Afreximbank Distinguished Lecture Series 1 / 04

LEADING ISSUES IN AFRICAN TRADETHE ROLE OF THE AFRICANEXPORT-IMPORT BANK

Dr. Suleiman Kiggundu

...with an introduction by C.C.Edordu

Mr. ChairmanHonourable MinistersYour ExcellenciesPresident of the African Development BankMembers of the Board of Directors of the African Export-Import Bank,Distinguished Guests,Ladies and Gentlemen

In a statement during my investiture as the pioneer President ofAFREXIMBANK on 10th December, 1993 here in Cairo, I did point outabout how great historical events had often assumed simple forms. I didemphasize in that statement that the erection of great nations, outstandingdiscoveries in science, medicine and technology that proved profound andinfluenced millions of lives in later years, seemed very simple when theyoccurred. The events of yesterday and the one that is about to commencetoday are pointers that my assessment of the event of the day under referencewas right. Gradually, through simple ceremonies, the AFREXIMBANKon which so much hope is reposed for tackling the problematic externalsector of the African economy is becoming a reality.

Mr. Chairman, distinguished Ladies and Gentlemen, there is no doubt thatthe “achilles heel” of Africa’s development had essentially been theconstraints posed by the external environment. Slavery and colonialismare about two well known historical examples. In more recent times, therole of external influences in shaping the Continent’s development hasbeen more profound.

3

Advisory Group on Trade Finance And ExportDevelopment In Africa:Concept and RationalebyC.C. Edordu

Address delivered on the occasion of the Inauguration of Afreximbank’sAdvisory Group on Trade Finance and Export Development in Africa on 17 th

November,1994. It was on that occasion that this Distinguished lecture was delivered .

*

*

At the early years of international concern over the development of pooreconomies which coincided with the emergence of many African countriesas nation states, two schools of thought emerged from outside theContinent. One advocated a course of exports based on comparativeadvantage, beginning with primary goods and moving to simplemanufactures as industrialization progressed. The other took a morepessimistic view of trade recommending import substitution policies asthe way forward for the Continent. Today, Africa’s development or lackof it can largely be attributed to the decision taken on the above twooptions about two decades ago. Suffice to state, however, that Africa,like all the other economies which adopted the import-substitutionstrategy, are today sorry examples of the consequences of trade-pessimism.Unlike the dismal economic performance experience of Africa under atrade pessimism policy regime, those economies that had great successwith exports and transformed the structure of their economies had not,in fact, pursued inward-oriented policies - or did so only momentarily.

This acknowledged failure of inward-oriented policies resulted in a lossof credence for the pessimistic view in the mid 1980s. All of a sudden,African governments began to see trade, especially exports, as a powerfulengine of growth. This therefore led many of them to begin to adopt“trade liberalization” policies around that period. The establishment ofAFREXIMBANK is one of the concrete evidences of this reversal indevelopment strategy. Naturally, the urgency to catch up on lost timehas meant that African policy makers would want institutions establishedin pursuance of this new goal to tackle the problems with utmost urgencyand vigour.

As regards AFREXIMBANK, the founders have provided it a charterdefining what it should do. There are, however, questions about how itshould do those things in the context of the new trade optimism and theurgency to catch up on lost time. The Bank, it would seem, is caught inthe twin and apparently conflicting goals of its founders which can beunderstood by the historical antecedents of its establishment. For example,to avoid going back to the era of controls and “big government”, it isexpected to operate along commercial lines. On the other hand, giventhe history of import substitution and the institutional and policy obstacles

4

to achieving the goals of the Continent’s current trade optimism, it isalso expected to play a trade development role. These conflicting goalsare expected to be achieved in a circumstance where some countries ofthe Continent can no longer deal in the international market place dueto their poor external sector situation. Yet, the Bank is not expected toplay IMF - type role as that would mean a duplication of IMF functions!Striking a balance in the midst of these conflicting goals demands difficultchoices. As a consequence, any attempt by the Bank to strengthen theContinent against its historical weaknesses requires that it draws heavilyfrom all available materials at its disposal.

It is for the above reasons that the forum being inaugurated today isbeing created to act as an intellectual compass that will provide materialthat will enable us define an agenda for action. Since the external sectoris a source of “good” and “bad”, the agenda so identified should becapable of maximizing the positive and minimizing the negative influencesof the current trade-led development strategy. The necessity for theattainment of this important objective imposes on us the need to drawfrom highly knowledgeable and leading thinkers from the Continent. Italso imposes on the Bank the need to look for areas of emphasis and theslant the Bank’s action has to acquire. This is because while our Bank’sCharter is clear on the broad range of activities the Bank may engage in,giving colour and emphasis to action is to a broad extent, a matter ofthought. It is for these reasons that we decided to provide at this earlystage, a forum from which the management of the Bank will draw bothintellectual guidance and practical insight.

Mr. Chairman, distinguished ladies and gentlemen, it is our hope thatthis forum will comprise of men of great intellectual bent as well aspractical men of affairs and experience who will compliment the functionsof the Bank’s statutory organs. In this regard, the kind of directionrequired from this Group may not be available from the main policyorgan of the Bank, the Annual General Meeting (AGM), which as aforum of shareholders is essentially a housekeeping forum. Luckily, theGroup has experiences to draw from similar Groups in some countrieswhere export credit agencies have been crucial to the overall performanceof the economies.

5

In the U.S.A., for example, there is an advisory committee of 12 membersfor the EXIM Bank of U.S.A. The Export Credits Guarantee Department(ECGD) of the United Kingdom also has a similar arrangement. Althoughthe operational modalities of some of these groups/committees differfrom what we have in mind, the differences generally reflect the variousdevelopmental stages of the countries concerned.

In our case, we have taken cognizance of the Continent’s trade problems,as they seem at the moment, in articulating some of the issues that theForum might address. These include (but are not limited to);

(a) the evolution of the external sector within the Africanexperience and an evaluation of possible financial response thatwould be desirable for improved development performance.

(b) an elaborat ion of the inter-relat ionships of Africaninstitutions and integration arrangements and what they maymean for an improvement of the collective lot of the Continent.

(c) the implication of the recently concluded Uruguay Roundof Multilateral Trade Negotiations on the “trade liberalization”efforts of the countries of the African continent,

(d) the prospects for diversifying Africa’s exports intomanufactures under a regime of policy-induced biases in thedirection of trade,

(e) the barriers, including the constraint of inadequate tradeinformation system, to intra-African trade and their trade financeimplications, and

(f) the reality or otherwise of the so-called “fallacy - of - composition” and its implications for intra-African trade, African trade performance and Afreximbank’s operations, etcetera...

6

7

It is against this background, Ladies and Gentlemen, that our firstin the series of talks has been scheduled to be delivered by Dr. S.Kiggundu who is an acknowledged banker and intellectual. Dr. Kiggunduhad been a university teacher and the Governor of the Bank of Ugandaand is presently, the Chief Executive Officer of Greenland Bank, acommercial Bank in Uganda. He therefore brings with him several yearsof experience on issues connected with trade-related problems of Africandevelopment from the intellectual and practical context. His training andexperience will of course be an asset to this Group and our Bank.

Let me emphasize at this point, that despite the enumeration of broadareas of possible emphasis, we have not placed a strict agenda for thisForum. This is because we believe that the generation of materials onwhich the Bank’s future will be built requires unfettered exchange ofideas. Besides, we recognize that when these discussions are so conducted,revolutionary ideas, sometimes unanticipated, may emerge given thecaliber of the participants in this Forum and their experience andknowledge of the development experience of other regions. For example,consider the case of the open economy development strategy which anumber of South-East Asian economies had used as development lunch-pads. Its outcome which was most desirable would tend to recommendit for other regions. Yet, the current poor development performance ofmany African economies in an environment of virtual universal adoptionof the strategy raises a question whether a generalized adoption can bringthe type of benefit it has brought to the Asian economies. Besides, exportexpansion inspired by export incentives in a regime of generalizedprotection would yield a result different from what would happen in aregime of better competition. The implication of the above questions isthat it raises certain issues on the most efficient way Afreximbank candeploy its resources. These underlying questions therefore need to beaddressed in an unfettered manner so that we can avoid the illusion ofattempting to apply a financial solution to a non-financial problem.

We also believe that the roles of finance and risk-bearing facilities in anenvironment that lacks uniformity in levels of liquidity will also raisea problem of relat ive geographical emphasis Afreximbankshould give to its range of Services. It may, for example, meanthat it should use off-balance sheet mechanisms to support trade in thoseregions with sufficient liquidity while it provides financing to illiquidreg ions , thus pe r fo rming i t s func t ions mos t e ff i c ien t ly.

Mr. Chairman, Ladies and Gentlemen, it is my firm belief that the ideasthat will be generated by this important Group will provide materialsthat will define an agenda for the Bank. Although it is conceptualizedas an Advisory Group, we see its role as more pervading. We, therefore,hope that our Forum will convene as often as necessary to provide thekinds of input highlighted herein and adjourn once its work has beendone. We also think that the Forum should have members who may findit impossible to be personally present but who can provide theircontributions in writing to the Bank.

I would therefore like to welcome our distinguished guests many ofwhom personally bore the cost of their participation in this Forum. I willlike to assure them that the Bank recognizes their contribution in thetask of getting our Bank and Continent moving. There are times whensuch sacrifices are called for, and it is only patriots that respond to suchclarion calls. Distinguished Ladies and Gentlemen, may I suggest thatour keynote speaker addresses us and we receive contributions on theAgenda he may propose to guide us at this stage of building a foundationfor our beloved Bank. This is because the Bank may well be the lasthope of the Continent in its bid to re-enter the international market placewith pride and respect.

Thank you and may the Lord bless you.

8

LEADING ISSUES IN AFRICAN TRADE:THE ROLE OF THE AFRICANEXPORT-IMPORT BANK

byDr. Suleiman Kiggundu

The resolution of the Board of Governors of the AfricanDevelopment Bank (“ADB”) of June 11, 1987 calling for theestablishment of the African Export-Import Bank (Afreximbank)which seems to be rooted in African nationalism, seeks to promoteAfrica’s development through increased trade. The main motivationfor the establishment of the Bank was not that it is a good andprofitable business, but that it will facilitate the realization of theobjectives of trade-led development strategy currently beingpursued by Africans.

This concern of the ADB’s Board of Governors was indeed wellplaced because Africa’s production and trade levels were, and stillare, depressingly too low. Whereas Africa accounted for 12 percent of the global population in 1992 (650 million out of 5.5 billion),it only produced 1 per cent of the world's Gross Domestic Product(GDP) ($310 billion out of $22.0 trillion) and its share of total globaltrade (exports plus imports) was less than 1 per cent ($53 billionout of $6.8 trillion) (World Bank, 1996). This low level of productionand trade renders the level of income and consumption of otherbasic necessities, not to speak of elementary luxuries, so low thusmaking the quality of life of the average African incomparablewith international standards.

The Afreximbank, like similar institutions in the USA, the UK andIndia, has been established to extend trade finance to supportintra-and extra-African trade. This paper explores some of theleading issues in African trade and discusses the potential role ofAfreximbank in addressing the well known inhibitions to intra-and extra-African trade.

1 Former Managing Director and Chief Executive Officer, Greenland Bank Ltd, Kampala, Uganda.Dr. Kiggundu,who currently lives in Kampala, delivered this Lecture in Cairo on November 17th,1994.

11

LEADING ISSUES IN AFRICAN TRADE:THE ROLE OF THE AFRICANEXPORT-IMPORT BANK

byDr. Suleiman Kiggundu1

12

Nature and Potential of African Exports

This paper examines the nature and potential of African exports,which the Bank seeks to promote and the likely market focus forthese exports. A cursory look at Africa’s export trade performanceshows a high degree of dependence on a few primary agriculturalor mineral exports. Africa’s relatively vast arable land and mineralresource endowment partially explains the dominance ofagricultural and mineral exports in total exports. About 27 percent of African exports are food and agricultural raw materialswhile unprocessed commodities, including minerals and energy,make up around 80 per cent of African exports. Agriculture alsoemploys from 65 to 80 per cent of African workforce and accountedfor 20 per cent of its GDP in 1992. Despite agriculture’s immensecontribution to GDP and exports, international trade policiesfrustrate the sector’s development (Wood and Mayer, 2001).

Table 1 highlights the structure of Africa’s exports during 1965,1980 and 1987. During these three years, fuels, minerals and otherprimary exports on average, accounted for about 90 per cent ofSub-Saharan, Africa’s total exports. Manufactured exports includingtextiles, machinery and transport equipment accounted for lessthan 10 per cent.

Developed countries agricultural trade barriers are a majorconstraint to African producers’ market access, and along withsubsidies, have been depressing global agricultural commodityprices, on the average, by approximately 12 per cent per annum.The problem with primary commodity exports is that they havesince 1950s, been exhibiting volatile and weak international prices,which give rise to poor and fluctuating national export earnings.For example, in 1980 Africa’s exports including those of NorthAfrica were valued at US$94.7 billion. The value in 1987 droppedto only US$53.2 billion largely on account of commodity priceweaknesses.

The sudden fall in petroleum prices in the 1980s furtherreduced export revenues in a number of African economies which,in turn, reduced Africa’s capacity to import. Drought, wars, highdebt service burden also tend to adversely affect much neededrehabilitation and expansion of capacity to raise export productionand also reduce export earnings.

Experience has shown that export receipts had fallen at a time ofsignificant growth in export volume due largely to sharp downturnin commodity prices. Uganda’s example is quite revealing in thiscontext. Global prices of coffee, the country’s major exportcommodity fell from US$2.05 per kg during 1987/88 to US$0.82per kg during 1992/93 resulting in about 59 per cent fall inUganda’s export earnings from $384 million in 1986/87 to $157million in 1992/93 .

Africa enjoyed an upturn in its terms of trade during thecommodity price booms of the 1970s, but trends from the early1980s have been fluctuating. Table 2 shows the terms of trade forAfrican countries. For most Africa countries, the terms of tradedeteriorated at an average rate of 2 per cent in 1983, 25.2 per centin 1986, and 5.2 per cent in 1988. While the overall trend after theearly 1980s has been downward, there were short-livedimprovement in African commodity prices and terms of trade. Inmost cases, the prices have declined by big margins and, for fiveof the major export products; they have declined by more than 50per cent in 1980. The income lost by developing countries as aresult of trade shocks and trade restrictions had been estimatedby UNCTAD to average US $500 bi l l ion per annum.

13

AlgeriaAngolaBeninBotswanaBurkina FasoBurundiCameroonCape VerdeCentral African RepublicChadComorosCongo, People's RepublicCote d' IvoireEgyptEquatorial GuineaEthiopiaEritreaGabonGhanaGuineaGuinea BissauKenyaLesothoLibyaLiberiaMadagascarMalawiMaliMauritaniaMauritiusMozambiqueNamibiaNigerNigeriaRwandaSao Tome and PrincipeSenegalSeychellesSierra LeoneSomaliaSudanSwazilandTanzaniaThe GambiaTogoUgandaZaireZambiaZimbabwe

n/an/a

1181117

n/a14

n/a52

n/an/a

1365013

n/an/a13

n/an/a724

n/a194

n/a14

n/an/a3240

n/a9122561

n/a4

n/a4914729745

196599785

n/an/a

533

n/an/a

1n/a90167

n/a8

n/a10017

n/an/a36

n/a100n/a

9n/an/a78

n/a11

n/a4869

n/a39

n/a35

n/a2

n/a10

n/a66156

n/a23

1980n/an/a4220

n/a151

n/an/an/an/a674

n/an/a

3336337

n/an/a21

n/an/a5710

n/an/a31

n/a

n/a86919

n/a258022114

n/a71664639317

1987n/an/a9478949477884593

n/a3293

n/an/a98603985

n/an/a8191

n/a259099965

10083

n/a956560

n/a4085148098

n/a831004886203

n/a

19651987

n/an/a9264

n/a2371

n/a4

n/a22

n/a92

n/an/a82

n/an/a52

n/an/an/a849391207387

n/a12290

n/a46

n/a25

n/a98

n/a7690239714

n/a39

1980n/an/a38179885406066

n/an/a1786

n/an/a96522660

n/an/a6264

n/a417884716659

n/an/a13890

n/a4316199879

n/a75922696314

n/a

1987n/an/a

54765

n/a544

n/a636

n/an/a

18113

n/an/a

69

n/a46141

n/a3

n/a621

n/a4360141

n/a13

n/a418

n/a22

196535364701175

n/a26

n/an/a

610

n/an/an/a1112

n/an/a1624

n/a381617248

n/an/a

4n/a

1n/a1645614

n/a23118

n/a7128

1980n/an/a21642155

n/a33

n/an/a1610

n/an/a

116102

n/an/a1736

n/a1141629240

n/an/a

111015559110187806340

1987

Countries Fuels, Minerals andMetals

Other PrimaryProducts Manufactures

Table 1: Structure of Africa's Exports (%share)

n/a not availableSource: World Bank, 1989

14

15

Table 2: Terms of Trade Index of African Countries ( 1985=100)

EthiopiaChadZaireGuinea BissauMalawiMozambiqueTanzaniaBurkina FasoMadagascarMaliThe GambiaBurundiZambiaNigerUgandaSao Tome and PrincipeSomaliaTogoRwandaSierra LeoneBeninCentral African RepublicKenyaSudanComorosLesothoNigeriaGhanaMauritaniaLiberiaEquatorial GuineaGuineaCape VerdeSenegalZimbabweSwazilandCote d'IvoireCongo, People's RepublicCameroonBotswanaMauritiusGabonSeychellesAngolaDjiboutiNamibiaNorth AfricaAlgeriaEgyptLibyaMoroccoTunisia

Country539910447959675896710575379212244478276627883967210793123605711810171657710380917161717914070126n/a61

n/a

5067

n/a11783

1992621069045113102759066109937107131505283766282858670107891246168106104667578106809373667182154721266261

n/a

57725611482

199181111107481021078211167111606314511457638776628510390741049612457879297697592998612178627988134651195965

n/a

52675110778

198994108105519797851077910873781351157477947775931079479939812449108869776687910196

111587569290138531115864

n/a

45614410574

198812288111n/a9610611298979188

n/a130124106n/a9311414110397106110109 n/an/a10817010499

n/a n/a n/a98

n/a n/a11795129 n/a10598

n/a98

n/a n/a

999716597105

198012691108n/a1271211131089192115n/a14015673

n/a100248811071237685125 n/a n/a59136130123 n/a n/a n/a150 n/a n/a895995

n/a23260

n/a62

n/a n/a

521005716583

197515968202n/a13211710812494101126n/a30619495

n/a136751081331608685105 n/a n/a21150179164 n/a n/a n/a87

n/a n/a9616119 n/a11016

n/a42

n/a n/a

1986178238

1970641069646107105731106110886371171154569857165858688721028512469801091037277791027611174737585144781246664

n/a

62786311585

1990

n/a not availableSource: World Bank (1993), African Development Report.

The problem of inadequate capital accumulation necessary forincreased production of goods and services is further aggravatedby the adverse terms of trade movements that the Continent hasbeen suffering during the last two decades. Declining realcommodity prices particularly for agricultural commodities andhigh taxes on exports not only siphon off the resources neededfor investment and economic growth, but also constitutedisincentives for private capital accumulation. Under suchconditions, attaining rapid and sustained growth would dependon the provision of external financing, not only to compensate forthe resource drain through terms of trade losses but also tosupplement domestic savings in financing of additional capitalinvestments needed for increased production. Given that privatecapital flows, including Foreign Direct Investment lag rather thanlead economic growth, such financing would have to be securedfrom official sources. Experience from reliance on this source offinancing has not been very encouraging. Not only has the regionbeen unable to benefit from the recovery in private capital flowsto developing countries that began in the early 1990s, but havehad to grapple with falling official financing. In fact, the seculardecline in Africa’s terms of trade is an important reason for themarginalization of the region in world trade.

The share of manufactures in Africa’s total exports is still verylow as shown in Table 1. Whereas, total African exports fell byabout 44 per cent, during 1980/87, manufactured exports rosefrom US$4.3 billion to US$7.7 billion over the same period,representing a cumulative rise of 79 per cent during the period.North Africa accounted for most of this rise. The sub-regionexperienced an acceleration in manufactured exports of about 120per cent from US$1.8 billion to US$4 billion between 1980 and1987 while the rest of Africa saw a rise of 44 per cent from US$2.5 million to US$ 3.6 billion during the same period. Among thesub-Saharan African countries recording most appreciable growthin manufactured exports were Botswana, Zimbabwe and Mauritiusas shown in Table 3.

16

17

Given the characteristics of African’s external sector as discussedabove, one can then make certain propositions regarding the slantAfreximbank’s operations should take if it is to make a significantimpact in resolving some of the problems affecting the growth ofAfrican exports. Discussed below are strategies that could bepursued in resolving the problems facing Africa’s export sector.

Production Strategy

Since primary commodity exports to the developed countriesface both income-inelastic demand and highly volatile internationalprices, African Export-Import Bank should focus more onpromoting manufactured exports and non-traditional exports likevanilla, vegetables, flowers and other horticultural products.Whether or not Africa has comparative advantage in the productionand export of any commodity is no longer an issue in internationaltrade. In his evaluation of the “availability theory”, a leading tradeeconomist argues that imports of a country will be concentratedin commodities which are not available at home either in theabsolute sense or in the sense that they attract a very high price.In other words, technology and high degree of mobility of factorsof production have rendered, more or less irrelevant, the classicalstatic theory of comparative advantage. In a dynamic

Source: World Bank, 1989

Country

641

486

550

283

164

152

137

135

120

108

1987

353

125

405

295

210

50

64

26

130

72

1980

1

0

61

15

14

6

24

10

17

4

1965

Botswana

Mauritius

Zimbabwe

Cote D’Ivoire

Kenya

Cameroon

Congo

Gabon

Nigeria

Senegal

Table 3: Export growth in manufactures for selected countries in Sub—Saharan Africa(US $ million)

18

context, any country can produce more or less anything except afew items which are strictly resource-based, and goods which areabsolutely immobile or too costly to move. Indeed, many productsin the world market, which are almost identical, are selling atdifferent prices. The success of each seller depends on the marketshare he enjoys, the historical links, the geographical advantage,the business contacts and aggressiveness of his marketing strategy.

The Importance of Intra-African Trade

African entrepreneurs should therefore focus on the manufacturingsector and should be supported by adequate financial resourcesand the enabling macroeconomic environment. Expandingmanufactured exports to the developed economies (the “North”)may not be easy, notwithstanding the encouragement from somequarters, like the European Union under the Lome Convention.Thus, emphasis should be in the promotion of South-South trade.Chenery (1970) argued that the demand for industrial product dependson the domestic market and net exports . This could be expressedalgebraically as:

j

In other words, Chenery points out that industrialization can besupported by domestic demand noting that demand for industrialproducts depends on the domestic market, net exports or exportexpansion and intermediate demand for certain products (HollisChenery, 1979).

The domestic market, in this case the African market, should beharnessed to absorb the manufacturing output during the initialstage of industrialization up to a point where demand from outsideAfrica would be limited and isolated if correct policies, adequatefinance and the correct business acumen are in place. In thisregard, Africa should be more or less self-sufficient in clothing,shoes, other textiles, leather, wood products and related items.These items do not necessarily require sophisticated technologyin production.

Significant in-roads into the secondary stage of industrialization,producing intermediate goods then heavy industrial goods couldeasily have been made on the basis of a wider African market. Amarket of 650 million people with a total GDP of US$310 billioncould go a long way to support basic industrial production. Eventhe sub-Saharan African market with a population of 500 millionpeople and a total GDP of US$173 billion could still provide asizeable market for African manufacturers. One could even talkof the Preferential Trade Area (PTA) market with a population of150 million people and a total of GDP of US$ 50 billion or for thatmatter the ECOWAS Market, the Central African Common Marketor the Maghreb Union Market as potential markets for manufacturesoriginating from the African continent.

Constraints to Intra-African Trade Promotion and AfricanEconomic Integration

Unfortunately, Africa has so far failed to integrate its marketsat the continental or the sub-regional levels and make them accessible toAfrican producers with regard to tariff and non-tariff barriers. The shareof intra-African trade in Africa’s total international trade is estimated tobe 5 per cent or between 10- 12 per cent if unrecorded trade is takeninto account.

Although the Treaty for the African Common Market was signedby the African Heads of State and Governments in Abuja, Nigeria,in June 1991, progress towards the achievement of its goal hasnot been as fast as one would wish. The Treaty requires ratificationby two-thirds of the member States before it comes into force. Inaddition, its implementation is envisaged over a thirty-four yearperiod. Given Africa’s circumstances and the pace of globaleconomic development, this time frame is far too long and itconveys an impression of lack of seriousness. Provisionalapplication of the Treaty, for example, ought to have commencedupon signature and definitive application should have beenallowed on ratification by only one-third of the member States.Unfortunately, this has not been achieved.

19

At the sub-regional levels, economic integration efforts also leavea lot to be desired. There is more rhetoric than performance. Italso seems that the leadership is yet to appreciate the strategy ofintegration as a basis for Africa’s economic emancipation. This isbecause the leaders seem to be more concerned with their uniquedomestic political difficulties than the vision of regional orcontinental integration. For example, the leaders of the PreferentialTrade Area for Eastern and Southern Africa (PTA) met and signeda treaty in Kampala in 1993 setting up a Common Market forEastern and Southern Africa (COMESA). This was after failing toset up a free trade area since 1980. Shortly after this, three EastAfrican leaders met in Arusha and agreed to revive the EastAfrican Common Market. Another example is the Southern AfricanDevelopment Co-ordination Conference (PTA-SADCC) circus,where the same leaders approved a merger in one forum andreversed it in another. These developments convey an absolutelack of commitment or political will on the part of the leaders.What purpose would the East African Common Market serve ifthere was no intention to implement the COMESA Treaty?

The system of payments for goods and services poses a majorconstraint to intra-African trade promotion and economicintegration efforts. The experience of the PTA Payments andClearing House, (PTAPCH) shows that with determination anumber of progressive steps can be taken. In attempting to issuePTA travellers' cheques, it was suggested that PTA payment andClearing House would require over US$50 million to back up thetravellers' cheques. As central banks, PTAPCH resolved to backup the issues authorized by each bank without necessarily puttingup any deposits upfront and proceeded to issue the PTA traveler’scheques within six months. For over six years, the issue has beenon the table without implementation.

Another programme which PTAPCH did not succeed inimplementing was getting each country to remove intra-PTA tradetariffs at once to facilitate the creation of a free trade area.

20

The argument was that removal of tariffs on food imports fromanother PTA country constitutes no loss to the country and nogain to the exporting PTA country. Such a move represented onlyan income transfer from government to businessmen or consumersand therefore should not cause undue concern to the countries.Governments, if they so wished, could impose other taxes likesales taxes to recoup the revenue lost by the removal of intra-PTAtrade tariffs. In any event, the argument suggested that becauseof low level of intra-PTA trade (about 5 per cent of total trade),the potential loss to each country was minimal. This was estimatedto be no more than 3 per cent of total recurrent revenue for eachof the countries involved. But because of lack of resolve on thepart of the national governments, tariffs on intra-PTA trade werenot removed.

In the same vein, one can argue for the immediate removal ofintra-African trade tariff barriers as a first step in thecreation of an African common market. Subsequently, additionalmeasures to eliminate other constraints to intra-African tradecould be implemented. Among these is the improvement in flowof trade information, easing payments difficulties and makingtrade finance more readily available for utilization by viableAfrican businesses,which is the mandate of Afreximbank.

In this case, Africa must then squarely face the policy conflictbetween sub-regional economic integration, which seeks to givepreferences to union members, and universal trade and foreignexchange liberalization across the Continent. Indeed this is thechallenge economic integration promoters cannot ignore.

Furthermore, to build trade capacity, there are also a number of tasksthat countries must focus on. These include eliminating roadblocks toinvestment; familiarizing exporters with the rules of the multilateraltrading system; implementing export strategies that reflect businessimperatives; building competitiveness of firms through quality-controlmethods, better marketing skills and packaging techniques, export financeand appropriate use of new information technologies, among others.

21

22

Financing Gaps and the Role of Afreximbank

Looking closely at the agenda or the program of action for the Afreximbankas it commences its lending operations consistent with its mission andmandate, attention needs to be drawn to its resource availability, itsobjectives as well as the nature of the trade financing gaps which Africancountries and business communities are facing. In this regard, it isimportant to note at the outset that international commercial banksvirtually stopped lending to Africa following the failure of many LatinAmerican countries to meet their debt obligations in the early 1980s. Thefear was that because of deteriorating terms of trade, huge and increasingexternal debt service burden and foreign exchange constraints therepayment promises of African institutions could not be trusted.

Many international commercial banks at that time could not accept thesovereign risk of any African country, let alone the payment risk ofAfrican commercial banks and/or private businesses. Most exporters toAfrica demanded confirmed and irrevocable Letters of Credit (L/Cs) andbanks demanded upfront, full cash collateral before they could add theirconfirmation to L/Cs opened by African banks. They also took 100 percent cash collateral from African commercial banks or central banks tohave their payment guarantees confirmed by prime banks. And becauseintra-African trade is conducted through the same channels, thisrequirement applies to it a fortiori, except when the business is transactedthrough the regional Clearing Houses.

Furthermore, the charges imposed in the few instances whenfinancing is provided are often on the high side and sometimesprohibitive. Suppliers have to accept high financial charges inorder to compensate for the perceived high risks in the transaction.

The implications of the above facts are somewhat, disturbing. Asprofessional central and commercial bankers, one would like toenjoy some degree of operational trust in Africa. Despite difficulties,African central banks hold substantial foreign exchange reservesdeposited with foreign banks.

23

African commercial banks also conduct sizeable businesses withinternational banks. This should be good reason for them to enjoy somedegree of trust. Table 4 gives the gross international reserves of sub-Saharan Africa during 1975 and 1991. With a total deposit of US$16.7billion in an institution, sub-Saharan African countries should be inposition to finance a significant amount of investment activities in Africa.Unfortunately, the Continent lacks the institutional arrangements throughwhich these reserves could be consolidated and used in a manner thatwould be supportive of its economic transformation. It is hoped that thecountries concerned would begin to look at the Afreximbank as the answerto making African money useful to Africans.

Afreximbank’s Lending Programmes

The above review points at serious problems confronting intra-Africantrade. The first agenda for the Afreximbank, which seems to have takenoff very well, is the mobilization of the initial share capital. The Bankalso expects to raise further funds from the international capital markets.This should enable it to finance a reasonable number of viable activities.The diverse number of shareholders, however, should not force the Bankto deviate from its core objective of promoting African exports infavour of other more profitable lending windows. The overwhelmingdemand for trade finance should also not force it to overtrade andneglect its other non-financial commitments in the area of tradefacilitation, for example collection of trade data for the purpose ofplanning to assist in policy formulation.

The second agenda is to carefully define and implement its trading(lending) activities to avoid losses. But it should not be so risk-averseas to sit on sizeable loanable funds amidst overwhelming financingdemands from the constituencies it has been created to provide tradefinance support for.

The Bank had already identified the following programmes in itsinitial operational phase: pre-shipment credit; post-shipment credit;guarantee facilities including export performance guarantees, bidbonds and advance payment guarantees; import credit for the purchaseof inputs for production of exports. These are facilities which, if wellutilized, will begin to address some of the problems identified above.

The Bank should endeavour to cultivate a wide spectrum ofcustomer relationship. This should include: private African exportersand importers sourcing goods from Africa, overseas importers sourcinggoods from Africa, commercial banks acting on behalf of theircustomers, and sometimes African government export credit agenciesas well as similar organizations and institutions.

The facilities required by African private exporters and importersbuying goods from Africa include opening of L/Cs, guaranteesand pre-shipment and post shipment/production credits. Theseare in conformity with existing Afreximbank facilities. Regardingdelivery of these facilities, the Afreximbank may handle financingrequests directly or through local commercial and export creditagencies or through African central banks. This is because it willbe easier and more cost effective to offer lines of credit to accreditedinstitutions in order to avoid having to appraise individual projects.The requirements of African and non-African commercial banksmay be to support their customers for numerous relatively smallfinancing requests. It would be better for Afreximbank to handlethese requests through lines of credit given to the banks directly.The requests by African governments and large corporations maybe sizeable enough to warrant Afreximbank’s direct appraisal andfinancing.

Although it is not included in its initial lending menu, it may benecessary for Afreximbank to provide commodity pricestabilization financing. The lending could be provided to theborrowing country or export agency to sustain production duringthe period when stocks are being accumulated.

24

GROSS INTERNATIONALRESERVES

1661.47

172.79n/a

66.64n/a6536371155151957021

n/an/a39161

22022

n/a223433

n/an/an/a n/a59

n/a11998104615

n/a n/an/a1057

54.46119.79182.8514.57153.20207.48

20435089326147186207590

n/an/an/a101961071458

1154,67864472

n/an/an/an/a295n/a29943

3,772915332n/an/an/a

3,187

1.02.61.01.02.52.31.44.81.24.55.01.45.31.000

5.04.00.23.64.40.60.01.34.44.41.20.01.01.00.01.42.00.10.10.217.65.51.60.03.00.01.5

MONTHS OFIMPORTS COVER

12345678910111213141516171819202122232425262728293031323334353637383940414243

EthiopiaChadZaireGuinea-BissauMalawiMozambiqueTanzaniaBurkina FasoMadagascarMaliBurundiZambiaNigerUgandaSao Tome and PrincipeSomaliaTogoRwandaSierra LeoneBeninCentral African RepublicKenyaSudanLesothoNigeriaGhanaMauritaniaLiberiaEquatorial GuineaGuineaSenegalZimbabweSwazilandCote d'IvoireCongo, Peoples RepublicCameroonBotswanaMauritiusGabonAngolaDjiboutiNamibiaSouth Africa

Countries

Sub-Saharan TotalWorld

3,04199,147

16,8861,179,130

Source: World Tables, 1994

TABLE 4: GROSS INTERNATIONAL RESERVES OF AFRICA (US$ MILLION)

1975 1991 1991

25

This could be a strategic move aimed at forcing world marketprices upwards for particular commodities. This lending wouldbe somewhat speculative and would require firm guarantees fromthe countries or the exporters’ commercial banks.

Afreximbank may also be faced with requests from regionalClearing Houses to provide credit facility to support debtorcountries in the Clearing House for specific time period in ordernot to disrupt the clearing arrangements. These requests may belimited under circumstances of foreign exchange liberalization.Without such credit facility for Clearing Houses, a debtor countrymay be required to rely on external donor funds, which, importers'experiences have shown is likely to force imports mainly fromdonor countries thereby rendering irrelevant regional clearingarrangements.

In its subsequent phases of operation, Afreximbank’s activitiescould be expanded to include long-term investment financing forexport projects especially in manufacturing and other non-traditional exports. However at this stage, Afreximbank wouldneed to be more scrupulous in its project evaluation and monitoringtechniques with a view to ensuring that all project risks are correctlyidentified and properly mitigated. Other activities should includefinancing of export product development, export marketing, exportbills rediscounting and forfaiting.

The initial lending approval of the Bank should be cautiousespecially with regard to selection of local banks through whichto deliver its services. This is because in most African countries,foreign exchange liberalization as a reform strategy is currentlybeing embraced. Therefore, emphasis should be placed ontransactions in countries where reforms have taken root and therules of commercial operations are clear.

26

27

In conclusion, the founding fathers of Afreximbank should becommended for this initiative. It is hoped that African leaders willmove decisively to make African economic integration a reality.Given the financing arrangements discussed with regards to urgentremoval of obstacles to intra-African trade, it could be argued thatthe level of production and intra/extra- African trade wouldincrease for the good of our people, if Afreximbank is given thenecessary financial, political and moral support.

28

References

African Development Bank (1993), Annual Report.

Hollis B.Chenery (1979), Structural Change and Development Policy,New York: Oxford University Press, Chapters 1-3.

Hollis B. Chenery and Lance J. Taylor (1968), “DevelopmentPatterns: Among Countries and Overtime,” Review of Economicsand Statistics, 50: 391-416.

Hollis B. Chenery and M. Syrquin (1975), Patterns of Development,1950-1970, New York: Oxford University Press.

Hollis B. Chenery, S. Robinson and M. Syrquin (1986),Industrialization and Growth: A Comparative Study, OxfordUniversity Press, New York.

Subramanian A., and Tamira, N., 2001, “Africa’s Trade Revisited”,IMF Working Paper no. 01/33, Washington D.C.

UNCTAD (1992), Human Development Report.

Wood, A. and Mayer, J. 2001 “African’s Export Structure in aComparative Perspectives” Journal of Economics, 25, pp. 369-394.

World Bank (1989), World Development Indicators, Washington.

World Bank (1993), African Development Report.

World Bank (1993), World Development Report, Washington.

World Bank (1994), Sub-Saharan Africa: From Crisis to SustainableGrowth, Washington.