$82Bn Africa’s Trade Financing Gap Worries Nigeria

Yemisi Izuora

The Federal Government has expressed serious concern over an estimated $82 billion trade financing gap in Africa.

Speaking at a recent round table discussion in Cairo, Egypt, on ‘Regional value chains and their importance in increasing trade and investment flow between Arab and African countries’, Finance, Budget and National Planning Minister Mrs. Zainab Ahmed, stressed the need for Africa to continuously address the trade financing gap and also take initiatives to attract foreign direct investment (FDI) and diversify the economy from producer of primary goods to finished product.

According to Ahmed : “A lot of resources are required before African countries can accelerate their industrialisation and structural changes. Infrastructure which is a pillar of growth is inadequate in Africa. To address this problem, there is the need to put in place measures that will attract foreign direct investment and diversify the economy from producer of primary goods to finished product.

The Minister charged African leaders to address regulatory bottlenecks by putting in place and enforcing laws aimed at fostering confidence in investors and banks through the creation of credit bureaus that oversee repayment records.

 

Ahmed also said that there is need to reorganise the banking system through opening the sector to competition, reviewing prudential ratios and putting in place innovative savings and borrowing instruments adapted to local needs.

 

She called for the development of capital markets and particularly bond markets for long-term financing needs by setting up adequate guarantee schemes against currency and other types of risks.

 

She stated that the gap has to be bridged “between the informal and formal financial sectors by formalising microfinance institutions to help them scale up activities while developing financial products geared towards Small and Medium Enterprises (SMEs).

 

Innovative financial tools that use technology such as mobile banking can also help leapfrog traditional finance services and reach a larger population.

On trade financing, “it is important to continue addressing the trade financing gap in Africa, estimated at USD82 billion in a joint 2019 African Development Bank (AfDB) and Afreximbank Trade Finance Survey. Trade financing supports two critical aspects of the trade process: risk mitigation, and liquidity; and is therefore important both for regional trade in Africa as well as inter-regional trade.

 

According to her, “Critical steps that have been taken in recent years to close the trade financing gap in Africa include programmes created by multilateral banks to de-risk banking transactions (e.g., AfDB’s Trade Finance Programme; IFC Global Trade Finance programme); leveraging technology – e.g., Afrexim’s Mansa due diligence platform (introduced in 2018) provides a single platform for due diligence checks in African counterparties; introduction and adoption of the Africa Continental Free Trade Agreement (AfCFTA).

She also highlighted continued mitigation of the impact of COVID-19 on access to trade financing (i.e., through interventions such as Afreximbank’s Pandemic Trade Impact Mitigation Facility (PATIMFA). Furthermore, “interventions such as Afreximbank’s Pan-African Payment and Settlement System (PAPSS) and the Afreximbank Trade Finance and Trade Facilitation (AFTRAF) programme are aimed at reducing liquidity constraints and increasing African trade.

 

On PAPSS, Ahmed said: “The new African payment system was officially launched on January 13, 2022, in Accra, Ghana. According to Afreximbank, PAPSS provides the solution to the disconnected and fragmented nature of payment and settlement systems that have long impeded intra-African trade. PAPSS is a cross-border financial market infrastructure enabling payment transactions across Africa, bridging trade challenges in a continent with over 40 known currencies. According to Afreximbank, participants pay in local currency, while a seller in another country receives payment in their local currency.

 

Speaking further she said: “The Afreximbank Trade Facilitation Program enhances the confidence of counterparties in the settlement of international trade transactions and improves correspondent banking relationships. It supports critical imports into Africa, boosts intra-African trade and facilitates the purchase of equipment for the production of export goods. It provides trade confirmation services, trade confirmation guarantees and irrevocable reimbursement undertakings.

Ahmed noted that the federal government and Economic Community of West African States (ECOWAS) has put in place measures to improve trade through the construction of Free Trade Zones. “Construction of regional roads that link some West African states through Lagos is on-going, the Calabar – Cameroon road is also on-going to facilitate trade and movement of people.

 

“The federal government is also working with ECOWAS to introduce single currency with the sole aim of facilitating trade and improving the wellbeing all citizens. ECOWAS has put in place Common External Tariff and ECOWAs Trade Linearisation Schemes. Nigeria is also working closely with ECOWAS for the full implementation of the IT base ECOWAS interconnectivity system SIGMAT, which automatically transfer relevant transit data. There is also free movement of people with the introduction of VISA on arrival.

 

The Minister also noted that Africa has a long history of trade with the Arab countries covering thousands of years. However there has been a significant shift in the trade patterns toward Asia over the past few decades.

 

“The scarcity of quality data and statistics on both domestic and foreign investment means a lack of evidence-based public policy and increases perceived investment risk. Regional trade remains dismal at a very low rate with much of their exports going to Europe. Though average tariffs have reduced over time, they remain very high; non-tariff barriers (e.g., burdensome technical regulations, import authorization procedures, cumbersome customs clearance and border controls) are obstacles to both Arab- Africa Trade).

On trade facilitation performance, Ahmed said that a lot needs to be done in terms of procedures, harmonisation, transparency, border agency cooperation and in both Africa and Middle East. “Though regional trade agreements are in place, their implementation and enforcement are lacking and benefits are not visible; lack of diversification is a serious drawback, given that oil and agricultural products remain by far the most important exports.

 

“Regional economic integration in both continents has seen very little progress due to different factors including weak institutions, the lack of infrastructure and state-owned enterprises this need to be strengthened for the integration to work properly; cumbersome licensing processes, complex regulations and investment barriers should be reviewed in line with best international practice.

 

She also noted that trade has been negatively affected by the wars, sanctions and political barriers in the region.

 

On why Arab-African collaboration is vital to investment and trade development in Africa, Mrs. Ahmed said: “The importance of trade collaboration between Arab and Africa cannot be over emphasized as it is a major enabler of mutual growth, job creation and poverty reduction. However, openness also needs to be accompanied by greater competitiveness (i.e. productivity-enhancing reforms in the home country) to fully reap the benefits.

“However, for the collaboration to work, there is the need to ensure; sound macroeconomic stability with investor and trade-friendly policies and regulations; good governance (that leads to efficient public administration, timely decision-making, impartial enforcement of property rights and contracts, lowering corruption, greater business integrity, etc.); investments in hard and soft infrastructure, all enabling trade and investment facilitation; and clear mechanisms.

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