In the past, we have discussed the AFCFTA and infrastructure, where we highlighted in the context of the AFCFTA the need for infrastructures like Transportation infrastructure, storage infrastructure, Technology infrastructure, Power infrastructure.
Today, we shall be examining financial infrastructure as an essential tool to drive the objectives of the AfCFTA*.
Capital is needed to accelerate the diversification of sources of growth and trade across the region, and ultimately to transform African economies in the medium and long terms. According to the African Development Bank (AfDB) Trade Finance in Africa survey report, bank-intermediated trade finance devoted to financing intra-African trade has remained consistently low across Africa[1]. Even though trade finance continues to be a relatively low-risk activity for commercial banks across the region, the share of bank-intermediated trade finance devoted to intra-African trade has, on average, accounted for less than 20 percent of their trade finance portfolios. This trend suggests that intra-African trade has been relegated to a lower-priority status, despite its potential for economic transformation and macroeconomic stability.
A recent review of policy options for sustaining the financing of African trade argues for financial deepening and integration within the region, with a focus on the development of a regional financial infrastructure for cross-border trade and investment. Key components of that financial infrastructure would include harmonization of regional payment systems to further facilitate cross-border payments, creation of swap arrangements between African central banks, and a multi-currency clearing center in the region, to reduce the risks from trading in several different currencies[2]. The review equally stresses the need to strengthen the coordination of a growing number of pan-African banks that are playing an increasingly important role in financing cross-border investment and trade.
There are initiatives which aim to transform African capital markets into effective instruments for global competition for capital. They include:
(1) the African Exchanges Linkage project to harmonize trading rules as well as settlement cycles and listing fees across Africa’s leading exchanges; and
(2) the pan-African Stock Exchange spearheaded by the African Securities and Exchange Association, to accelerate financial integration with the goal of increasing the diversification of asset allocation across geographies and sectors, while addressing the liquidity challenges that have consistently constrained the promotion of African trade and investment.
Similarly, the development of the regional sovereign bond market in the West African Economic and Monetary Union has the potential to improve the coordination of security issuances and market oversight. This will eventually enhance the ability of member states to finance their operations on local financial markets.
The ongoing process of financial market integration at the regional level is providing governments with a wider market for their securities as well as increasing the prospects and options for extending maturities while lowering yields, compared with national issuances. Furthermore, these regional initiatives are mitigating the liquidity constraints and exchange risks that have been major challenges to long-run growth and macroeconomic stability. The development impact of financial market integration will be further enhanced by digitalization which has the potential to catalyze the pooling of resources towards long-term investment.
A growing number of institutions are already drawing on digital transformation to foster financial integration and boost trade. For example, the African Export-Import Bank has designed its Pan-African Payment and Settlement System (PAPSS) to resolve the challenges associated with the fragmented and costly cross-border payment and settlement infrastructure inherited from the colonial era. The new system is fully aligned with the IMF’s farsighted recommendation to increase the use of local currencies in cross-border trade to reduce both transaction costs and liquidity constraints. It also has the potential to significantly raise efficiency by disintermediating correspondent banking relationships for intra-African trade payment flows, while at the same time integrating formal and informal trade to boost both intra-African trade and overall African trade[3]. Also, it could lead to collaboration between intra-African asset allocators and reduce overall currency risks.
Private sector involvement is also necessary as financial drive for AfCFTA, this can be helped through the revitalization of national development banks as it is also particularly important for catalyzing private investment. Under the private sector, underwriters are as important as banks in serving as a means to achieving the purpose of AfCFTA. Drawing on a wide-range of risk-mitigating instruments and financial products, insurance companies have the potential to de-risk investment and crowd in private financial resources that are critically needed for the development of industrial and manufacturing capacities to sustainably address supply-side constraints and boost both extra- and intra-African trade[4]. In support of this, the Federal Government has advised insurance companies in Nigeria to explore the huge opportunities in AfCFTA for market expansion and stability.
CONCLUSION
The African Continental Free Trade Agreement is set to boost reduction of tariffs and enhance intra-African trade. However, trade without the infrastructure, financial or otherwise, to facilitate it would not yield exponential dividends.
As the life source of trade, finance is the fuel needed to power the diversification of sources of growth and trade in implementation of the AfCFTA. While we commend the ongoing Pan-African Payment and Settlement System (PAPSS), National development banks should be part of the emerging financial infrastructure for economic transformation, because both short- and long-term finance is required to reduce the risks of maturity mismatch to keep countries on a path of fiscal and debt sustainability in the implementation of the continental trade integration reform.
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LATEST UPDATES ON AfCFTA
- AfCFTA receives boost as cross-border payment system takes off.
African Export-Import Bank (Afreximbank) and the African Continental Free Trade Area (AfCFTA) Secretariat have announced the commencement of the Pan-African Payment and Settlement System (PAPSS), a financial market infrastructure to enable instant, cross-border payments in local currencies among African markets launched two years ago. READ MORE HERE
- Group calls for AfCFTA Forum on Railway
A rail advocacy group, African Railway Roundtable, has called on the African Union Development Agency – New Partnership for Africa’s Development (AUDA-NEPAD) and the secretariat of the African Continental Free Trade Area (AFCFTA) to urgently convey an AfCFTA Railway Forum. READ MORE HERE
- AfDB to incorporate AfCFTA in its country, regional integration strategies –Adesina. The African Development Bank (AfDB) has said it would incorporate the African Continental Free Trade Area Agreement (AfCFTA) into its country and regional integration strategies. READ MORE HERE
- How blockchain adoption for payments will aid AfCFTA goals – Adeyemi Adepetun.
At a time when cross-border trading is high on the agenda with the African Continental Free Trade Area (AfCFTA) agreement, the Chief Technical Officer of Digital Encode Limited, Dr. Oluseyi Akindeinde, believes that the adoption of blockchain for payments will fast-track the achievement of the trade agreement’s objectives. READ MORE HERE
[1] Annual Report 2017 – African Development Bank
[2] IMF Annual Report 2019
[3] ibid
[4] 20.12.28-AfCFTA_Fofack[1].pdf
