Posted: April 4, 2016
Keynote Address for the 2016 ICC Banking Commission Annual Meeting for Mr. Mzwandile Masina, MP Deputy Minister of Trade and Industry
|“Trade and Supply Chain Finance: Enabling New Trade Corridors in and with Africa”
It gives me great pleasure to address you this morning. The global economic crisis has triggered a slowdown in global economic growth that is manifesting itself in a demand-driven fall in international trade exacerbated by the deficit of credit and trade finance.
It extends to falling commodity prices; declining remittances; contracting foreign direct investment (FDI); and the potential of declining official development assistance (ODA). These effects have been superimposed onto the ongoing global food crisis, volatile energy prices, and climate-change challenges.
Consequently most developing countries are being heavily hurt through declining exports, rising unemployment, and falling family income; bringing millions of people back into poverty or aggravating the conditions of those in extreme poverty.
This has raised the need for global leaders to seek ways to reignite development and poverty-reduction efforts globally and in developing countries, and on setting in place the conditions that will avert future crises and facilitate a sustainable process of economic transformation across the globe.
For the African Continent this is especially challenging in view of low levels of development and heavy reliance on commodity exports. The global downturn has affected commodity prices and thus brings to the fore the urgent need to transform African economies from commodity-exports to industrialized countries, and to develop intra-Africa trade anchored by a new manufacturing base.
Already there are visible improvements in intra-Africa trade. The nominal value of intra-Africa exports has increased from US $27.6 billion in 2005 to $87.1 billion in 2014. This represents an average annual growth rate, in nominal US Dollar value, of 13.6% over this period.
Underlying this is a trend that marks a percentage increase in internal Africa trade compared with the rest of the world. In 2005 African countries were a destination for 9.1% of the global exports of Africa. By 2014, this number reached 15.7% in 2014. This shift becomes even more pronounced when crude oil, which is largely exported to parties outside the continent, is excluded.
In that case African countries have grown from 15.1% in each other’s export baskets to 23.7%, over the period 2005 to 2014. This 2014 number is comparable to intra-ASEAN trade, a bloc that is often put forward as having relatively high levels of intra-trade.
Intra-Africa trade will only increase if African countries start to produce the manufactured goods that their neighbours need to import. It is therefore essential to develop and diversify the manufacturing base across Africa.
Policy makers in Africa have realized the critical importance of developing and diversifying their manufacturing sectors. It is for this reason that we have decided to implement a development integration approach. In the initial design of African integration efforts, the traditional linear integration model, as devised and implemented in the European Union integration project, was followed.
It soon became clear, however, that this is not a suitable model for African countries, due to the largely under-developed economies and also wide disparities in levels of economic development. The linear integration model assumes the existence of a production base from which to benefit in liberalized trade, and also assumes that conditions exist under which efficient trade can take place.
These assumptions mostly do not hold when it comes to intra-Africa trade. It was therefore necessary to take a step back in order to simultaneously develop suitable trading conditions and a production base from which to trade, supported by market integration to stimulate industrial development. In the absence of this, an integration effort holds relatively little benefit for most members, and therefore would not be sustainable.
Recently, integration in SADC and the Tripartite is being undertaken in three distinct pillars: market integration through the creation of a free trade area; industrial development; and infrastructure development. The link between the latter two pillars is well recognised. Market integration (i.e. trade liberalization) supports industrial development; and infrastructure development, planned and coordinated from a regional perspective, supports both industrial development and market integration.
Competitiveness in industry critically requires a sizable market – something which no SADC, Tripartite or African country on its own can offer. Even in the case of the largest economy in SADC – South Africa, with a GDP of US$349 billion and population of 53 million people – pooling the Tripartite market multiplies these numbers to US$1.2 trillion and 626 million people, respectively.
South Africa regards the industrial development pillar to be very important for the success and sustainability of African economic integration. The aim is to promote the development of regional value-chains among African countries to promote industrial development.
Industrial development and diversification is essential to enable African countries to trade amongst themselves and so benefit from free trade agreements, whether in existence already or being negotiated such as the Tripartite FTA and Continental FTA.
The striking and well-known feature of most African economies is the concentration of economic activity in the primary sector – agriculture as well as mining, gas and oil; and on the other side of the spectrum the presence of a services sector. The relatively high proportion of GDP contribution from the services sector in some countries, does not necessarily demonstrate a large and thriving services sector, but reflects the relative absence of a secondary/manufacturing sector.
Importantly, the large services sector in most African countries comprises predominantly non-tradable services, such as retail trade, where labour productivity is also low. It is this absence of, or at best an underdeveloped manufacturing sector, that is the immediate concern of economic transformation in Africa.
Not only are most African economies lacking a manufacturing sector, but they are also significantly concentrated in very few products. There is a need to change the structure of and diversify African economies. Structural transformation refers to the reallocation of economic activity across the broad sectors: agriculture, manufacturing and services.
Clearly the need is to draw more economic activity into the manufacturing sector in order to develop that. Without structural transformation, it is doubtful whether Africa can create the millions of higher-productivity jobs needed to lift workers out of agriculture and the informal sector.
The development integration approach requires integrated planning through the establishment of trade corridors. The aim is not to only promote regional transport routes as a means of transporting goods and services or as a gateway for land-locked countries, but most importantly use corridors as a tool for stimulating social and economic development in the areas surrounding the route.
It involves strengthening the physical facilities needed for efficient and effective transportation and trade by establishing and revamping transport links; improving the quality of infrastructure, increasing carrying capacity, and dealing with related safety issues; upgrading infrastructure associated with manufacturing activities; encouraging multimodal structures; and upgrading border areas.
As a country we have a targeted Spatial Development Initiative (SDI) programme. The SDI methodology is a simple and effective process to unlock the rich resource base of the region by facilitating investment-led growth and, in the longer term, contributing to the establishment of integrated development and manufacturing platforms.
The programme is implemented through a multi-pronged approach and relies on bilateral agreements and cooperation between South Africa and SDI participating governments, which are mainly in SADC.
Continentally, the African Union has identified eight (8) Corridors that are flagship projects to facilitate interconnectivity, promote industrial development, boost intra-Africa trade and facilitate movement of goods and services. These are driven through the Presidential Infrastructure Champion Initiative (PICI).
The African continent has endorsed the principle of using Corridors to promote industrialisation. As such, linked to the Corridors, is a targeted programme to identify untapped manufacturing potential and promote the development of regional value-chains.
Furthermore, negotiations on trade in services have been prioritised in SADC, the Tripartite and the Continental FTA processes. It is recognised that services are critical to support an industrial led growth. The priority sectors include; financial, construction, energy, tourism, communication and transport services.
The developmental integration approach raises additional financing needs on the continent: not only for trade, but very importantly also for industrial and infrastructure development. The role of trade finance in international trade is quantitatively important: Some estimates report that up to 90% of world trade relies on one or more trade finance instruments.
A Report submitted by a Study Group established by the Committee on the Global Financial System in January 2014 shows that funded loans are often dollar-denominated as well, but the overall picture is more mixed. In India, more than 90% of import loans and many export loans are denominated in US dollars. In China, trade finance loans are denominated in US dollars and in renminbi.
In Brazil, the most common local trade finance loans (called ACCs) are denominated in local currency, but funded with lines in foreign currency (mainly in US dollars) that are repaid with payments in foreign currency from export proceeds. In advanced economies, funded loans to resident exporters and importers, in contrast, seem often to be denominated in domestic currencies.
This is the case for 80–90% of the trade finance loans in Italy, 60% in Hong Kong and 45% in France. An analysis of the most cost effective mechanism of providing trade finance is required. This is more critical now given the need to drive economic activity in Africa.
International trade has evolved over the past several decades from the simple paradigm of manufacturing a final product in one country and selling it in another to a world in which products often cross several borders and accrue value added in multiple international locations before going to market.
This fragmentation of the production process, known as a global value chain (GVC), involves a high volume of trade in intermediate parts before final goods are assembled. This requires rethinking international trade and finance.
In this regard the Third International Conference on Financing for Development in July 2015, acknowledged that lack of access to trade finance can limit a country’s trading potential, and result in missed opportunities to use trade as an engine for development.
It committed to exploring ways to use market-oriented incentives to expand WTO-compatible trade finance and the availability of trade credit, guarantees, insurance, factoring, letters of credit and innovative financial instruments, including for micro, small and medium-sized enterprises in developing countries. It called on the development banks to provide and increase market-oriented trade finance and to examine ways to address market failures associated with trade finance.
With regards to Africa, the challenge for the Banking Sector is to ensure that financing mechanisms support the implementation of the development integration agenda, including all its three pillars. The simultaneous implementation of the pillars is necessary to promote sustainable development in Africa.
In conclusion, the current global downturn brings to the fore the necessity and urgency to transform African economies from commodity based to industrialized countries. This requires a focussed agenda to promote industrial development. This work programme will need to be underpinned by an infrastructure work programme to promote inter-connectivity and boost intra-Africa trade.
Financing for trade remains important. There is large and growing scope in this field for banks such as members of the ICC Banking Commission. Financial institutions which assume the risk of companies can exercise considerable influence – in some cases control – over investment and management decisions.
In recent years, the conventional view that financial intermediaries should confine their traditional role of mobilizing resources and attracting capital inflows seems to have lost much of its ground. A global perspective on the role of banks reveals a more pro-active and positivist approach to the bank’s role in facilitating the achievement of broader goals of economic development.
This requires a critical assessment of the emerging credit requirements not only in terms of quantum but also in terms of their diversity and priority. It may be noted that the credit requirements of the economy are dynamic in nature and are basically a function of the way the economy expands in terms of infrastructure development, commodity specialization and productivity gains.
Further, as development gains momentum, there is a need to step up the resource mobilization process as well. The key issue is whether we are providing adequate funding to the productive sector in the economy and whether the funding instruments are responsive enough to the needs of industrialists.
An aspect that you may also want to pay attention to and possibly make inputs to policy makers on, is the matter of trading in African currencies, rather than (mostly) Dollar-based. It is an anomaly that African countries trade among themselves in the currency of a non-regional party.
While a monetary union has been mentioned in some blocs for some time, it is mostly accepted that the widely varying levels of development might make that a less suitable ambition at this time. The matter of trading in African currencies, however, might be a low hanging fruit.
From a policy perspective, however, probably a much larger potential for the financing sector could be in financing industrial development, cross-border value chain activities (which inevitably will require trade flows), and infrastructure development.
These elements are critical components of the Developmental Integration Model, and indeed of Africa’s development. It is also a critical element of sustainable development, as elaborated in Goal 9 of the Sustainable Development Goals. This is where the support of the financing system is critically required.
I wish to thank the Banking Commission of the International Chamber of Commerce for honouring me with an invitation to address this meeting. Your work and discussions here over the next two days are very important to assist many African countries in advancing their economic development. I thank you, and wish you fruitful deliberations.