Dr Edward George, Head of Group Research at Ecobank, reports on Africa’s informal trade flows.
Official statistics indicate that the level of intra-regional trade in Africa is low, averaging around US$140bn per year versus around US$850bn with the rest of the world. Moreover, Africa’s share of intra-regional trade has been falling, from a peak of 15.6% of total flows in 2015 to an estimated 11.9% in 2017. But these official data do not tell the whole story, because they fail to capture the vast volumes of informal trade that flow under the radar.
The scope of these informal flows is extraordinary, supplying everything from food and fuel to consumer goods and industrial raw materials, and all this into some of the remotest parts of Africa. The value chain operated by Somali traders in East Africa runs from Dubai and South Asia to ports in Somalia (Bosaso, Mogadishu and Kismayo), then flows over the Kenyan border, via the Dadaab refugee camp to Nairobi’s Somali quarter, Eastleigh, and from there to markets in the city and beyond. These Somalis dominate the trade of sugar, rice, charcoal and khat, and are believed to be the source of more than 80% of the smartphones sold in Nairobi (most of which are flown into Eldoret from Dubai). The ingenuity of informal traders and their ability to get goods and services to African consumers is remarkable. How is it that anywhere in Africa (even where there is no electricity) you can find a guy selling cold beers from a polystyrene cooler?
So how large are Africa’s informal trade flows? Well, no one really knows. There are no reliable statistics on informal trade because of its very nature – it mostly involves individual traders, many of them carrying only a few sacks of goods, it is entirely in cash, and traders make concerted efforts to escape the attention of the authorities. But you only need to stand on the borders between Togo and Ghana, Benin and Nigeria, or Zambia and the DRC, to see that the majority of goods flowing over these borders are informal, involving no paperwork and leaving no trace in the formal banking system. At some borders almost 100% of goods cross informally.
So why is so much of Africa’s trade informal? There are numerous factors, all of them interconnected. Informal traders lack access to formal financing, forcing them to self-finance or borrow informally. SMEs make up the bulk of the trade sector (and account for over 90% of businesses in Africa), and they tend to be small operations with low overheads and operating exclusively in cash. Most SME owners lack formal education and very few have the required documentation and financial knowledge to operate in the formal sector.
Tax and duty evasion is another motivator of informal trade. Take the flows of rice and fuel over the border between Benin and Nigeria. Each year Benin imports an estimated 1.5 million tonnes of rice, most of it parboiled. However, Beninois prefer white rice (‘riz blanchi’) while their Nigerian neighbours almost exclusively eat parboiled rice. Overland imports of rice into Nigeria are illegal, yet every year most of Benin’s rice imports make their way over the border from Benin and Niger into Nigeria, much of it being re-bagged with Nigerian logos in a sophisticated operation on the outskirts of Lagos. In the other direction, Nigerians smuggle bootlegged fuel into Benin which it is sold by informal street-side vendors as ‘kpaya’. All across Africa there are smuggling chains feeding food, fuel and consumer goods across the continent’s porous borders.
But the reality is that informal traders need to pay ‘informal taxes’ – payoffs to local police, border guards and vested interests, in order to get their goods to market. And for many informal traders the use of cash to settle transactions – which can run into the millions of dollars – is becoming unmanageable. Each season over US$2bn is distributed in cash to buyers for the purchase of cocoa in Côte d’Ivoire – and at least 10% of this, if not more, goes missing. Moreover, making cross-border transactions using informal means is expensive, time-consuming and often just impossible. The incentive for informal traders to formalise is therefore huge.
For many years governments, policymakers and banks have fretted over how to bring these vast informal flows into the formal economy. The benefits are obvious: to reduce corruption and fraud; to boost tax revenues; but also to professionalise informal businesses and enable them to get access to financing and capital investment. But too often KYC concerns, opposition from vested interests and the perceived low value of informal trade have derailed these efforts.
Two new factors could change this picture. The first is the Africa Continental Free Trade Area (AfCFTA), which aims to unite all 54 countries in Africa into a single market. The AfCFTA is a bold statement of intent, and although it will take many years to implement and Africa’s two largest economies – South Africa and Nigeria – have yet to join, it represents a huge opportunity for informal trade. Once the AfCFTA single market is enacted, billions of dollars of informal flows will become legal overnight – from the smallest vendor to the medium-scale commodity trader. In a stroke this could drastically reduce fraud and corruption at the borders, while making numerous informal traders bankable.
The second is fintech, and its ability to provide cheap, instant and easy cross-border payments via mobile and digital channels. Today traders drive from DRC into Zambia to trade maize and sugar with cash hidden under their truck, transacting in cash throughout; in the future they can do all their transactions digitally in either currency, greatly reducing the risk of theft.
These two factors could be game-changers for Africa’s informal trade. Together they could enable banks to substantially boost lending to the sector, governments to raise the funds needed to invest in parts of the value chain that really need it (for example, by ending the appalling congestion around ports like Lagos and Mombasa), and SMEs to scale up their businesses and get over the ‘missing middle’.
Ecobank is a pioneer in this space. In Tanzania the bank has partnered with the Tanzania Revenue Authority (TRA) to enable digital payments of duties and customs clearance for goods entering and in transit through the country. This means that goods destined for Zambia can pay all relevant duties digitally on arrival in Dar-es-Salaam and require little more than a barcode check to pass the border into Zambia. The ultimate challenge will be replacing trust in cash with digital trust, and this will require robust technical systems and active engagement with African traders, both for education and for feedback to improve the system.