivity. 

Digital technologies can also help alleviate infrastructural barriers and provide vendors access to a larger customer base through e-commerce platforms. According to the International Trade Administration, Africa’s e-commerce market is expected to post double-digit growth, and surpass half a billion users by 2025. This growth is supported by the expansion of mobile internet, the increasing adoption of smartphones and a fast-growing, tech-savvy Africa’s middle class. According to our survey, 73 per cent of Africa’s business leaders predict that at least 20 per cent of their sales will be generated through e–commerce channels in 2-3 years.

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