Trade flows

How Africa can make the next quantum leap in trade

The huge opportunities for growth in Africa’s trade will only be unlocked if structural issues can be overcome

In 2010, Kenyan and Chinese archaeologists digging on the Indian Ocean coast found a haul of brass coins that have rewritten Africa’s trade history. Minted in the early 15th century, the coins show that Chinese missions were reaching the African continent 100 years before Europeans arrived.

In the 1950s, newly-independent economies across Asia and Africa began to revive this ancient shipping route, but progress was slow. Trade between China and Africa only reached the one-billion US dollar mark in the 1980s, with India-Africa trade following in 1991.

This century, however, Asia-Africa trade has hit the fast lane. Trade between China and Africa has ballooned nearly seventeen-fold to USD135 billion, with trade between Africa and India surging six-fold to USD55 billion

This means more markets for African exports and access for Africans to a wider variety of consumer goods – often cheaper and better adapted to local conditions.

Africa’s developing

Meanwhile, imports of more affordable industrial goods – from 3G phone masts to efficient machine tools – have accelerated Africa’s own growth and development.

Global Asian companies spanning agriculture, telecommunications and infrastructure, such as Samsung and China Communications Construction Corp have made Africa-based enterprises a focal point for their foreign investments.

Africa has also begun, slowly, to trade with itself. Companies like the Nigerian conglomerate Dangote Group are leading the way, expanding across the continent, whilst MTN’s telecoms presence across the continent continues to grow – where trade and connectivity are inextricably linked.

Trade between Africa countries has doubled since 1990, in part jump-started by the formation of three regional trading blocs – the Southern African Development Community, the Common Market for Eastern and Southern Africa and the East African Community.

Continent can do more

Yet, intra-regional trade still accounts for just 12 per cent of Africa’s total exports and imports. This despite the fact that Africa has a population of more than 500 million people, most of them young, a combined GDP of USD625 billion, bountiful natural resources and large areas of uncultivated farmland.

The opportunities for further growth in Africa’s trade – with itself and with other regions such as Asia – are huge

If the three African trading blocs were to combine, Africa could easily be one of the largest economic unions in the world today.

The opportunities for further growth in Africa’s trade – with itself and with other regions such as Asia – are huge, but will only be unlocked if several structural issues can be overcome.

First, credit in general – whether in the form of trade finance or to support capital investment – is scarce across Africa. With the exception of South Africa and Mauritius, credit-to-GDP ratios remain low. Kenya has the next-highest ratio, at 37 per cent, compared to Nigeria at about 12 per cent.

The lack of credit affects companies of all sizes and acts as a brake on growth and development. An additional dimension of this issue is financial inclusion – the extent to which populations have access to financial services.

Not enough ports, roads, airports, power stations are being built. This has a knock-on-effect on the competitiveness of African companies

Second, lack of infrastructure is massive barrier. The World Bank and African Development Bank put the funding gap in infrastructure at USD45 billion per year, meaning not enough ports, roads, airports, power stations are being built. This has a knock-on-effect on the competitiveness of African companies, adding cost and complexity to their business.

Third, governance – both corporate and public – remains a challenge in many countries. Despite huge improvements across the continent, this plays into a perception amongst some investors that the continent’s risks outweigh its benefits.

Tackling the headwinds

How to tackle these headwinds? As I see it, there is a huge opportunity for international banks such as ours to support the next stage of the continent’s growth, by providing trade finance, facilitating cross-border investment and bringing much needed innovation in areas such as risk management and corporate governance.

But we can, and should, go significantly further. Partnering with governments in Africa to support financial deepening can have a dramatic effect: deeper markets afford lower transaction costs – whether in credit markets or in goods and services. Lower transaction costs benefit all market participants and contribute to sustainable economic growth.

Banks can help reduce these costs through the services they offer in their branches, by supporting mobile payment technologies, or facilitating liquidity in local government bonds and helping local companies access international bond markets.

Another way banks can support growth is by joining initiatives that support trade and investment in Africa, such as the US government’s Power Africa initiative, which aims to add more than 10,000 megawatts of cleaner, more efficient electricity generation across six African countries by 2018. Recently, we more than doubled our commitment to this commitment, to USD5 billion.

More power will be a catalyst for further investment and infrastructure development in African markets – bringing Africa’s next quantum leap in trade within reach.