Will Trade be the same after COVID-19?

By Ellen Ohene-Afoakwa, Regional Corporate Director – West Africa, Absa Bank

With the disruption of the global supply chain by Covid-19, there is a concern as to where Africa’s future market and trading opportunities lie. Trade and export demands have dwindled for some companies and skyrocketed for other companies. For the first time in world history, the price of the West Texas Intermediate (WTF) Crude oil slammed into negative $37 per barrel in April 2020.

The Covid-19 pandemic has taught all African economies the importance of self-reliance in healthcare, pharmaceuticals, agriculture, and PPE production. The AfCFTA could therefore not have come at a more opportune time as several African economies are beginning to look within and focus on local manufacturing and production of most essentials needs and exports.

As the government of Ghana stated in the objective response to COVID-19, we must inspire the expansion of our domestic capability and deepen our self-reliance. We have seen this in our local manufacturing industries with our pharmaceuticals and distilleries collaborating to manufacture alcohol-based sanitizers to meet the increasing demands.

How would COVID -19 affect export trade?

Export trade has been impacted by mass production shutdowns and supply chain disruptions. There is a huge supply chain challenge on the ability for businesses to ship and receive products on time due to logistic bottlenecks and limited workforce capacity. Countries that are net exporters of oil and gas will perhaps experience the biggest adverse impact. Other commodities such as coffee and copper prices will also plummet as a result of the impact of COVID-19 on export trade. The JP Morgan global Purchasing Managers’ Indices (PMIs) for March showed export orders in manufacturing sinking to 43.3 relative to a baseline value of 50, and new services in export business dropping to 35.5, suggesting a severe downturn.

Impact on the sub-region

Across the region, COVID -19 has impacted businesses and sectors differently. The hospitality sector, due to border closures and reduction in international travel, tourism and entertainment have adversely been impacted, whilst technology services providers are seeing growth as people embrace the new normal, where organizations have employees working from home, students learning online, etc.

In addition, Covid-19 has disrupted the global supply chain and this presents an opportunity for countries to look at rebalancing over-reliance on global suppliers in favour of more competitive regional and local manufacturers. This presents a huge opportunity for our local manufacturer. This is the time for local and regional manufacturers as well as exporters to collaborate to increase market share.

Financing Opportunities are available to Businesses

1. Credit facilities for SMEs:  There are both secured and unsecured loans available for the SME sector to access, and at Absa, we offer unsecured loans of up to GHS 500,000 to SMEs among other credit solutions.
2. Enterprise and supply chain development: Non-traditional bank lending solutions are provided to finance SMEs (who supply or distribute goods on behalf of a corporate organization) within Corporate’s value chain.
3. Export Credit Agency (Backed Financing): ECAs are private or quasi-governmental institutions that act as an intermediary between national governments and exporters to issue export insurance solutions and guarantees for financing. 
4. This facility enables local manufacturers and exporters to purchase equipment needed for processing to add value to our raw materials for exports.
5. It also offers facilities with longer tenure and competitive interest rates.

For example, exporters within the small-scale industries can take advantage of the $300 million guarantees offered by EXIM US to source and procure machinery and equipment from the United States for their factories.

Some examples of ECAs are Ghana EXIM Bank, United Kingdom Export Finance(UKEF), African Export-Import Bank (Afreximbank), and Export-Import Bank of the United States (Ex-Im Bank).

Taking advantage of such financing options help equip private-sector operators to add value to our raw materials through processing and thereby generating higher export value.

• Contingent liability solutions through Letters of Credit:  This provides a higher level of security to exporters. Its inclusion in a contract of sale provides possible assurance to both parties (exporters & importers) and safeguards your business by determining;
• Payment – A means of payment
• Security  – Independent  payment undertaking by the issuing bank
• Credit function  – Deferred payment terms

Opportunities for the Ghanaian business to meet the country and continent’s needs.

• There is an opportunity for upscale and collaboration of our local industries to meet both local demand and that of the continent. Africa has the second-highest urbanization rate in the world and by 2050, 56% of its population will be urban (UNDP, 2017). Demand for food in urban areas will reach $1 trillion and this is clear evidence of why local and regional manufacturers must scale up to meet the local demands as well as exports.
• Investment opportunities exist in the Agro-processing industries to add value, reduce post-harvest losses, reduce our import bill, increase our exports and expand demand for local agricultural produce.
• Developing arable land through irrigation is another key area. A report released by the African Development Bank Group (2017) noted that Africa has 65% of the world’s remaining uncultivated arable land. Ghana only has about 11 000 hectares irrigable land, with a potential to irrigate about 346 000 hectares (2010 Population and Housing Census Report/ Central Intelligence Agency – The World Factbook). This can boost our food crop harvest to meet both local and continental demands. 
• Distribution is another area of opportunity to meet the country and continent’s needs. Support services are in demand in Ghana, such as the supply and installation of cold chain equipment, packaging and factory building technology. In the distribution field, there are investment opportunities in providing post-production services needed in transport, packaging and cold vans.

Is there a silver lining in the COVID-19 crisis for Africa and AfCFTA?

There is a huge supply chain challenge. Logistic bottlenecks and limited workforce capacity that has affected the ability for businesses to ship and receive products on time. However as the old adage goes, “crisis is also an opportunity” and this is no exception. African countries can build more resilient and sustainable economies if they can do things right following the pandemic.

Covid-19 has disrupted the global supply chain and this presents an opportunity for countries to look at rebalancing over-reliance on global suppliers in favour of more competitive regional and local manufacturers. There is a huge opportunity for our local and regional manufacturers to collaborate to increase market share.

How should Ghana and Africa navigate the waters now?

• Significant attention must be given to the most sensitive part of our economy, that is, SME lending. According to the International Trade Centre and Association of Ghana, SMEs constitute about 85% of all businesses in Ghana; however, the pandemic has saddled the majority with several challenges that have affected operations and business growth. Support measures must be implemented to ease the burden businesses are going through and aid the smooth recovery of our ailing economies.

The Ghana Coronavirus Alleviation Programme put in place to support our SMEs in these challenging times is a good example. Algeria and Angola governments have put in place debt finance, employment support and business cost to alleviate SMEs adversely hit by the pandemic.

• Efforts in the current crisis should also focus on assisting strategic multinational corporations and their suppliers to preserve the value chains.  Some countries are also allowing companies in export-oriented industrial parks to supply locally, and facilitating multinational corporations’ expansion into new production lines as part of the country’s strategic re-orientation to in-demand products and services in light of COVID-19.
• We also need to keep Africa’s supply chains and borders open for business. This means expediting shipments for relief and medical consignments, paperless pre-arrival processing and digital solutions to respect social distancing. Governments need to keep on-line trade information and help desks operational to help speedy response.

The Opportunity Africa offers

Africa is a continent beaming with enormous growth opportunities. I will, however, focus on the huge potential for industrialization and infrastructure.

Huge Potential for industrialization

Processing presents an opportunity for value addition to rich raw materials as we process, package and add value. Some examples are:

• Cotton for textiles and Apparels
• Cocoa for Chocolates:  In confectioneries, Niche Cocoa Confectionary, is a bean-to-bar producer of refined chocolate, chocolate drinks, and spreads.
• Cereals – Ghana and Africa abounds in maize, millet and other cereals
• Breweries – Africa, in particular, has a low-cost beer market due to the ready availability of starch crops such as Maize, Cassava, and Sorghum.

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Apart from the above, developing export-based manufacturing in sub-Saharan Africa by increasing local production in areas such as PPEs, Sanitizers, Pharmaceuticals, Construction materials, chemical and machinery. Pharmaceuticals and protective equipment are imported largely from Europe and other COVID-19 affected countries. As global demand for these products sharply rises, the increase in prices can lead to reduced availability for Africa.  Despite the large medical aid promised by traditional donors and China, diagnostic material, personal protective equipment, and other medical equipment are in short supply. This evidently provides investment opportunities for the continent.

Infrastructure (Transport, Communication & Electricity)

• Improving infrastructure increases the chances of growing exports.

Investments and improvements in infrastructure can significantly lower production and transaction costs, thereby increasing competitiveness and expanding market access.

• An opportunity to develop Strategic facilities such as Trade harbours, financial hubs and special economic zones create avenues to improve our infrastructure to make our nations more attractive to investors.
• Develop Commute Channels such as cross-border railways, air routes, water routes, roads, etc. to ease trade and exports, as the cost of transport is often higher than the value of the goods being transported.
• Infrastructure is a key determinant of attracting investment in export-based manufacturing. In Rwanda, the favourable business climate, along with relatively high-quality infrastructure and trade logistics services, suggests it has a promising platform to attract Foreign Direct Investment into export-based manufacturing. Countries that do not have these favourable infrastructure characteristics are likely to miss the next wave of Chinese investments into the African manufacturing sector.

How do we salvage and keep AfCFTA on track amidst Covid-19 restrictions?

• Negotiations towards the AfCFTA should continue via video conferencing platforms to enable our readiness once the pandemic is under full control. The AfCFTA should also be ready for countries and businesses to utilize for recovery in areas of trade, investment, manufacturing, jobs and growth.
• Invest heavily in the continent’s telecommunication infrastructure. We need to leverage on technology to promote sensitization of AfCFTA initiatives and promote collaboration between relevant stakeholders. Ensuring internet availability and accessibility at affordable rates to the great majority of people of our people will help keep the vision on track. We also need to maintain active and multiple transactional channels to help facilitate trade activities amidst restriction.
  • Encourage cross border trade activities: enforce commitment from AfCFTA nations to allow goods and services to freely move across African countries while ensuring the highest standard of hygiene protocols.
• Ease the cost of Transacting: Collaboration amongst financial institutions, telecommunications companies and Fintechs to improve convenience and reduce the cost of cross border transactions to promote trade as well as support the expansion in e-commerce channels.
• Digitization: Movement restriction also offers an opportunity for the continent to move away from our traditional ways of trading and leveraging on innovative solutions to promote trade.  We need to create and trade over digitalized commodities and stock exchange markets.

Conclusion

There is a great potential for exponential growth in export trade if we take the right steps. COVID-19 provides an opportunity for us to take more concrete steps towards realizing the African Continental Free Trade Area (AfCFTA) by:

• Focusing on increasing local production capacity,
• Investing in new technological developments in our agricultural and production process and
• Harmonizing our trade-related regulations, customs controls, and reducing both tariff and non-tariff barriers.

We should be able to boost Intra-Africa trade from the 18% of total exports, (as at 2018) to meet and even exceed that of our European and Asian counterparts whose intra-continental trade are well above 50%. 

Africa has what it takes to overcome the challenges COVID-19 has brought and redefined export trade as we leverage on our wealth of human and natural resources for expansion.