FX International Payments
By Frances Coppola
Real GDP growth in the continent of Africa averaged over 5 percent between 2001 and 2014, according to an Africa Development Bank report. Though growth weakened to an estimated 3.6 percent in 2015, it remained above the global average of 3.1 percent. According to the same report: “At this growth rate, Africa remained the second-fastest-growing economy in the world (after emerging Asia), and several African countries were among the world’s fastest-growing countries.”1
Cross-border trade in Africa now represents about two-thirds of GDP. Imports and exports have grown steadily since the mid-1990s, apart from a brief reversal during the 2008 financial crisis. Since 2009, they have increased at an annual average rate of 2.6 percent.2 Much of the export trade involves oil and commodities, though foodstuffs, textiles and precious metals are also important.3 Imports are dominated by foodstuffs, machinery and equipment, vehicles, chemicals and fuel.4
Most of this trade is with countries outside Africa: less than 20 percent of cross-border trade is between African nations.5 Perhaps because of the legacy of old colonial relationships, the EU has historically been Africa’s largest trading partner, though the U.S. and China are also important importers of oil and commodities. In 2015, China overtook the EU as Africa’s largest trading partner by value.6 According to the Office for National Statistics, the U.K.’s total trade with Africa was £34.45 billion in 2014 (the most recent year it reported), with slightly more than 68 percent of that in goods and the rest in services.7
In the last 15 years, Africa has become far more open to international finance, and this has driven its strong trade performance. Many countries have opened their financial borders, allowing in significant amounts of international investment. Banks have boomed, providing much-needed sources of funding for international businesses. Mobile payments have brought flexibility and convenience to millions.
Yet despite Africa’s increasing financial openness, expanding import-export trade with Africa remains challenging due in large part to a shortage of trade finance.
Access to trade finance is essential for intra-regional trade as well as trade with the rest of the world. But there is currently insufficient trade finance capacity in Africa to support the needs of the continent’s importers and exporters.
In 2014, the African Development Bank conducted a study of 276 commercial banks in 45 African countries. It discovered that although 93 percent of banks in Africa – including international banks – provide trade finance, there is a significant deficit compared to demand for trade finance.8 The International Chamber of Commerce (ICC) estimates the trade finance gap in Africa at $110 billion to $120 billion (approximately £89.3 billion to £97.4 billion based on late December 2016 exchange rates), which is approximately 25 percent of total demand.9
The trade finance gap is partly due to an African banking sector that is still underdeveloped and lacks sophisticated risk assessment capacity. Letters of credit issued by banks are the most common trade finance instrument for African businesses, but on average, banks reject 10 percent of applications. The ICC says that the main reason for rejection is poor creditworthiness, much of it due to the banks’ limited ability to assess credit risk accurately.10 For international businesses, lack of U.S. dollar liquidity is also a barrier to trade, since many African countries have limited FX reserves.11
But there is another problem too. Historically, European banks have provided the majority of cross-border lending to developing countries. But now, under pressure from regulators and shareholders to reduce their risks, these banks are retreating to their core markets, leaving a gap that domestic banks in developing countries are ill-equipped to fill.12 The World Trade Organisation says that small and medium-size enterprises (SMEs) in developing countries are experiencing particular difficulty obtaining trade finance.13
To counter this, supranational organisations such as the World Bank and the Africa Development Bank are introducing measures designed to help businesses in developing countries gain access to trade finance, mostly in the form of loans and grants. And there are private-sector initiatives too. Money managers are providing trade finance to import-export enterprises against the collateral of future sales.14 And online financial technology (fintech) companies are creating new sources of trade finance for SMEs around the globe, including those in Africa.15
Africa holds exciting opportunities for international U.K. businesses, both those exporting to the continent and those importing from it. New providers, including fintechs, and support from supranational organisations may help to remove trade finance bottlenecks, thus improving the prospects for international trade with Africa.
With 17 years experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.
1. Economic Outlook 2016, Africa Development Bank; http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/AEO_2016_Report_Full_English.pdf
3. "Which are Africa’s biggest exports?", World Economic Forum; https://www.weforum.org/agenda/2016/05/which-are-africas-biggest-exports/
4. "Resources for importing from and exporting to Africa", Illinois Center for African Studies; http://www.afrst.illinois.edu/outreach/business/imports/
5. Economic Outlook 2016, Africa Development Bank; http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/AEO_2016_Report_Full_English.pdf
6. "Africa’s Largest Trading Partners in 2015", Talking Drums; http://talkingdrums.com/en/2015/08/02/africas-largest-trading-partners-in-2015/
7. "The UK’s trade and investment with Africa: 2016", Office for National Statistics; https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/articles/theukstradeandinvestmentrelationshipwithafrica/2016
8. Trade Finance in Africa, Africa Development Bank; http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/Trade_Finance_Report_AfDB_EN_-_12_2014.pdf
9. Global Trade and Finance Survey 2016, ICC; http://store.iccwbo.org/content/uploaded/pdf/ICC_Global_Trade_and_Finance_Survey_2016.pdf
12. "Negative Rates, Part 3: Banks, Business Investment and Trade Finance", American Express; https://www.americanexpress.com/us/foreign-exchange/articles/influence-of-negative-interest-rates-on-trade-finance-from-banks/
13. "Trade Finance and SMEs", WTO; https://www.wto.org/english/res_e/booksp_e/tradefinsme_e.pdf
14. "Fund managers find yield in Africa trade finance loans", Bloomberg; https://www.bloomberg.com/news/articles/2016-07-20/fund-managers-find-yield-in-africa-trade-finance-loans
15. The Future of FinTech: A Paradigm Shift in Small Business Finance, World Economic Forum; http://www3.weforum.org/docs/IP/2015/FS/GAC15_The_Future_of_FinTech_Paradigm_Shift_Small_Business_Finance_report_2015.pdf