Menu Close

Trade finance holds key to unlocking intra-African trade

Add to my bookmarks
ClosePlease login

No account yet? Register

Share This Article:

Picture: Tumi Pakkies/African news Agency (ANA)/Taken on November 21, 2021 – Secretary-General of the African Continental Free Trade Area Secretariat, Wankele Mene, President and Chairperson of the Board of Directors, Afreximbank, Benedict Oramah, Nigerian former President, Olusegun Obasanjo, Commissioner for Economic Development Trade, Industry and Mining in African Union, Albert Muchanga and KwaZulu-Natal MEC for Finance, Ravi Pillay. AfCFTA is a game changer for our Continent and all the countries that are part of this free trade area are pinning their economic prospects and future on its successful implementation.

By Thoko Modise

If you shop at any of South Africa’s major supermarkets, you are likely to find on the shelves, wheat from Eastern Europe, chicken from Brazil, rice from China, and a bottle of whiskey from the United States.

These products are part of the imports that are shipped to our country, demonstrating the extent of our economy’s interconnectedness with the global economy and commerce. Conversely, shoppers in foreign markets consume our maize, wine, grapes, apples, berries, pears, sugar, avocados, and many other food products that we export mainly to their markets.

Since the Russia-Ukraine war broke out in February last year, food prices have skyrocketed, causing food shortages in many parts of the world, particularly in Africa, where most countries rely on grain imports to feed millions of citizens.

Overcoming food insecurity on our Continent is among a wide range of topics discussed at this year’s Afreximbank Annual Meeting (AAM) in Ghana’s capital, Accra, from 18 to 21 June.

South Africa, a major food exporter, was represented by a business delegation at AAM2023, where more than 3,000 delegates attended the gathering that celebrated Afreximbank’s role over the past 30 years, as an enthusiastic promoter of intra-African trade, industrialisation, and economic integration on the Continent.

The Pan-African development finance institution is among African lenders that are playing a pivotal role in supporting the implementation of the two-year-old African Continental Free Trade Area (AfCFTA).

Afreximbank has between 2016 and 2021 disbursed over $86 billion to finance cross-border trade in Africa. South African companies have also tapped onto this funding, which has helped them to spread their tentacles across the Continent.

AfCFTA is a game changer for our Continent and all the countries that are part of this free trade area are pinning their economic prospects and future on its successful implementation.

AfCFTA was launched on January 1, 2021, creating the world’s largest free trade area covering 47 countries and 5,000 products.

The establishment of AfCFTA has brought the Continent one step closer to full integration, where African economies could in future, integrate in a synchronised manner that enables free movement of goods, services, capital, and people across the Continent. However, as a first step, AfCFTA has eliminated trade barriers, paving the way for an emergence of a huge continental market with a combined gross domestic product (GDP) of $3.4 trillion and 1.3 billion consumers.

When this GDP number is juxtaposed against the Continent’s combined consumer and business spending, AfCFTA could potentially create a vast market with a purchasing power of around $6.7 trillion, powered mainly by automotive, agriculture and agro-processing, pharmaceuticals, and transport and logistics sectors.

Given that a large free market has been created for African exporters and importers, there is a need for a concerted effort to be made to fast-track the development of regional value chains. This will lay the foundation for rapid industrialisation and diversification of African economies, many of which are single-commodity exporters.

I am excited by this year’s AAM theme, ‘Delivering the Vision, Building Prosperity for Africans’. This theme has strong resonance for our Continent which for the last 60 years has made progress in attaining political alignment but has been plagued by lack of economic integration and thus its markets have been fragmented and unattractive to foreign investors.

The lack of economic integration confined Africa to only accounting for about 3 percent of global trade, a shortcoming that was compounded by our Continent’s low propensity for intra-regional trade, which is far lower than any other part of the world. Our Continent was also held back by its heavy reliance on exporting raw materials whose prices tend to fluctuate in tandem with international commodity prices.

The implementation of AfCFTA will go a long way to addressing the bottlenecks that hold us back from prospering. The African Development Bank (AfDB) estimates that if Africa were to boost its share of global trade by 1 percent, this would translate into $70 billion of additional income, which is about three times the total amount of development assistance that we receive annually from the rest of the world.

However, boosting intra-African trade and our share of global trade will require extensive mobilisation of trade finance to support home-grown exporters and importers to take advantage of AfCFTA. A burgeoning trade finance industry will provide financial instruments that make it easier for African importers and exporters to transact while reducing risks associated with international trade, particularly currency fluctuations and non-payment and non-delivery of goods.

The significance of trade finance in facilitating international trade is also highlighted by the World Trade Organisation (WTO), which estimates that between 80 percent and 90 percent global trade relies on trade finance.

Without trade finance, exporters will be wary of sending shipments to importers without upfront payments while importers may fear making upfront payments due to risk of exporters not honouring their end of the bargain by failing to ship the goods. Trade finance takes away this risk, thereby helping cross-border trade to flourish.

I look forward to engagements around the mobilisation of trade finance as it must keep up with a potential growth in intra-African trade, which is expected to grow exponentially over the next decade due to the implementation of AfCFTA.

Thoko Modise is the General Manager for Communications at Brand South Africa