Over the next two years, Africa’s economic growth is expected to average around 4% above the estimated growth for developed economies. Yet, the majority of its population remains below the poverty line.
The sustained economic growth is partially attributable to commodity trade in its raw form, but does not translate into similar levels of economic development. Industrialization is a critical component of economic development, with a myriad of benefits that include improved standard of living, economic stability, growth in agricultural production, balance of payment surpluses, and high employment rates.
While several African countries have unique policies as part of the import substitution drive to reap the benefits of industrialization, the impact of these policies is yet to be realized. There is a need for governments to create an enabling environment to help industries succeed.
The industrial sector of the continent has experienced sluggish growth as the resource-rich continent continues to face infrastructural deficits, energy and power challenges, and limited manpower, among others.
What is being done?
In spite of these challenges, there is a conscious effort by governments, the African Union (AU), and African Development Finance Institutions (DFIs) to provide solutions. The AU is driving the industrialization agenda through the implementation of AfCFTA.
The timely launch of the Dangote fertilizer plant, targeting exports to other African markets, is expected to address food security concerns by making the African continent self-sufficient in its food production and processing. The coming onstream of the Dangote Refinery in 2023 will heavily reduce Nigeria’s reliance on imported refined petroleum products and retain the much-needed foreign exchange in the country.
These examples can be replicated across all AU member countries should the drive towards industrialization be fully supported with a greater level of political commitment by African leaders.
A borderless Africa stands to benefit from closer trade and is one of the key arguments for Africa’s transformational change, economic development, and economic integration.
However, there are a number of impediments to the transformation agenda across the continent with unique trade policies, borders, and tariff restrictions on the movement of goods across countries. There is also the challenge of unique regulations which require harmonization to eliminate these restrictions. Though the AU has made significant progress on tariff concessions, there is still a lot more to be done for AfCFTA to come to fruition.
In the first quarter of 2022, eight African countries participated in AfCFTA’s Guided Trade Initiative, paving the way for inaugural trade under the initiative to commence. Kenya shipped its inaugural consignment of value-add tea to Ghana under AfCFTA in October 2022.
2023: The year of African trade?
To further accelerate the implementation of AfCFTA, the AU has adopted 2023 as the “Year of AfCFTA: Acceleration of the African Free Trade Area Implementation”.
In tandem with the implementation drive, opportunities exist for African DFIs to support the industrialization and borderless trade agenda on the continent without eliminating small and medium-sized enterprises (SMEs). SMEs often face financing challenges due to information asymmetries, lack of collateral security, and perceived high risk.
SMEs can tap into the regional market opportunity to expand their target market and increase revenue generation. Both corporates and SMEs can tap into the available financing and guarantee products offered by the African Trade Insurance Agency (ATI) and other African DFIs to expand their operations and drive their trading activities on the continent.
Key African DFIs have taken steps to drive the implementation of AfCFTA. Afrexim bank, with the goal to address food security on the continent, partnered with the AfCFTA secretariat and World Food Program.
This partnership will work on agricultural development, climate action, and trade in Africa, with the aim of disbursing USD2 billion in farming loans and credit lines for agro-processors and commodity traders by 2025. This will be done through Afrexim bank lending instruments and blended finance facilities.
The African Development Bank has entered into partnerships to bolster trade finance and improve customs services in some African countries. Similarly, the ATI’s bespoke political and credit insurance solutions are available to investors, lenders, and suppliers who are looking to mitigate credit risk in the African SME sector.
The lead role taken by African DFIs on the industrialization drive provides a positive assurance that Africa is on the right path to weather the storms of these challenging economic times. Moving forward, these multilateral institutions should look to continually create innovative solutions and partnerships to drive Africa’s transformation agenda. This will go a long way to alleviate investor fears of doing business on the continent. In the same vein, increased commitment from African governments to seize opportunities presented by AfCFTA, through appropriate policy reforms and review of regulations, remains the anchor of the accelerated implementation of the free trade area.
About the Author: Ama Thompson is a Political and Credit Risk Underwriter with the African Trade Insurance Agency (ATI), based in Nairobi, Kenya
