Home Finance As Africa’s Exports Approach $1 Trillion, Political Will and Policy Alignment Are Critical for Sustainable and Inclusive Growth

As Africa’s Exports Approach $1 Trillion, Political Will and Policy Alignment Are Critical for Sustainable and Inclusive Growth

by internationalbanker

By Sunil Kaushal, Chief Executive Officer, Standard Chartered Africa and the Middle East (AME)

 

 

 

 

New research from Standard Chartered suggests that at its current compound annual growth rate (CAGR) of 3 percent, Africa’s merchandise exports will reach $952 billion by 2035, highlighting the significant potential for the continent. But with the political will and a fully implemented African Continental Free Trade Area (AfCFTA), a World Bank (WB) analysis1 suggests exports could be further boosted by as much as 30 percent.

Underpinning Africa’s current export potential are key international corridors linking many of the continent’s economies to South Asia and the Middle East. These are expected to grow in the coming years, with a CAGR of 5.1 percent to 7.1 percent—higher than the global average of 4.3 percent over the same period. Furthermore, with the African Union (AU) becoming a permanent member of the G20 (Group of Twenty), the continent faces a bright socio-economic future. But despite this promise, there are multiple political and structural hurdles to overcome.

Intercontinental governance and alignment

One of the continent’s greatest trade challenges is the lack of cross-border alignments in industrial and trade policies. Standard Chartered’s research shows that 63 percent of business leaders cite complex and opaque trade rules as key challenges to intra-African trade. Transparency and aiding the understanding of reporting mechanisms and joint trade initiatives can accelerate trade between African countries. This is where the AfCFTA plays an important role in advancing alignment.

Operational since July 2019, the AfCFTA’s remit is to create a single and liberalised market to achieve the vision of ‘an integrated, prosperous and peaceful Africa’. Woven through many of its objectives is the core focus on trade-policy alignment and developing new industrial value chains that will enable Africa’s markets to unlock value-creating activities, generate wealth and quality employment opportunities, and reduce import dependency on essentials, such as pharmaceutical and agricultural products.

Enriching value chains

However, while value chains require a concerted effort from within the region, foreign direct investment (FDI) must continue to play a role. FDI inflows are critical to building Africa’s value chains. Multinationals not only bring in capital and employment opportunities but also play key roles in introducing technological sophistication into local industries and facilitating knowledge spillover and tacit learning. Value-chain enrichment will also be significantly boosted by creating a continental customs union that will eventually eliminate tariff and non-tariff barriers. This transformational goal has delivered historic opportunities for continent-wide growth within the European Union (EU).

Similar to the EU, the AfCFTA aims to lay the foundations for pan-African administrative frameworks and institutional mechanisms in areas such as dispute settlement. The World Bank suggests that if such policy infrastructures are fully implemented, total exports from AfCFTA markets in 2035 could potentially increase by 29 percent over the 2035 baseline, and total intra-AfCFTA exports could almost double over the same period. This huge potential also offers companies untold opportunities for new market entry, innovation and enrichment of national and intra-African value chains.

Having created the world’s largest free-trade area, connecting 1.3 billion people with a combined gross domestic product (GDP) of $3 trillion, the impact of AfCFTA trade-policy alignment on consumer choices could be historic.

For small and medium-sized enterprises (SMEs), entrepreneurs and emerging industries, free markets with little or no tariffs offer scalability and are virtual Petri dishes for invention, product development, risk-taking and investment. Moreover, as Africa’s value chains mature and diversify, the continent will gain greater leverage from its natural resources and commodities.

Africa’s economies export raw materials around the world for further processing and, in return, import finished goods for consumption at many times the raw-material prices. This means they lose out on value-added and wealth-creating activities and are exposed to balance-of-payment problems and volatile commodity-price fluctuations. Removing trade barriers will make it easier for goods to flow across the continent, rendering it more attractive to foreign investors. A liberalised African trading bloc with common standards for trade alignment and zero intra-African tariffs would be extremely attractive to global investors and multinationals.

Transfer of skills and technology

The removal of trade barriers also incentivises FDI, which is not only an important contributor to value-chain enrichment but also to infrastructure development, localisation, capital injection and skilled jobs. Markets seeking FDI must demonstrate political stability, balanced budgets and stable foreign exchange rates. Additional prerequisites include efficient infrastructure to facilitate trade and connectivity with key partners.

Morocco’s automotive industry is a prime example of how a national industrial development plan can be accelerated through encouraging private-public partnerships and FDI. In 2014, Morocco’s government renewed its industrial-development plan, committing further funds to infrastructure, dedicated industrial zones and local value-chain integration. In 2019, the market secured FDI from another global player, Stellantis, which opened a production plant in Kenitra. This progress has helped Morocco’s automotive sector successfully integrate into global value chains—delivering greater export capacity and long-term economic resilience.

Digital trade and SCF solutions

Digital technologies play an important role in driving Africa’s trade growth. For instance, adopting digital finance platforms, including supply chain finance (SCF) solutions, could help democratise access to trade finance and unlock up to $34 billion in export value in five key African markets by 2035.

In addition, digital solutions can help Africa leapfrog traditional trade barriers, enabling markets to reduce trade costs by digitising customs and border procedures, minimising the time spent on manual processes and making trade more efficient. For African businesses, digitised information can increase transparency and lead to smoother information flows, boosting cross-border connectivity between vendors and buyers.

Digital trade-finance solutions can also democratise access to trade-finance facilities. This is especially beneficial on a continent with a vast trade-finance gap, estimated at an annual $91 billion, that persists as a key barrier to Africa’s economic development and export growth. SMEs—the backbone of most of Africa’s economies—are disproportionately affected by this problem. In Kenya and Tanzania, for instance, one in six SME exporters fails to meet export sales due to a lack of funding, resulting in a US$50,000 loss of trade per SME per year, according to the African Development Bank (AfDB).

To remedy this, digital SCF solutions can be deployed, reducing the time and monetary costs associated with obtaining supply-chain financing and unlocking greater economic participation from African businesses, particularly SMEs. Our research shows that greater adoption of digital trade-finance solutions could potentially increase the combined exports of Egypt, Ghana, Kenya, Nigeria and South Africa by $34 billion by 2035.

None of these outcomes is impossible. In fact, with shared ideals and a willingness to cooperate, policymakers and bodies such as the AfCFTA have everything they need to transform Africa’s potential and unlock a new era of sustainable and inclusive growth for generations to come.

The full report (“Future of Trade 2023”) can be accessed on Standard Chartered’s website2.

 

References

1 The World Bank (WB): “Free Trade Deal Boosts Africa’s Economic Development,” June 30, 2022.

2 Standard Chartered: “Future of Trade 2023.”

 

 

ABOUT THE AUTHOR
Sunil Kaushal is the CEO of Standard Chartered Africa and Middle East (AME) and a member of Standard Chartered’s Global Management Team, the highest executive body within the bank. Prior to this, Sunil was the Regional CEO of Standard Chartered South Asia and CEO of Standard Chartered India. He has been with the group for nearly 24 years and has approximately 34 years of banking experience in diverse markets across North Asia, Southeast Asia, South Asia, the Middle East and Africa.

 

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