African countries must diversify exports, UNCTAD warns

African countries must diversify from commodities by promoting high-value services and improving access to private finance or risk prolonged macroeconomic instability, says a new report from the United Nations Conference on Trade and Development (UNCTAD).

The 2022 Economic Development in Africa Report calls for African governments to shift away from traditional commodity-led models for industrialisation and instead review regulations which stifle investment and undermine the scalability of the continent’s 50m registered small and medium-sized enterprises (SMEs).

High-value services will lead the way to high-end integration

“The services sector, currently dominated by low value added and informal transactions, does not exhibit sufficient competitiveness, sophistication or efficiency to act as a backbone of productive activities for industry, manufacturing and agriculture”, says the report.

UNCTAD secretary-general Rebeca Grynspan called on African governments “to strategically design and target incentives that encourage entrepreneurs to move into economic activities with the potential to drive structural change”.

This, she advises, “does not mean that governments should be ‘picking winners’ in the private sector, but rather should focus on creating an enabling environment”.

If Africa is to meet sustainable development goals outlined in the African Union’s Agenda 2063, it must find a way to effectively move into high-value global supply chains. At present, this seems far off. The continent is home to a disproportionate 45% of the world’s commodity-dependent economies, with 45 out of 54 countries currently depending on primary commodities for more than 60% of their export revenue.

Export diversification cannot be achieved until the continent’s service sector, which remains dominated by traditional services, is freed from regulatory complexities which limit SMEs’ access to private finance and thus constrain the development of regional and durable industrial supply chains, the report says.

The report estimates that at present, African SMEs suffer from a private funding gap of $416bn every year. So long as this continues, a lack of viable competition will concentrate the dividends of economic development in the hands of larger state-backed companies.

The “efficient, cost-effective supply of services, including financial services, can be decisive in the overall diversification process”, Benedict Oramah, president and chair of directors of the African Export-Import Bank remarks at the beginning of the report.

“African countries should prioritise [financial services] to promote productivity, export growth and sustainable development, and increase greater resilience against future shocks.”

AfCTA will play a key role

“The implementation of the African Continental Free Trade Area Agreement is key to unlocking new opportunities for industrialisation and export development”, according to Oramah.

The report, which identifies short-term headwinds such as complicated intracontinental tariffs and the continent’s uneven patchwork of competition legislation, is broadly optimistic about the potential of AfCFTA to drive Africa’s entry into high-value global supply chains.

“A regional approach through the African Continental Free Trade Area could support countries with limited administrative and financial capacities to implement strategic industrial policies”, the report claims.

By removing barriers to information-sharing, AfCFTA will hope to replicate the success of the EU’s single market: countries such as Nigeria, Ghana and Ethiopia, which have been unable to move up the automotive value chain due to limited financing and R&D facilities, may be better able to secure concrete gains by integrating operations on a regional scale.

The report attributes Africa’s current debt difficulties to its dependence on commodity exports, warning that economic growth in the last two decades has been misleadingly driven by an unsustainable commodity supercycle. 

Surges in commodity prices cannot last forever, and have often precipitated untenable levels of public spending. In Zambia, where commodities account for 89.8% of merchandise exports, this year’s collapse in the global copper market has had a severe trickle down effect, exacerbating the country’s debt woes and stifling private investment. 

Future macroeconomic vulnerability, the report suggests, would be mitigated by a diversification of economic objectives to promote domestic and regional industrial supply chains through effective provisions for private financial services.