Africa Must Do More To Unlock Potential For Rising Intra-African Trade

Africa Must Do More To Unlock Potential For Rising Intra-African Trade
Africa countries must form closer trade link with each other

AFRICANGLOBE – Growth in intra-Africa trade is outpacing trade between Africa and rest of the world. However, more needs to be done to boost intra-African trade to take advantage of the increasing commercial depth of Africa’s rapidly expanding consumer markets.

Exports by African countries to their peers on the continent have surged by 32% since the 2008 economic downturn, compared to growth of just 5% in exports to the rest of the world. Nevertheless, in 2011, intra-African trade accounted for merely 9% of the continent’s total trade with the world, compared to 25% for Latin America and almost 50% for Asia.

Anne-Marie Woolley and Megan McDonald, joint heads of Standard Bank’s Structured Trade and Commodity Finance (STCF) business in Africa, believe that given the right focus, intra-African trade can be a driving force for growth in Africa.

“Although intra-African trade has grown significantly over the last five years, it is off a very low base and remains vastly below par when compared to other developing regions of the world,” said Woolley, head of Standard Bank’s London-based STCF team. “Yet while there are challenges, there are substantial opportunities that can arise from boosting intra-African trade, particularly when one considers that Africa is expected to grow by more than 6% this year, outpacing most of the developed world in terms of growth.”

Some of the structural issues impeding intra-African trade include poor road and rail infrastructure, restrictive tariff structures, the unavailability of foreign exchange and the lack of trade-related financial solutions. While African governments are well-placed to assist in addressing the structural barriers to trade on the continent, equally so are financial institutions able to take the lead in attending to the problems impacting the availability of financial services.

“With many international banks having reviewed their risk appetite and subsequently withdrawing from, or limiting their exposure, to trade finance in Africa, an opportunity exists for local banks to step into the vacuum,” said McDonald, head of Standard Bank’s Johannesburg-based STCF team. “Much of the growth in regional trade can be attributed to finance provided by African banks, being able to leverage off their local market knowledge and ‘on the ground’ presence and thereby acting as important catalysts in driving regional trade activity.”

Unlocking Growth Opportunities 

Evidence of the dormant opportunities that can be unlocked by boosting trade within the continent is particularly true of the agricultural sector, which has the potential to provide more immediate benefits than manufacturing, which takes far longer to develop.

Intra-African flows account for about 20% of Africa’s total agricultural trade activity, compared to averages of 78% for the European Union and 60% for Asia. While African countries produced just 3.5% of the world’s rice in 2011, they were responsible for 35% of global rice imports that year, indicating the potential opportunities that exist for the continent’s rice producers.

Ethiopia is another clear example, accounting for as much as 40% of Africa’s coffee exports. Yet in spite of this, Ethiopia made just 3% of the US$1.2bn it earned by exporting coffee beans in 2012 by doing business with other African nations.

“The trade data shows what can be achieved if African nations made greater strides in conducting trade with each other,” said Woolley. “They could potentially unlock billions of additional dollars simply by placing more focus on trading with their African peers.”

South Africa, the continent’s largest economy, is also missing out on potential trade opportunities within Africa. Of the $2.3bn South Africa earned by exporting fruit in 2012, only 8% came from the rest of Africa; with Angola absorbing 15%, followed by 12% for Benin and 11% for Mozambique.

Similarly, other African nations could benefit by boosting their trade links with South Africa. Of the $1.2bn of South Africa’s expenditure on cereal imports in 2012, just $19m (1.5%) was sourced from other parts of the continent; while 15% of the $86m of coffee imported into South Africa in 2012 originated from Africa.

East Africa Getting It Right

Nevertheless, there are certain “bright spots” on the continent where intra-African trade is flourishing. Standard Bank research shows that East Africa enjoys by far the deepest levels of trade integration on the continent.

Of the total exports from the five-member East African Community (EAC), 43% are directed to the rest of Africa, a ratio consistent with levels observed in Asia. On an individual basis, 49% of Uganda’s exports were absorbed by African partners in 2011, followed by 48% for Kenya, 36% for Tanzania and 35% forRwanda.

In contrast, trade integration within the Southern African Development Community (SADC) is comparatively low, with just 14% of its member economies’ total exports going to other African markets. The Economic Community of West African States (ECOWAS) and the Common Market for East and Southern Africa (COMESA) have similarly low levels of trade integration with the rest of the continent, with the export ratio standing at a mere 15% for both trade blocs.

“There is definitely an opportunity for the various regional trading blocs in Africa to work more closely together,” said McDonald. “Greater cooperation in areas such as harmonising tax regimes, lowering tariff barriers, improving infrastructure, streamlining bureaucratic barriers and promoting the free-flow of goods across borders could pay huge economic dividends over time.”