Amid great fanfare 44 African countries signed the long-awaited African Continental Free Trade Area (CFTA) earlier this year. The bloc is expected to boost intra-African trade--pegged at less than 20%--by eliminating import duties and scaling back tariffs. If fully implemented, a market of 1.2bn people with a combined GDP of $2.5 trillion will be created.
Efforts to create a free trade grouping date back to the establishment of the African Economic Community under the Abuja treaty in 1991. In this context, therefore, the CFTA should be celebrated. Nonetheless, it remains more of a beginning than an end to overcoming intra-African trade barriers.
"The political act of signing the free trade area will not, on its own, promote intra-African trade," says Benedict Oramah, president of the African Export-Import Bank (Afreximbank).
On this note, Moody's, an international credit ratings company, argued shortly before the deal was signed that the CFTA may improve the region's credit profiles but "Africa's under-developed infrastructure, non-tariff barriers and finance constraints will limit the potential benefits."
A 2017 report by the African Development Bank (AfDB) estimates an annual $90bn trade finance gap on the continent. If enterprises with cross-border trade ambitions struggle to access finance then the objectives of CFTA may not be properly met.
Trade finance constraints
As it stands banks support about one third of total trade in Africa. However the share of bank-intermediated trade finance devoted solely to intra-African trade stands at a modest 20%, according to AfDB. Of this percentage, well-known and large corporates take the lion's share, but small to medium-sized enterprises (SMEs) and first-time applicants face significant challenges in accessing trade finance facilities from banks.
For the financiers there are a number of associated risks. Saad Sheikh, head of private investments and portfolio operations at TLG Capital, a private investment firm in Africa, points to the lack of robust credit rating systems. This makes it hard to appraise a client's credit risk and means that defaults are met with very few consequences. "In Europe if you renege on a contract as an entity or country then your credit rating gets impacted," he says. "In Africa your credit rating doesn't hold that much importance."
Egypt, for example, has been attracting investment despite its rating six levels below investment grade by Moody's--one level below Nigeria...