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Europe remains one of the most important continents for African trade, but recent years have seen a decline relative to other regions, with a notable uptick in flows from China and MEA regions.
Prior to COVID-19, Africa’s trade finance gap was closing, decreasing from $120 billion in 2011 to around $81 billion in 2019.
However, the macroeconomic disruptions and geopolitical uncertainties that followed have caused that gap to widen again. In the years following, Africa’s recorded cross-border trade has grown relatively modestly in recent decades and currently accounts for between 2-3% of global trade.
Trade agreements are key. The EU maintains open and transparent trade policies, albeit they can be somewhat fragmented.
Post-Brexit, the UK has actively sought to negotiate or refresh trade agreements, resulting in several Economic Partnership Agreements with African nations.
In early 2024 the UK will host the UK-African Investment Summit with the aim of strengthening UK-Africa ties further, another significant indicator of the optimism and opportunity surrounding the continent.
International diplomacy and initiatives are a vital step forward in closing Africa’s trade finance gap, but there is further reason to be optimistic as we move towards a golden era of digitalisation in trade finance.
The transformative potential of digital trade solutions is vital to empowering businesses through technological innovation and collaboration. By automating and streamlining trade finance processes, digital tools can significantly reduce costs, foster inclusivity, and enhance the availability of financing for African businesses.
1. Collaboration is key
The pandemic has accelerated the adoption of digital trade finance, beginning a transformation of an industry that remains highly paper-based. These manual processes slow down access to finance and increase the cost and complexity which further exasperates the challenges faced by SMEs.
However, while innovative technologies are readily available, their efficacy relies on regulatory and legal reforms. This makes collaboration between policymakers, banks, financial institutions, and development finance institutions (DFIs) paramount.
Initiatives such as the African Continental Free Trade Area (AfCFTA) provide a further avenue for collaboration and establishing standards tailored to African trade while remaining aligned with global standards. AfCFTA, underpinned by robust political momentum, offers a prime opportunity to dismantle barriers to trade, and digitalisation is the cornerstone.
Efforts within the AfCFTA framework are continuously focusing on implementing policy advice, adjusting regulations, and setting up digital norms, creating a favourable environment for digital trade.
2. The ESG convergence
In the post-pandemic, AfCFTA-enabled, hyper-digital world, trade technologies and environmental, social, and governance (ESG) principles are converging and are of particular importance to global investors. This is paving the way for impactful and sustainable transformation across economies and societies.
European consumers are increasingly socially and environmentally aware and prioritise seeking out products which have appropriate certifications. Whilst this could present a barrier for some exporters, it unlocks a significant opportunity for those able to comply.
There is an important need for digital supplier financing solutions which directly influence supply chains and align with sustainability principles.
As a consequence, corporate buyers can accelerate the payment collection of trade receivables for their suppliers, offering instant liquidity. This approach not only bolsters the sustainability of suppliers’ financial well-being but also contributes to a more robust and resilient supply chain for corporate buyers.
3. Empowering SMEs
Digital trade technologies hold significant benefits from an ESG perspective, particularly through sustainable financing solutions. These solutions focus on aiding SMEs, including women and young entrepreneurs, who make up approximately 80% of Africa’s economic activities.
It’s vital that there is a drive towards empowering SMEs with more inclusive access to finance. In recent months The African Export-Import Bank (Afreximbank) has proposed the formation of public and private Export Trading Companies (ETCs) to bring together the continent’s SMEs so that they can compete effectively in international markets.
Additionally, the industry needs to focus on the development of digital solutions to help with day-to-day financing concerns, which take into account local needs and nuances.
Further, to level the playing field, there must be an emphasis on creating solutions that reduce the cost of these instruments and the complexity which can create barriers to access.
A promising future for African trade
As Africa continues to promote itself as a centre of global trade, the synthesis of trade technologies, innovation, and ESG principles is vital for the continent’s future growth and prosperity.
Integration and adoption of digital platforms will require pulling a combination of levers to solve the challenges faced by SMEs. The easy win will be the development of innovative new technology, and there are already some notable examples of this.
But without regulatory and legal reform and increasing the necessary support for foreign currency liquidity, they will gain limited traction.
Despite hurdles posed by global geopolitical shifts, inflation, and supply constraints, Africa’s steadfast commitment to economic growth through trade remains unwavering. The increasing drive towards digitalising trade finance emerges as a beacon of hope in the face of these challenges.