Why Formal Trade in Africa lags, while Informal Prospers

A local market in Accra. ©EnterpriseAfrik

 While Africa’s trade with the rest of the world – such as with China and India – has been on the rise in recent years, trade between African countries still lags, especially when compared to other regions in the world. 

In an article published last month by Dr Álvaro Sobrinho, a leading business figure in Angola and chairman of emerging bank Banco Valor, intra-Africa trade today is at roughly 12%, around half the share 15 years ago. This compares to Europe where trade between regional borders is estimated at 70%, and Asia at 50%.

It has been argued that one reason behind low intra-regional trade in Africa is poor transport and logistics infrastructure, and the resulting high cost to transport goods. However, according to Edward George, head of soft commodities research at Ecobank, while formal trade flows between African nations might lag, informal intra-regional trade is more advanced than one might expect.

“I was just recently in Nigeria talking to rice traders – 1.5m tons of rice goes into Benin and then makes its way across the border into Nigeria, through Benin or Niger, basically to avoid taxes. So that is, you know, half the country’s consumption of rice,” George told an audience at the Africa Trade Finance Week in Cape Town last week.

“So informal flows are extraordinarily developed and actually very good at getting to market.”

Why does formal trade lag?

The potential for regional trade not being adequately captured can be seen in Ghana’s exports to Côte d’Ivoire.

According to George, Ghana’s official exports to Côte d’Ivoire last year were less than 1% of its total exports. Considering that Côte d’Ivoire is Ghana’s largest neighbouring economy, this is a meager percentage.

He added that a large reason for this is that the two countries have different legal and monetary systems, currencies and languages.

Ngozi Okonkwo, chief legal officer at Oando, agrees. “I can say, from my experience, one major challenge that we have had is trading with countries that have very stringent requirements. It is understandable that there are local content type laws in most countries in Africa but sometimes it can be a challenge trying to work within the framework of those laws, especially where it would not be [giving] opportunities to make the quantum of investments that you would want to make and have the degree of control that somebody would want to have in that country.”

She added that the language barrier between English and French-speaking countries is a particular challenge.

“It’s a lot easier when you speak the same language … and we need to understand the local language in some of the countries because that is where the trust is built, if you are speaking the same language. If you don’t speak the same language then clearly there is a significant complication involved and you have to rely on interpreters; it’s just not the same,” continued Okonkwo.

“And then, sometimes between the two trading companies, one will have to sort of make more concessions than the other because you can’t have two different applicable laws in the same contract. It has to be one law. These are different issues that keep coming up.”

George added that the East African Community has been successful in terms of this integration of laws and regulations, alongside the Southern African Customs Union.

“So the models are out there. I think the real key is how do we get the CFA franc zone and the West African monetary zone to be doing more trade together,” highlighted George. “That’s the biggest headache.

Source: How We Made It in Africa