Opportunities for intra-African trade

• Scope for the continent and its trading partners to reap economic benefits

Trade finance is a critical aspect of trade and, according to Akinwumi Adesina, president of the African Development Bank (AfDB), an important instrument for influencing Africa’s long-term economic development and structural transformation

A report by the AfDB and the African Export-Import Bank (Afreximbank), Trade Finance in

Africa: Trends Over the Past Decade and Opportunities

Ahead, says that in the past decade Africa’s trade growth has been one of the worst among the major regions of the world, as a result of a number of factors including falling commodity prices, competition, inadequate foreign exchange liquidity, regulatory challenges and access to trade finance, as banks have gradually scaled back activities from riskier markets.

The study showed that although trade finance remains a popular activity among banks in Africa, the participation rates continue to decrease, falling by 16% between 2013 and 2019. In December 2022, the AfDB noted that Africa s annual trade finance gap is about $81bn. Trade uncertainty in Africa has been exacerbated by the impact of the pandemic and global geopolitical challenges.

KEY PLAYER

Michael Foundethakis, global head of projects and trade & export finance and Africa

Steering Committee chair at Baker McKenzie, explains that Afreximbank is a key player in the finance and promotion of African trade and one of the architects of the AfCFTA, but there is still a substantial gap in trade finance in Africa.

This is chiefly as a result of a drop in trade finance participation rates among international and African commercial lenders, he says, adding that Afreximbank and several other development banks have increasingly tried to bridge this gap through increased lending and alternative products to support market participants.

Foundethakis points out that despite the persistently large trade finance gap, trade remains a key driver of Africa s social and economic development.

Which is why banks such as the Afreximbank and AfDB have tried to stay on top of market developments and provide solutions to boost intra-Africa trade.

According to a Baker McKenzie research report conducted with Oxford Economics, AfCFTAs $3-trillion Opportunity, there are now unprecedented opportunities for Africa, and its trading partners, to reap economic benefits following the possible improvements in transport infrastructure, reduction of red tape for cross-border dealings, renewed funding and improved liquidity

If successful, AfCFTA will provide the opportunity for African countries to diversify their economies, scale production capacity and widen the range of products made in Africa, in particular boosting the production of manufactured goods and the potential for multinational companies to set up manufacturing plants on the continent. Closer integration of neighbouring economies is a potential avenue for creating scale and competitiveness through domestic market enlargement, thereby promoting development and boosting foreign investment through greater efficiency.

In July 2021, the AfDB, through its Financial Sector Development s Trade Finance operations, launched a transaction guarantee instrument as a means to increase trade finance on the continent. The AfDB says the new instrument will help local financial institutions build relationships with international banks, in the process increasing their network of global trade finance partners. It will also improve access to finance for African small and medium enterprises, for example. The transaction guarantee instrument will provide regional and international banks with up to 100% nonpayment risk coverage for trade transactions initiated by local banks in Africa. The guarantee will cover various trade finance instruments, including confirmed letters of credit, trade loans, irrevocable reimbursement undertakings, avalised bills and promissory notes Efforts to increase intraAfrican trade received another boost in early February 2022 when Afreximbank and AfCFTA signed an agreement relating to the management of the Base Fund of the AfCFTA Adjustment Fund. The fund will support African countries and the private sector to effectively participate in the new trading environment established under the AfCFTA. The fund consists of a base fund, made up of contributions from states, grants and technical assistance funds to address tariff revenue losses as tariffs are progressively eliminated; a general fund to mobilise concessional funding; and a credit fund to mobilise commercial funding to support both public and private sectors.

GRANT FUNDING

In July 2022, Afreximbank announced it had renewed approval of a $1bn facility to operationalise the AfCFTA Adjustment Funds. It also approved grant funding valued at $10m to seed the Base Fund of the AfCFTA Adjustment Fund.

The Adjustment Fund follows the Pan African Payment and Settlement System (PAPSS), which was launched by Afreximbank and the AfCFTA Secretariat in January 2022. PAPSS is a centralised payment and settlement system for intra-African trade and commerce payments. Wamkele Mene, secretary-general of AfCFTA, says PAPSS is critical to the promotion of intra-African trade, as its establishment