They’ve all come to look for Africa

The very mention of Africa brings about elation amongst investors who are aware of the tremendous opportunity there waiting to be tapped. According to the World Bank, five of the world’s ten fastest-growing countries by five-year GDP average are in that continent. Africa as a whole has an annual output of around $2 trillion, comparable to India or Russia.

While there’s a plethora of opportunities for growth, the region is heavily skewed towards commodities, and hence suffers significantly from the vagaries of commodity price cycles. The commodity price boom increases the risk of Dutch disease as over-specialisation in natural resource exports increases financial windfalls that harm the growth of the non-resource sector.

Though exports from Africa increased at a compounded annual growth rate of 11 per cent from $213 billion in 2005 to $552 billion in 2014, it was solely commodity driven. According to Unctad’s Commodity Dependence Report 2014 , out of 53 countries in Africa, 45 were commodity-dependent developing countries. This meant that more than 60 per cent of the country’s merchandise exports value constitutes commodities.

Interestingly, in the last 10 years, exports have seen a consistent linear increase except during the 2009 global financial crisis, and again during 2013 and 2014, and in all these cases it was a result of the sharp fall in commodity prices.

In Nigeria, oil and gas accounts for 80 per cent of the state’s revenue, and 95 per cent of its foreign exchange earnings. Angola’s exports are worth around 65 per cent of its GDP, and oil comprises 98 per cent of total exports. Even South Africa, the most diverse and developed African economy, remains heavily resource-dependent. Its gold industry has been in decline for the last couple of years as shafts plunge deeper, ore grades decline and costs climb, knocking it from the world’s biggest producer to number five, according to the World Gold Council. In spite of this, precious minerals such as gold, platinum and diamond remained almost 14 per cent of its exports.

With most of Africa relying on revenues from commodities and natural resources exports, it is clearly not sustainable, given the rapid cooling of commodity prices. Africa should, instead, advocate a forward integration approach in mining, wherein there exists scope for value addition of minerals, such as metals processing in the country where it is being mined. Hence, it is time to pursue a targeted strategy that focuses on mitigating the reliance on mining.

According to Unido, Africa’s share in world manufacturing output stands at 1.5 per cent, and is 4 per cent less than that of Latin America which, too, is in the bottom of the ranking. This lacklustre manufacturing needs to be converted into a situation where Africa becomes an integral part of the global value chain by entering into primary processing of its resources, be it cotton, agro products, and minerals, so that the cost efficiencies work out better for raw material importing countries in other parts of the world.

Very few countries have been able to grow and accumulate wealth without investing in their manufacturing. In fact, there remains a direct correlation between exports and the economic success of a country, where domestic manufacturing improves external accounts by both limiting the imports and diversifying exports. The success stories of manufacturing FDI in automotives in South Africa, the leather industry in Ethiopia, the garment business in Lesotho, and pharmaceuticals across East Africa, needs to be further capitalised on.

According to the African Development Bank, the infrastructure needs of Sub-Saharan Africa exceed $93 billion annually over the next 10 years. To date, less than half that amount has been mobilised, thus leaving a financing gap of more than $50 billion. The poor state of electricity, water, roads and ICT cuts national economic growth by 2 percentage points every year and reduces productivity by as much as 40 per cent. About 60 per cent of the world’s uncultivated, arable land is in Africa, but because of poor roads and lack of storage, African farmers lose up to half their crop while accessing the market.

Currently, intra-Africa trade is the lowest in any continent accounting for just 16 per cent of total trade, compared to Asia’s 60 per cent. The irony is that Nigeria, Africa’s largest economy, generates less electricity than tiny Singapore, despite possessing huge gas reserves. Africa desperately needs to improve its infrastructure to fulfil its potential in manufacturing.

Exim Bank, in cognisance of the government’s ‘Focus Africa’ initiative launched in 2003, began extending concessional lines of credit. So far, there have been 144 LOCs in operation in 41 countries in Africa alone, worth $7.2 billion. These credit lines over the last many years have helped ameliorate socio-economic conditions in Africa perceptibly.

The bank, in order to assist trade and investment, has facilitated 199 project export contracts worth around $8.4 billion in 42 countries across Africa by 70 Indian companies, with EPC (Engineering Procurement Construction) services accounting for more than half the projects financed in Africa, the rest being in infrastructure. Exim Bank has also supported several ventures in pharmaceuticals, fertilisers, textiles, agro, rubber products, and engineering goods. These ventures, among others, serve to contribute to capacity building and capacity creation. Africa is possibly at a point where India was around three decades back — on the cusp of a consumer boom. Unctad reports that FDI inflows into Africa have more than doubled from $19 billion in 2005 to $42 billion in 2014.

African countries should increasingly explore avenues in low to mid-end manufacturing which are consistent with their comparative advantage. Africa also has an edge in duty-free and quota-free access to US and EU markets for light manufactures under the Africa Growth and Opportunity Act and the Cotonou Agreement, which could be utilised.

As countries across the globe are vying for space in the continent, the African nations collectively should realise their huge latent potential, and work together to undertake measures to improve the business climate and facilitate the establishing of sound governance so as to shift gradually from mining to manufacturing.

The writer is the chief manager of the Research and Analysis Group, Exim Bank. The views are personal

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