GCC-Africa trade flows to grow

Trade levels could soar if Africa reins in its reliance on commodity exports. Published in MEED, 22 April 2013

Despite its endowment of globally desirable natural resources, sub-Saharan Africa is one of the worst performing regions when it comes to trade. That is true both in terms of intra-regional commerce and dealings with the rest of the world. However, international investment has been picking up and, if the continent can move away from relying on commodity exports, there is a chance that trade levels could quickly rise.

Currently, just 13 per cent of African exports go to other countries on the continent, according to the Switzerland-headquartered World Trade Organisation (WTO). Only the Middle East, where 10 per cent of exports stay in the region, performs worse on this count. Other parts of the world manage far higher levels of intra-regional trade. In Latin America and the Caribbean, the figure is 29 per cent; in North America, 48 per cent; in Asia, 54 per cent; and in Europe and the former Soviet countries of the CIS it is 75 per cent.

Lacking diversity

The low level of intra-African trade is due to weak economic and infrastructure ties between countries, coupled with a lack of diversity in what nations produce. Just as Gulf economies are reliant on oil, in Africa most exports are drawn from a relatively small list of commodities.

These commodities include oil and gas from Angola, Cameroon, the Democratic Republic of Congo, Equatorial Guinea, Gabon and Nigeria; cocoa and coffee from Burundi, Ivory Coast, Ethiopia, Ghana and Rwanda; aluminium from Guinea and Mozambique; cotton from Burkina Faso and Mali; cashew nuts from Gambia and Guinea Bissau; and tobacco from Malawi.

While crude oil brings in significant sums for a number of African countries, overall trade levels remain small by global standards. Close to 60 per cent of African exports by value are accounted for by oil, natural gas and related products.

In total, the continent’s merchandise exports were worth $572bn in 2011, lower than for other regions. Figures from the WTO show that only two sub-Saharan African countries – Nigeria and South Africa – had more than $25bn-worth of trade in commercial services in that year. Meanwhile, the value of merchandise trade for each country on the continent was less than $250bn.

At those levels, African countries generally sit in the bottom half of global league tables. Nigeria and South Africa are the only two to feature in the WTO’s list of the 50 largest exporters, with exports of $116bn and $97bn respectively in 2011. None features among the world’s 50 biggest exporters of commercial services.

A key problem is that Africa generally ships cheaper raw materials, rather than the manufactured goods and high-end services that people pay more for. “The lack of [added value] in so much of the continent’s exports [means] it is still not getting to the point where a new African urban class lives by the value-added sectors of manufacturing and services,” says one former senior UN development official.

Increasing trade

Africa’s trade profile helps to explain why the value of trade between sub-Saharan Africa and the GCC countries is limited: the Gulf is certainly not in need of hydrocarbons imports, so trade has to revolve around other products. However, it has been growing quickly. In the first decade of this century, GCC exports to Africa grew by an average of 14.7 per cent a year and imports increased by an average of 27.5 per cent, according to the Switzerland-based Gulf Research Centre.

In total, GCC exports to Africa in 2011 were worth $26.6bn, while imports from the continent were worth $7.2bn, leaving the GCC countries with a healthy trade surplus of $19.4bn that year.

The main product the GCC sells to Africa is fuel, which accounted for about half of all exports to the continent in 2011. This was followed by other goods closely connected to the hydrocarbons sector, such as plastics and fertilisers. Of the trade going the other way, the most significant category is precious stones and metals, worth $1.5bn in 2011, followed by electrical equipment, fruit, and iron and steel.

In the future, food imports from Africa could lift the trade figures much higher, particularly if the GCC countries continue to invest in overseas farmland in their pursuit of food security. Given the size of Africa’s Muslim population, religious tourism, particularly to Saudi Arabia, is another potentially important market.

Currently, just seven sub-Saharan African countries feature among the GCC’s 50 largest trading partners, led by South Africa in 22nd position and followed by Kenya, Nigeria, Tanzania, Ethiopia, Uganda and Zambia. The trade between the GCC and those seven countries amounted to close to e13bn ($16.7bn) in 2011, according to figures from the European Commission. The most important trade links that these and other African countries have with the GCC are with the UAE and Saudi Arabia, which between them account for 75 per cent of trade. All the GCC countries have a trade surplus with Africa, the smallest being Qatar’s $424m, rising to $7.4bn in Saudi Arabia.

These GCC-Africa trade figures pale in comparison to Africa’s trade with its most important partners. A third of the continent’s trade is with the EU, with a total value of e268.5bn a year, according to the European Commission. The next most important partners for Africa are China, with e99m of trade; the US with e93bn; India with e41.5bn; and Japan with e21.7bn.

The continent’s strong trade links with the EU are a legacy from the colonial era, when the UK, France, Belgium and other states controlled vast swathes of Africa. Their armies and administrators may have largely left, but the trade routes they set up have proved more resilient.

The continent’s investment flows are even more skewed towards the world’s richest countries. According to African Economic Outlook, a partnership between the African Development Bank (AfDB) and the France-headquartered Organisation for Economic Cooperation and Development, the EU and US together accounted for 81 per cent of inward investment into Africa between 2005 and 2010. China, by contrast, accounted for just under 1 per cent. The Middle East provided 6.1 per cent of the total, up from 3.2 per cent in the first half of that decade.

Investment grows

The good news for Africa is that investment is increasing. Foreign direct investment inflows to sub-Saharan countries jumped from $29.5bn in 2010 to $36.9bn in 2011, a level comparable to the peak of $37.3bn achieved in 2008, according to the UN Conference on Trade and Development. The main beneficiaries were Nigeria, South Africa and Ghana, all of which received more than $3bn in 2011. Republic of Congo, Mozambique and Zambia all received between $2bn and $3bn, while Chad, Democratic Republic of Congo, Guinea, Tanzania and Niger all received more than $1bn.

One further area of investment could open up in the coming years if, as some anticipate, more African countries begin to offer sovereign bonds to international investors. Of particular interest to the GCC countries is sovereign sukuk (sharia-compliant bonds). To date only Gambia and Sudan have issued them, but according to credit ratings agency Standard & Poor’s (S&P), a number of others are lining up to join them. North Africa is one obvious source, but governments in South Africa, Nigeria, Senegal and Mauritius have also expressed an interest in offering sovereign sukuk.

“We believe that sukuk issued by African sovereigns could address an investor base in the GCC countries or at the Saudi Arabia-based Islamic Development Bank, which may be looking for sharia-compliant investment opportunities,” says Christian Esters, a primary credit analyst at S&P.

If that happens, it will help to broaden the economic ties between the Gulf and Africa and perhaps help grow trade as well.