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Africa payment series – a view from the African Development Bank

Africa payment series – a view from the African Development Bank

Business Intelligence,
17 September 2018 | 5 min read

Driving growth in Africa – the role of the financial infrastructure in boosting intra-African trade

By Moono Mupotola, Director of Regional Integration, African Development Bank

In June 2018, Swift published a white paper on Africa’s transaction flows. Using Swift data, we’ve mapped trade flows against financial flows, revealing a unique perspective on Africa’s transaction patterns. We look at how transaction banking has changed in Africa over the last five years and identify potential drivers for change and their impact on banks doing business in Africa.

 

We also spoke to industry leaders in Africa to hear their thoughts on the future of banking on the continent. Here, Moono Mupotola, Director of Regional Integration at the African Development Bank, looks at how to drive growth in Africa.

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Africa Payments: Insights into African transaction flows
Africa Payments: Insights into African transaction flows

Africa is still rising. Despite challenging global economic conditions over the last five years, African economies have shown increased resilience. Real output is growing steadily and faster than projected.

The continent’s strong economic growth over the past two decades was not met by accelerated industrialisation. On average, African industry generates $700 of GDP per capita, less than a third compared to Latin America ($2,500) and barely a fifth in comparison to East Asia ($3,400). Low-tech products and unprocessed natural resources make up for more than 80% of Africa’s exports in many of the continent’s largest economies. This leaves them vulnerable to external shocks like fluctuations in commodity prices, decreasing external demand and extreme weather conditions.

Structural economic transformations and diversification can be truly transformative and key drivers of sustained, inclusive economic growth. However, diversification remains timid in many African countries. Nations like Mauritius are making progress, shifting from a sugar-dependent economy to a regional financial services hub. Botswana has also embarked on a bold journey to diversify its economy by positioning itself as a diamond cutting, polishing and marketing centre. Rwanda is also winning on the diversification front by slowly transitioning into an innovation and technology hub, while Ethiopia is poised to become a manufacturing hub. However, the diversification and transformation challenge remains for many others.

Countries with more advanced manufacturing sectors hold a potential for growth if they can access a larger less-fragmented African market. The signing of the landmark continental Free Trade area (CFTA) by 44 countries in Kigali in March 2018 offers hope for increased intra-African trade. Similarly, the African Union’s Agenda 2063 calls for increased intra-African trade from the current 16% to over 25% by 2025.

While the free flow of goods and services is crucial in boosting intra-regional trade, the movement of financial flows across borders is equally important.

However, while the free flow of goods and services is crucial in boosting intra-regional trade, the movement of financial flows across borders is equally important. It has been five years since Swift addressed the issue of movement of financial flows in Africa and it is still clear that foreign currency remains the preferred payment method when trading across Africa and globally. However, recent data released by Swift indicates a shift towards intra-Africa clearing and trade, and a rise in the use of local currencies.

While the US dollar still dominates, it is releasing its hold. 51.1% of transactions from Africa were denominated in dollars in 2013 compared to 45.1% in 2017. A significant increase can be seen in the use of local currencies, especially the West African franc and South African rand. Payments in franc increased from 4.4% in 2013 to 7.3% in 2017 while transactions in rand increased from 6.3% to 7.2%.

The Central Bank of the West African States and the Southern African Development Community’s Integrated Regional Electronic Settlement System have played a key role in supporting this. The value that regional harmonisation plays in promoting sustainable economic development is undeniable.

This is why the African Development Bank has supported similar initiatives across the continent, including the East African Payment System and the West African Monetary Zone’s project to link payment systems. Likewise, in support of the CFTA, Afreximbank is working on establishing a Pan-African Payment and Settlement Platform (PAPSP), which will not only lower transaction costs but also facilitate informal cross-border trade, currently estimated at $93 billion.

Another interesting trend is the rise of African multinationals investing into other African countries. At the forefront are African financial institutions. Today, Ecobank has a footprint in 24 countries while Moroccan banks are now present in 16 countries, up from just three in 2005. This is welcome news. Indeed, banks support about one-third of total intra- African trade.

More than ever before, Africa needs to accelerate intra-regional trade and bring down market barriers.

More than ever before, Africa needs to accelerate intra-regional trade and bring down market barriers. Papers such as this Swift report provide invaluable insight for policy makers, banks and other financial institutions. The study is a compelling guide that will help stakeholders better understand the movement of financial flows and goods. It is my hope that the report will assist in developing the right policies to connect the continent’s markets, deepen regional integration and adopt reforms that enhance competitiveness.

Africa Payments: Insights into African transaction flows
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