Anesu Gamanya, ECDPM Great Insights magazine, Volume 9, Issue 1, 2020
High levels of political and economic risk make exporting to other African markets a risky proposition for many African firms, particularly small ones, but greater provision of affordable trade insurance can help mitigate these risks and encourage African firms to engage in intra-African trade under the AfCFTA.
Now that the fanfare has died down, the signatories to the African Continental Free Trade Area (AfCFTA) Agreement are rolling up their sleeves to implement what will become the world’s largest regional trade community. The AfCFTA aims to facilitate intra-African trade by removing tariffs and addressing the various non-tariff barriers that have long hindered trade between African countries. However, another significant obstacle to intra-African trade remains: the high level of political and economic risk on the African continent.
Such risk is not unique to Africa, as Brexit and the recent trade dispute between China and the United States demonstrate. However, Africa is host to a high proportion of ‘unstable’ countries (Figure 1). A significant number of African countries face civil unrest, ranging from armed conflict to election violence. Growing government debt is another big risk factor in Africa.
The unpredictable nature of political and economic risk and the fact that such risk is beyond the control of the business community creates uncertainty, which reduces the willingness of African businesses to trade with businesses and customers in other (risky) African markets. And by reducing African firms’ willingness to trade with other African markets, political and economic risks can significantly undermine intra-African trade under the AfCFTA.
Source: Marsh Country Risk Map 2020
In the long term, major reforms and institutional strengthening are needed to address political and economic risks and create a stable environment that fosters intra-African trade. These, however, will take time. In the short to medium term, trade credit insurance (also known as export credit insurance) offers a financial instrument to help African businesses export to high risk markets within Africa and benefit from opportunities created by the AfCFTA.
Trade credit insurance is an insurance policy and risk management product typically offered by private insurance companies and national export credit agencies (ECAs) to exporters wishing to protect themselves from the risk of delayed payment or non-payment by customers buying on credit. In the case of international trade, non-payment can often result from political risks such as currency inconvertibility, political violence and expropriation of assets. Trade credit insurance is therefore important for cross border transactions involving countries with high political and economic risk, like in Africa, where it can be difficult for businesses to recoup losses incurred from non-payment. Such losses can be particularly devastating for small and medium-sized enterprises (SMEs), which are less able to absorb the impact of non-payment.
In Africa, trade insurance is offered by private insurers, both local and international, as well as by national ECAs. In addition, the African Trade Insurance Agency (ATI) and the African Export-Import Bank (Afreximbank) provide trade insurance products across the continent, largely through financial intermediaries such as commercial banks. However, despite these providers, there is still a large gap in the provision of trade insurance in Africa.
Larger institutions such as ATI and Afreximbank tend to offer trade insurance products to or through sovereign entities, financial institutions and large businesses. Private insurers, on the other hand, avoid taking on high-risk trade transactions or high-risk clients such as SMEs because, unlike ECAs, they are not backed by governments. National ECAs are meant to fill this supply gap, but they often have limited financial resources for underwriting insurance products. As a result, African firms, particularly African SMEs, seldom obtain trade insurance. In South Africa, for example, where the trade insurance market is relatively mature, only about 4,500 out of 150,000 businesses that could potentially use trade insurance actually obtained it.
Filling the gap in the provision of trade insurance in Africa can help African businesses, especially African SMEs, seize opportunities for expanded intra-African trade. But closing this gap will require mobilisation of significant financial resources and capacity. Implementation of the AfCFTA will likely increase demand for trade insurance, as African businesses look to enter new markets. This provides an opportunity for ATI, Afreximbank, development finance institutions, national ECAs, private insurance providers and other relevant actors to explore innovative public-private partnerships that can help boost the supply and availability of trade credit insurance in Africa. These institutions can bring their unique and complementary resources and expertise to such partnerships.
Regional and continental institutions, such as ATI and Afreximbank, bring financial clout and creditworthiness. These institutions have significant financial resources and, given their creditworthiness, can mobilise more from international sources. National ECAs can help to identify potential exporting firms in their respective countries, while private insurers can bring their industry expertise. Partnerships between these actors can mitigate the risk that each of the institutions would have to underwrite on their own. Less risk will encourage national ECAs and private insurance providers to take on the riskier trade transactions usually associated with SMEs.
The South Africa – Africa Trade and Investment Promotion Programme (SATIPP) provides an example of such a partnership. This programme is a partnership of Afreximbank with the Export Credit Insurance Corporation (ECIC) of South Africa to facilitate the expansion of South Africa’s trade and investment with the rest of Africa. Part of the programme supports activities of South African SMEs in regional supply chains by offering credit facilities and other risk mitigation instruments.
By facilitating the supply of more affordable and accessible trade insurance to African businesses, particularly SMEs, partnerships such as SATIPP can give businesses the confidence to take advantage of the opportunities created by the AfCFTA. That could help boost intra-African trade and achieve the objectives of the AfCFTA.
About the author
Anesu Gamanya is a Project Analyst at International Financial Consulting LTD, a Canada-based firm providing advisory services to national, bilateral and multilateral organisations around the world.
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Photo: Luanda skyline, Angola. Credit: David Stanley/Flick