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WTO annual report reminds trade finance gap as a main constraint to the African trade expansion

The World Trade Organization (WTO) has made available its latest Annual Report, the periodic publication describing the organization's activities over the past year. Apart from revealing plans for the revitalization, by 2024, of the Appellate Body (which is currently paralyzed due to the fact that all its seven members have not yet been appointed, as we discussed in this post), the report once again highlights the problem of Africa's trade finance gap as a major constraint to African export development. In an era of enduring discussions about the potential of the AfCFTA and how this agreement can accelerate intra-African trade, it is important to keep this constraint in mind.

In October 2022, the WTO, in collaboration with the International Finance Corporation (IFC), released a report on trade finance in West Africa, which we described in this post. The report found that trade expansion in four West African economies (Côte d'Ivoire, Ghana, Nigeria, and Senegal) is severely constrained by the limited and costly access to finance by local firms. It reveals that the cost incurred by companies in West Africa to obtain financing for their trade operations is disproportionately higher than in other African regions. For example, it is explained that in the four analysed countries, the cost for opening a letter of credit varies from 2 to 4 percent with respect to the value of the transaction. In more advanced countries, this cost does not go beyond 0.50 percent.
At continental level the situation is not much different. The WTO Annual Report recalls that the trade finance market in Africa barely covers 40 percent of total merchandise exports and imports. This is almost half of the global average, which ranges between 60 to 80 percent.

Trade finance and, in particular, export credit financing and insurance (which in Africa are expensive and very difficult to obtain), are essential for exporters to mitigate the risks involved in international trade. This is why Africa is still today, predominantly, a cash economy.

In a nutshell, the lack of trade finance in Africa means that African companies receive little support from banks to expand their business activities beyond the national borders of the States from which they operate. This is unfortunate, as it is known that the vast majority of businesses on the continent suffer from huge difficulties in cash flow and working capital. In an economy like Africa, the banking system should be the main pillar of trade expansion as well as of investment and economic development.

This is not yet the case, at the moment. And as long as this situation will continue, the increase in intra-African trade heralded by AfCFTA evangelists will never materialize, remaining stuck in the status of untapped potential.


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