Because when we continue to do extra-Africa trade, we are not able to gain the dynamic comparative advantage that is deliverable from trading with ourselves.
Afrexim Bank executive chairman Prof. Benedict Okey Oramah is in the country to open their regional office in Kampala.
He spoke to Paul Busharizi about his vision for the office in the context of the wider African trade picture. below are excerpts
Q: You have set for yourselves the mandate to improve trade in Africa, what is the state of trade in Africa?
A: You have to look at it from two perspectives; what Africa trades and who Africa trades with. Let me start with what Africa trades. The continent today has seen some progress in terms of the size of its trade. I recall around the mid-1990s, total African trade was about $250b.
Today we are talking of total trade of about $1 trillion. But what has not changed is the composition of that trade, it has not changed that much. In the 1990s and 1980s, trade was commodity-dependent. So oil, coffee, cocoa, tobacco, and copper represented the bulk of the trade.
For many of our countries, one or two single commodities accounted for over 85% of the total exports. Fast forward to 2018, it is the same picture — commodity dependence. We have not seen a structural change in the way Africa trades. And the reason for this can be found in the second question I asked: Who does Africa trade with? Africa continues to trade less with itself.
There has been some progress from what it was in the 1990s, which is still small compared to other continents.
Why is this?
Because when we continue to do extra-Africa trade, we are not able to gain the dynamic comparative advantage that is deliverable from trading with ourselves. Consider this today; more than 40% of total intra-Africa trade is in manufacturings. Almost 50% according to some statistics. So, imagine if we were able to expand intra-Africa trade to where I think it should be?
It could be up to $500b. And I will tell you why. When you ask people for the constraints to intra-Africa trade, they say infrastructure. I agree. Africa has serious infrastructure problems.
But I tell people that this same infrastructure supports $1 trillion of total trade, why is the intra-African share of this trade-only $150b? Why is China, India or US able export to Africa but Nigeria cannot export to Uganda? There is a fundamental issue.
This tells me the tremendous scope of intra-regional trade — even if you do not grow the total trade, if you are able to grow the inter-regional trade, you are going to transform the items being traded to more dynamic goods that will prepare you to do even more in the global value chain.
The biggest problem we have is lack of trade information. For me, that is the biggest constraint. We did a study on leather. What we found was a bit shocking. That Kenya was importing certain kinds of leather products from outside Africa at a higher cost than what Burundi was exporting out of Africa — and through Mombasa bypassing the Kenya market.
South Africa was also importing a type of leather product at a higher cost than Ethiopia was exporting. Ask a Nigerian, for example, about what somebody in Uganda can sell to Nigeria, they do not know. But ask them what they can get from Asia, Europe, they will tell you.
How are you planning to address this?
We are actually building a portal. The African Union is also doing something called the Africa Trade Observatory. We are trying to see how ours and theirs link up. Because this is really for me, this is the greatest problem.
Some people do not know what is available just across the border. They import it from outside Africa yet it may be in production just across the border.
The East African Community has had some success in increasing trade within the region. Are you looking to capitalise on this?
Our strategy is to use regional offices to boost intra-regional trade. By making it possible for potential users of our products to have access to trade and product financing, to make it easier for them. So we do not have such physical presence in East Africa yet. So that is why we are doing it this year.
There are a number of things we are putting out, which will make the regional offices the big vehicles to get them to our clientele to boost trading further. To give you an example, can we be under the Africa Connect Free Trade Agreement.
Although there is a lot of trade in eastern Africa, there is not that much across the blocks. But we are in the different parts of Africa. So we shall bridge those gaps, make sure information flows and also make sure we have businesses.
We have also announced a $1b Africa Connect Free Trade Agreement (ACFTA) adjustment facility. This facility will be made available to the different countries and companies to enable them adjust to the opportunities offered and manage the challenges that will come with it.
For example, there are companies here that may want to begin exporting but they have to retool, so we need to make those investments. So this regional office will be nearby, make it possible for us to understand the requirements and make it possible to deploy these interventions. We have also introduced a Pan African payment and settlement system.
We are now piloting it. We are piloting it in the west African monetary zone. That will be for a few months, and we will expand to the whole continent. Discussions are ongoing with eastern Africa countries. So, our branch will be a very good vehicle not only to make it possible for people to use the pan-African payment system, but we also want to begin to offer certain credit using the payment experience we see from that system.
On top of that, the business we are doing in East Africa is about $1.5b. We want to promote intra-Africa trade to more than $4b. So that is why this branch is important. We covering Ethiopia, Sudan, South Sudan, Djibouti, Kenya, Uganda, where we are, Tanzania and Comoros.
What are you hoping to replicate here from your 20-plus years of experience?
We are the leading trade finance bank on this continent. We help countries manage episodic shocks. During the last commodity price shock of 2014, 2015 and 2016, we launched a counter cyclical trade liquidity facility. And over a two-year period, we were able to disburse on a revolving basis more than $10b. We are promoting value added exports, because we want to change the structure of Africa exports.
So the focus is to help countries build infrastructure, industrial parks, export processing zones and also individual companies to enable them to retool. But also go beyond that, to connect them to global value chains, as well as to connect into regional value chains. We also want to support the development of the infrastructure to connect not only within the region, but also across regions.
We are in the advanced stages of discussions on becoming the PanAfrican issuer of the inter-state transit guarantee — for people moving goods across borders. Today, you have multiple issuers of those transit guarantees but we, as a Pan-African institution, will issue one that can be electronically tracked, making it more efficient. All these interventions will be better achieved from our regional offices.
Well, I see opportunity for growth in trade. Let us look at international trade. I know we say its low. But I have seen estimates that informal trade is between $40b-$60b of intraAfrica trade.
We want to formalise this. But beyond that, the biggest issues we have are that even when we deal with trade information, the counter-parties do not trust themselves, which raises the cost of doing business.
So that is why you need somebody like us who stands in between those who do not trust themselves, so we can begin to build the trust. We have relationships across the continent. So if a Kenyan does not trust a Senegalese, Ugandan or a Malian, no trade happens.
But if we stand in between and say ‘do not worry, we confirm the LC from a bank you will get your money,’ it works. So we have to begin to make the banks work together across the continent, we have about 600 banks. So, what are we doing?
We have made it a point that by 2021, we will have tradelines for 500 of the banks. As we speak, we have onboarded at least 320 of the banks. And we said by 2021 we would have about $8b of trade lines across the continent. So, no one country will be able to say it does not have a line to trade with another African country.
When we have achieved this, I can tell you it will be the beginning. Because now once they trade and gain experience, they probably won’t need us anymore. Other banks will come in. And once this happens, you will see trade that had been diverted out of Africa for lack of information and trust, begin to come back to Africa. That will be the first phase of new trade.
Then the next one, because we are now trading with ourselves, things will be looking better, intra-regional investments will start occurring, new capacities will be credited and naturally, foreign investment will come.
Where have your services been most helpful in recent years?
There are so many things we have been involved in for close to 30 years. We supported Zimbabwe; we made sure they had food and fuel at their lowest moment. But going beyond that, Malawi has stabilised macroeconomically because of Afrexim Bank. And as I mentioned to you, there is the counter-cyclical trade liquidity facility. When there was a commodity price shock a few years ago, many countries had difficulties. We did not want countries to go into default for trade.
You know, once you have commodity price shocks, there is usually a backlog of Letters of Credit to be paid. If the countries do not get support to enable them adjust in an orderly manner, they default.
And that would have caused even worse problems and long-term difficulties. What caused the problem for Africa in the 1980s? But we intervened, provided the credit that made it possible for countries to adjust in an orderly manner. Today we are big supporters of South Sudan. We are today leading the effort in Eritrea. These are countries that have come out of difficulties.
What are your hopes for your new office here in Kampala?
We are hoping for good things. This is a part of Africa making good progress. We hope to add impetus to by providing the financing, the debt payment services, trade information services, the link with other parts of Africa to make the advantages you have here more pronounced.
Beyond that, just last year, we launched a fund for export development in Africa, which is a private equity fund. So we see this part of the world as a good place to operate because many of the companies that operate here need more than debt, they need patient capital to grow further.