Off the back of the signing of the African Continental Free Trade Area (AfCFTA), GTR caught up with African Export-Import Bank (Afreximbank) president Benedict Oramah to discuss initiatives that the bank will soon be launching, and to hear his views on how best to address Africa’s trade finance gap.
GTR: Africa’s trade finance gap is estimated to be in the region of US$120bn. What impact has derisking had on this gap? What is Afreximbank doing to address the challenge?
Oramah: We know what the international commercial banks are doing. Instead of using the “d” word, we can say that they are going away. The compliance cost is high. Africa is fragmented – it has 55 countries: for these banks it’s not interesting, it doesn’t make sense for them. So they pull out. We’ve had many countries complaining, and many central banks coming to us to complain about the refusal of international banks to accept or confirm letters of credit issued by local banks. We are trying to solve this.
We have now finished building the Africa Customer Due Diligence (CDD) Repository Platform, which we started almost four years ago. The platform will have CDD information on African corporates, banks and other players. It also provides online chat capability. So if any bank is conducting a CDD/KYC and wants additional information, it can easily communicate with the particular bank or entity: they can sit in London and get all the information they need. It will significantly reduce the cost of compliance. We are going to integrate it into our trade information portal, and we hope that the banks will subscribe to it. The pilot is starting this month. A full launch is expected on the sidelines of the bank’s annual meeting in July.
I’m happy that we’ve finished building the platform – hopefully it can be used to bring about the return of the international commercial banks. We need them. The trade finance gap in Africa is estimated at US$120bn, but I personally think it’s as much as US$200bn. Afreximbank’s pipeline alone is about US$50bn and that’s only a small fraction of the market.
GTR: What is new in the conversation about intra-African trade today?
Oramah: Whereas a few years ago, intra-African trade was political talk, today it is becoming a reality. African companies are beginning to look across their borders for markets. The different African governments are also beginning to design continental strategies.
What is new is the signing of the Africa Continental Free Trade Area (AfCFTA) on March 21. It is a giant step from our perspective: that day 44 African countries signed to form a single market. The ratification process is still ongoing: it needs 27 countries for this to happen, and the African Union believes this will happen before the end of the year and that the agreement will become effective early next year.
Something else which is new, and which supports the AfCFTA is the upcoming, first-ever Intra-Africa Trade Fair, promoted by Afreximbank in collaboration with the African Union and the government of Egypt. It will be held in Egypt from December 7-18. We expect more than 70,000 visitors and 4,000 exhibitors at the fair, which we plan will take place every two years. Those that cannot attend in person will be able to participate – and close deals – virtually.
Separately, Afreximbank is about to launch the Pan-African Payment and Settlement Platform, which will boost intra-African trade. We have been working on it for a couple of years. The plan is to start the pilot in six West African countries by the end of the year, and then accelerate implementation.
The problem is that Africa has multiple currencies. Apart from the West and Central African CFA countries, every other country has its own currency. In cross-border trade, payments are made in hard currency – either the US dollar or euro – which means getting a third currency involved. Governments want to build their reserves, so they tend to prefer exports to markets that issue hard currency. For this reason, a significant amount of cross-border trade occurs informally. Our estimates put informal cross-border trade at almost US$40bn, and this is compounded by the fact that most traders do not have a system that enables them to settle in a secure way.
The platform will help formalise informal trade – it will be available on mobile devices – and it will reduce the foreign currency content of intra-African trade payments. It will provide a clearing platform. So buyer in country A buying from a seller in country B can pay in his or her own currency for the goods, while the seller will receive his or her own currency. At the end of the day, the only countries that will have to pay dollars will be those in deficit. We believe that while we will not achieve zero foreign currency content, it will reduce significantly.
We are partnering with the West African Monetary Institute (Wami) to launch the pilot. The West African Monetary Zone is the continent’s only economic community that does not already have a settlement platform.
We want to start with a clean slate and then roll it out, because the solution we have resolves the reason for the low volumes in some of the other existing settlement platforms.
GTR: What does the AfCFTA need to truly succeed? What are the challenges to boosting intra-Africa trade?
Oramah: What happened in March 2018 was a political act – the governments signed a document. The political act is huge, and it provides the framework that harmonises a couple of things over time. It is extremely useful. But the people who make it work are the business people. To help them to do so, we have to deal with the challenges that African countries face today.
One of the biggest problems that intra-Africa trade has today is a lack of trade information. For example, Kenya today imports certain kinds of leather from outside Africa, which can be sourced in Burundi. Egypt imports meat from outside of Africa – but Chad produces a lot of that kind of meat. There are several such examples. The average African businessman who wants to do international trade does not view another African country as a market.
People say that infrastructure is the biggest problem. My counter-argument to that is yes, infrastructure is a problem, but Africa’s infrastructure today is able to carry about US$1tn of total Africa trade, so why is intra-African trade’s share only US$150bn?
GTR: What is Afreximbank doing to help alleviate these problems?
Oramah: Afreximbank is building a trade information portal for African businesses. The platform will vend information – some of which will be free. It will also offer bespoke advisory services, such as market entry studies.
At the same time, the African Union is also working on what it calls the ‘trade observatory’, with the support of the International Trade Commission (ITC). The plan is to see how to merge the two initiatives because we want to make sure that the information is available.
In terms of infrastructure, our approach is to support the infrastructure that supports the manufacturing of goods and services that impact trade, for example, the construction of industrial parks. Africa currently imports about US$60bn of light manufactures from China. We know that the Chinese are moving away from light manufacturing, so we need to attract some localised companies to fill this gap, otherwise another country will take over from China to sell those products to Africa.
Amongst other infrastructure-related initiatives, we also have a programme to support vessels that can carry goods along the coast of Africa. We are contributing where we can.
We are about to start a study of a type never done before to get the status of the infrastructure that currently carries trade today – how trade is transported, and the volumes that are carried. People don’t use the roads that we think they use. The actual goods carried in trade today are not the ones governments are focusing on. We intend to give our findings to institutions that support these projects, like the World Bank, so that they can get an idea where their financing would be most effective. It will be a continent-wide initiative. We are in the process of doing the selection of the people who will do this study.