Intra-Africa Supply Chains: Digitalisation To Unlock Opportunities

Fitch Solutions / Operational Risk / Africa / Mon 06 Sep, 2021

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Key View

  • Since 2020, economic disruptions due to the Covid-19 pandemic have accelerated plans to boost economic diversification and supply chain resilience all around the world, and Africa is no exception.
  • Increased digitalisation and streamlined customs procedures are key measures that will strengthen economic growth and deepen regional integration.
  • As many countries embrace regionalisation in sourcing strategies, African states will benefit from broadening their trade markets for improved economic resilience in the post-pandemic era.
  • Although Africa is home to about 1.1bn people, trade barriers including border inefficiencies and fragmented markets, have hindered the region’s internal trade potential.
  • Africa's sub-regions are the global underperformers in our Logistics Risk Index for Trade Procedures and Governance, with an average score of 31.6 out of 100, far below the global average of 50.2 out of 100.

Border Inefficiencies Weighing On Intra-Africa Trade Potential

Developing Sub-Regions - Trade Procedures & Governance

Note: 100 = Lowest risk; 0 = highest risk. Source: Fitch Solutions Logistics Risk Index

Covid-19 Impact Exacerbating Africa's Trade Gaps

The economic and public health crisis aggravated by the Covid-19 pandemic has given impetus to supply chain diversification and increased economic resilience around the world. As Africa looks to boost trade opportunities and economic resilience in the post-pandemic era, the continent is likely to benefit significantly from increased intra-continental trade as a growth strategy. Regions such as the EU and Asia have enjoyed robust growth over the past few decades, largely due to countries boosting trade with their regional peers. In addition to deepening intra-regional trade, having trade agreements with top Asian trade partners will bode well for African growth, as this will improve the continent's access to large key markets, such as China and India, at reduced costs. Enhanced border capacity will further boost a country's ability to respond to shocks, improving overall trade resilience.

Supply Chain Disruptions Spurred Local Production Opportunities

Africa remains highly dependent on external markets for trade, given the continent's weak interlinkages along the value chain. Supply chain disruptions due to border closures and economic slowdowns in key trade markets, such as China and Europe, negatively impacted many African economies and underscored the need for increased local production, particularly for essential items such as medical equipment, to counter disruptions. Regional outperformers, including Ethiopia, South Africa, Kenya and Ghana, responded to disruptions to imports by repurposing existing manufacturing facilities. Personal protective equipment (PPE) supplies, sanitiser, surgical gowns and face masks were among the top locally produced goods in response to shortages. Key sectors that repurposed their production lines include garments and textiles, beverages, and educational institutions. Amid shortages of Covid-19 test kits and PPE, Ghana and Senegal developed low-cost Covid-19 test kits. Kenya addressed the PPE shortage by converting idle factories into manufacturing facilities. Ethiopia, Ghana and South Africa locally produced more advanced products, including ventilators and assisted breathing apparatus.

While some of these manufacturing shifts were temporary, they highlighted the potential to meet local demand to varying degrees. Local manufacturing stands to benefit from increased investment and improved connectivity along the value chain, particularly in the form of better links between producers and suppliers. With adequate support structures and improved access to input products, domestic manufacturing has the potential to meet both local and regional demand, which will advance supply chain resilience.

Internal Trade Will Boost Resilience In Africa

Global - Intra-Regional Trade, % of total trade (2019)

Source: ITC-Trade Map, Fitch Solutions

Intra-Africa Trade Will Further Unlock Growth

African countries trade more with the rest of the world than with each other, as shown by data from 2019 (latest available data), with many states heavily dependent on commodity exports for growth. This presents significant development challenges for most countries, especially amid commodity price shocks and periods of weak demand from key import partners, such as China, India and the EU. Despite Africa being home to more than 1.1bn people, intra-Africa trade remains low relative to intra-reginal trade in other areas of the world (see chart above). According to Trade Map data, only 16% of African exports were to regional peers in 2019, relative to 53% of exports in North America to regional peers, 56% of exports among regional peers in Asia and 68% for Europe. This highlights significant untapped opportunities for intra-regional trade in Africa, given the continent’s large consumer base, and underscores Africa’s limitations in meeting its own needs. Intra-regional trade has been relatively stagnant over the past few years (see chart below), which points to structural limitations that are keeping the continent from maximising its trade potential.

Within Africa, intra-regional trade is highest in the Southern African Development Community (SADC), which averaged 20.4% of total trade between 2015 and 2019. This is followed by trade within the East African Community, which accounted for 10.8% of total trade, the Economic Community of West African States (8.6%) and the Economic Community of Central African States (3.2%). Some of these limitations are attributed to under-developed production capabilities, which keep exports concentrated in commodities and unprocessed goods. Other factors include border and customs inefficiencies that make trade between African states more costly and time consuming, relative to importing from abroad.

Weak Sector Links And Border Inefficiencies Hinder Potential

Africa - Intra-Regional Trade In Selected Economic Blocs, % of total trade (2015-2019)

Source: ITC-Trade Map, Fitch Solutions

Streamlined Customs - A Key Solution To Non-Tariff Barriers

Barriers to intra-regional trade include tariff and non-tariff barriers. Non-tariff barriers, such as infrastructure gaps, customs delays and weak administrative procedures, significantly impede trade among African states. The African Continental Free Trade Area (AfCFTA), which aims to create one African market, directly addresses the issue of trade barriers. One of the objectives of the agreement is to eliminate tariffs on 90% of goods produced on the continent. The AfCFTA also aims to progressively eliminate existing non-tariff barriers to enhance intra-Africa trade. Countries with streamlined border controls and greater adoption of digital services for cross-border trade stand to benefit the most from improved trade procedures, as these factors reduce time delays and costs in clearing goods.

One-Stop Border Posts Reduce Trade Inefficiencies

Trade within Africa is primarily conducted via road. Some measures that can be taken to reduce non-tariff barriers include harmonising trade regulations and customs controls. East Africa is the wider region’s outperformer when it comes to consolidating customs controls. The East Africa region has several one-stop border posts (OSBPs) between member states. OSBPs assist in facilitating trade by eliminating the duplication of identical controls and procedures on each side of the border, reducing lengthy transit times for passenger and freight vehicles, as well as the high costs of trade that negatively affect the competitiveness of African businesses.

East Africa, a region with 11 member states, has eight OSBPs. As the Covid-19 pandemic subsides, regional growth is expected to pick up and subsequently business in East Africa will benefit from greater trade efficiencies relative to businesses operating in other sub-regions. Countries in these other regions - particularly in the SADC, which has the highest level of intra-regional trade - need to accelerate plans to implement OSBPs to reduce the negative impact of inefficient border controls on the region's growth and supply chains.

One-Stop Border Posts In East Africa
Border Region Border Post
Kenya-Ethiopia Moyale
Kenya-Tanzania Taveta (Ke)/Holili (Tz)
Kenya-Uganda Malaba
Kenya-Uganda Busia
Tanzania-Burundi Kabanga (Tz)/Kobero (Bu)
Tanzania-Zambia Tunduma
Tanzania-Uganda Mutukula
Uganda-Rwanda Mirama (Ug)/Kagitumba (Rw)
Source: Trade Mark East Africa

Digital Adoption Will Enhance Competitiveness

Infrastructure development, especially in the areas of transport and electricity, are key to unlocking regional trade. Out of the 54 countries on the African continent, 16 do not have direct sea access. In addition, more than 80% of Africa’s trade takes place by sea, which means that ports play a crucial role in Africa’s trade growth. Ports need to be maintained, modernised and expanded to increase trade volumes and government revenue collection, and the issue of illegal trade needs to be addressed.

Port expansion and increased digitalisation will not only enhance port capacity, but will increase earnings for traders and improve Africa's competitiveness in the global market. In 2020, the Nigerian Shippers’ Council announced plans to increase digitalisation at ports by moving cargo clearing processes and other port transactions online. Ghana-based online logistics company, Jetstream, closed a USD3.0mn seed round in June 2021. The company platform aggregates private sector logistics providers at African ports and borders online, which provides businesses with greater visibility and control over their supply chains, improving certainty in corporate decisions and lead times. In South Africa, the port of Durban is using drone technology and sensors to monitor traffic and inspect infrastructure without interrupting operations. Given the numerous inefficiencies at many ports in Africa, there are growing business opportunities in connectivity and digital payments, sensory equipment, and software design to boost productivity and deepen regional integration. Increased digitalisation of private and public trade-related services will spur intra-regional trade and allow African businesses, particularly consumer-facing ones, to realise increased trade gains from better access to the continent's large consumer base.

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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