Opportunities for investment in Africa outweigh the obstacles, according to a report by leading African companies covered in the African Development Bank’s (AfDB) new Africa-to-Africa (A2A) Investment Report, the first ever report on inter-African trade published by the Bank.
The report revealed the realities African companies face when investing in the continent, the emerging trends in A2A investment and the steps African policymakers can take to accelerate intra-African investment.
According to the report, more African companies are investing in Africa, stating that such companies have confidence in the continent’s long-term growth potential.
“They are at the cutting edge of their industries, and are capitalising on their knowledge of local markets to generate higher returns and impact,” a statement from the AfDB explained.
In line with the Bank’s High 5s for transforming Africa and the African Union’s Agenda 2063, the A2A Report aims to take the conversation on investing in the continent a step further. It shows what African multinationals are doing to drive investments in Africa, d how they are expanding their African footprint, and gives insights into how to scale-up investments more widely.
“As global foreign direct investment to Africa falls, intra-African investments are picking up pace,” the President of the African Development Bank Group, Akinwumi Adesina said.
“Africa’s big companies are increasingly on the move and expanding their African footprint. It is through more investments that the continent can build inclusive, sustainable growth and development. We have made this our collective commitment in the High 5s,”he added.
The A2A Report features eight publicly-listed and privately-owned African companies operating in consumer services, finance, industry, media and diversified portfolios and investment, with home bases in North Africa (Morocco), West Africa (Nigeria, Togo), East and Central Africa (Ethiopia, Kenya) and Southern Africa (Mauritius, South Africa).
Highlights from the Report’s intra-African investment stories include the importance of having a clear long-term vision, getting up-to-date investment facts, building local partnerships to deliver on the ground and tapping into talent in the local labour force.
South Africa will ease some immigration rules, including agreeing visa waiver agreements with more countries, in an effort to boost investment and tourism, Home Affairs Minister Malusi Gigaba said on Tuesday.
The changes are part of a broader economic turnaround programme announced by President Cyril Ramaphosa last week as his team seeks to drag Africa's most developed economy out of recession.
"We play a critical economic role in admitting over 10 million international visitors to South Africa annually, which includes tourists, business travellers, investors and neighbours," Gigaba told reporters.
"Millions of jobs are sustained by the economic activity generated by these travellers."
Gigaba said negotiations were also being finalised to conclude visa waiver agreements with more than a dozen countries across Africa, the Middle East and eastern Europe, including Saudi Arabia, Iran, Egypt, Qatar and the UAE.
Much-criticized rules on travelling minors will be simplified, he said.
In June 2015 new rules were implemented requiring parents to carry an unabridged birth certificate for accompanying children and consent letters from parents who were not travelling.
The tourism industry said the regulations, which came into effect during Gigaba's previous tenure as home affairs minister, were hurting business.
Tourism contributes more than 400 billion rand ($28 billion) to South Africa's economy, or around 8 percent of GDP.
The share of internal trade in Africa remains low, as reflected by official statistics. This is despite numerous regional trade agreements that have led to tariffs removal within the trading blocs. At least in principle.
There are a host of shortcomings that limit trade: non-tariffs barriers, red tape and insufficient infrastructure. Tariff barriers remain high outside areas covered by the agreements. Enhancing trade integration between African countries could yield large economic gains. This idea motivated the latest initiative for integration, the continental free trade area.
However, a large part of cross-border trade between African countries is informal. It either avoids customs entirely, or goes through official posts but is not recorded. Informal trade is difficult to measure. Most studies have relied on estimates based on partial surveys, or on accounting exercises. They concluded that a substantial share of Africa’s regional trade was informal, on the order of 30% to 40%.
Informal trade is pervasive for agricultural goods as well as many industrial goods. Some traders are entirely informal; others are registered businesses but escape trade regulations and duties nonetheless.
This gap in the measurement of actual trade is problematic for trade policy. Why is it so pervasive, and what should governments do about it?
Our recently published study goes someway to filling the gap by looking into the magnitude, composition and determinants of informal trade in Benin.
What we found
In 2011, the national statistics of Benin identified 171 non-official border points to conduct a survey of informal trade. As in many African countries, informal trade is pervasive in Benin. It operates in the open, and is tolerated, for the most part, by officials. Each border post was surveyed for a period of ten days. Each trader crossing the border (in either direction) was asked a short questionnaire about products and quantities traded, prices, origin and destination.
The rate of response to the survey was high. This means that, for the first time, there’s a representative sample covering all informal trade at a country’s borders that can be compared with the official trade data such as customs data.
Using this data, our study confirms that informal trade is, in effect, a vital part of the trade system. For example, informal trade makes up the major part of trade in domestic products between Benin and Nigeria. Official statistics underestimate total trade by 50% for imports, and by about 85% for exports.
These figures are broadly in line with previous estimates for sub-Saharan countries. This confirms that trade statistics on the continent suffer from a serious blind spot.
Our study also shows that formal and informal trade differ by product composition. Informal trade isn’t restricted to livestock and a few agricultural goods. Product and sector diversity is high. For example industrial products, such as textiles, agro-food, and transportation equipment are traded heavily on this channel.
Another noteworthy feature is that the product overlap between the formal and informal channels is very low: most goods are traded exclusively on one or the other.
This suggests that official statistics are also massively underestimating the product diversity in regional trade.
So why are some products traded formally, while others are exclusively traded informally?
Reasons for trade informality
We estimate that products facing high tariffs are more likely to be traded informally. Non tariff barriers, such as sanitary and phyto-sanitary regulations, or technical barriers to trade (such as labelling requirements, quality standards), are also associated with more informality.
This suggests that complying with these regulations represents a cost for traders. They are therefore willing to avoid them by skipping the customs controls.
This raises serious questions around issues of product quality. There’s no doubt that controlling product quality and enforcing regulations is necessary for consumer protection. Frequent cases of food poisoning in Nigeria, and their association with informal trade show the importance of this issue.
The difficulty lies in distinguishing between enforcement and excessive requirements. For example, our research shows that a lot of perishable products are traded exclusively on the informal channel. This suggests that traders aren’t avoiding formal channels because they want to smuggle products that don’t meet health and safety standards. They simply want to sell products that would otherwise be spoiled if kept for too long.
How to address trade informality
There is a great deal of evidence that trade costs are high in sub-Saharan Africa. This is due to inadequate infrastructure, excessive regulations and requirements at customs, as well as harassment and bribery. The pervasiveness of informal trade is a symptom of this.
Reducing tariffs should help formalise some of this informal trade. But it is difficult to predict by how much. It’s possible that incentives to go informal remain high for many traders, even under the continent’s proposed free trade agreement, especially if preferential treatment is costly or difficult to obtain.
Some authors suggest giving specific support to informal traders, for instance access to simplified trade regimes. The rationale for this is that there are too many obstacles – procedural and infrastructural – preventing informal traders from operating within the official framework.
Informal trade is, in effect, a vital part of the trade system on the continent, improving food security, and providing a source of income for a substantial share of the population. By reducing trade costs for a large share of (less visible) trade operators, specific facilitation measures could offer valuable opportunities to reduce poverty.