The continent-wide phenomenon of failing to add value to raw materials for export and the ensuing overreliance on processed imports is a key reason for the unfavourable exchange rates experienced by many local currencies and ranks as a primary factor responsible for the high cost of capital. Consequently, businesses, particularly Small and Medium-sized Enterprises (SMEs), are unable to access the requisite finance at competitive rates.
This is according to the Chief Technical Advisor at the Secretariat of the African Continental Free Trade Area (AfCFTA), Prudence Sebahizi, who made this point at a recently held Absa-UPSA Law School Quarterly Banking Roundtable on the role of banks in trade financing, where he argued that increased industrialisation, an emphasis on value-addition as well as the consumption of locally-made goods and services, will invariably make finance more accessible to businesses on the continent.
Noting that the FTA is the ideal vehicle to drive this change, he said such a move will ensure that African countries are able to determine prices of commodities, as opposed to what pertains now; where they are merely price-takers.
“For so long, Africa has been dependent on the importation of finished products from outside the continent, whilst we only sell our raw materials. We are busy sending our money outside the continent and this has made the cost of accessing money locally, very high because every cash that we have is sent outside,” he said.
The level of exchange rate volatility can only be addressed by examining the level of what we produce on the continent, vis-a-vis what we consume… currently, we do not determine the price of any major commodity such as gold or oil, it is imposed on us. Our currencies as thus not strong enough to determine anything on the global financial market. However, the AfCFTA will change that trend as we will consume what we produce, send our money within the continent and this will bring down the cost of capital.”
Mr. Sebahizi also stated that digitalisation and deeper integration of financial and capital markets and their related systems will lead to increased customer data-sharing, which will result in easier access to capital for creditworthy businesses across the continent.
He added that a more robust regulatory framework for financial services under the AfCFTA Protocol for trade in services, which includes financial services, will improve the movement of financial products and services across the continent and make them more readily accessible and at a lower cost. “Previously, national and regional level policies had made it complicated to have access to financial services outside one country and this will be remedied as AfCFTA progresses,” he remarked.
On his part, the Regional Head of Trade responsible for East and West Africa at Absa Bank, Kobina Solomon, whilst extolling the virtues of a possible common currency and easier means of payments and settlement, said businesses must also take certain practical steps to ensure that they are not only able to access capital but access it in a manner that reduces avoidable cost.
Noting that banks are playing a crucial role in providing advisory services, he said businesses should endeavour to receive payment in a third currency, especially the dollar, as it is then easier to extend dollar-based facilities to them.
He also asked businesses to take advantage of commercial arrangements that allow them to receive factors of production on credit and pay at a more favourable time, as opposed to taking out long-tenured loans and having interest accumulate. “If you take a look at the high-interest rate regime in a lot of markets, there is a way that clients can actually reduce the cost of the loans that they access. Clients that are currently into production should endeavour to be paid in dollars as it will make it easier for loans to be extended to them in dollars,” he said.
“The cost you pay on a loan is the function of three things; interest rate, principal, tenure. Oftentimes, we see that, based on the model by clients, which we consider to be quite inefficient, they borrow money now, use it to pay in advance for imported inputs, wait for it to come, use it as part of the manufacturing process before converting it to cash.
That is inefficient, there are trade solutions such as contingent liabilities that are available, even letters-of-credit that will give comfort to suppliers to provide goods without having to borrow in advance, as that doubles cost and leads to higher cost of loans. As you go about your commercial negotiations, kindly involve us early to guide and advise you to maximise your commerce efficiency,’ he explained.