Authors:

International Finance Corporation (IFC)—a member of the World Bank Group—is the largest global development institution focused on the private sector in emerging markets. It works in more than 100 countries, using its capital, expertise, and influence to create markets, and opportunities in developing countries.

The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. The goal is to ensure that trade flows as smoothly, predictably, and freely as possible.

Date of publication/ Date de publication: October 2022

Site of publication / Site de publication : https://www.ifc.org/

Extracts from pages / Les extraits proviennent des pages : 2-3, 15-19, 32-35

Chapter 1:

The Trade Profile of the ECOWAS4

Integration into the global economy through trade brings well-documented benefits to developing countries by linking them to new markets while boosting access to technology, knowledge, and sources of capital. Firms that participate in international trade, either as importers or exporters, pay higher wages, are more skill- and capital-intensive, grow larger, and tend to be more productive than non-trading firms.

The next decade could see a prolonged period of accelerating trade, faster growth, economic diversification, and poverty reduction across Africaas global trade flows recover from the COVID-19 pandemic and governments commit to further trade liberalization, including through the AfCFTA. However, seizing these opportunities requires decisive action by a range of stakeholders to ensure economies are not held back by institutional and structural barriers. In West Africa, and specifically in Côte d’Ivoire, Ghana, Nigeria, and Senegal, many firms continue to be constrained by high trade costs despite improvements in competitiveness and expansion into new products and markets.

A major step in alleviating this challenge would be to improve access to trade finance—debt facilities such as letters of credit used by importers and exporters to transact business. This study showcases new data and scenario analysis which demonstrate the importance of closing trade finance gaps to facilitate new opportunities for the region’s traders and bring down overall costs.

ECOWAS4 trade: advancing but still behind potential.

Côte d’Ivoire, Ghana, Nigeria, and Senegal, with a combined GDP of $615 billion, traded $208 billion in goods and services during 2021, according to the WTO. Trade flows are largest relative to the economies of Ghana and Senegal, at 62 percent and 63 percent of GDP respectively. For Côte d’Ivoire the ratio is around 45 percent while for Nigeria it is 25 percent, reflecting its large domestic economy. Nevertheless, as Nigeria is the biggest economy in the region, it accounts for over half of total ECOWAS4 exports and imports. Together, the four countries contribute to nearly 17 percent of the African continent’s total trade value. Their biggest export markets are in Europe, India, China, and the United States.

New opportunities for ECOWAS4 traders are on the horizon. While the four countries suffered a $60 billion slump in trade after 2019 on account of the COVID-19 pandemic, trade liberalization and the lifting of restrictions in accordance with AfCFTA commitments should boost commerce between African countries. Indeed, the value of trade from the ECOWAS4 to the rest of the continent could rise more than five times in the next 15 years, according to World Bank projections.

The removal of non-tariff barriers and trade facilitation measures are critical drivers of this outcome, which could be further reinforced by the dynamic effects of trade expansion on productivity and investment. Meanwhile, the share of agricultural imports from non-African partners is expected to nearly halve from over 80 percent today to less than 45 percent in 2035, upon full implementation of the agreement, while imports from the rest of Africa into the four countries could double in value.

In West Africa, and specifically in Côte d’Ivoire, Ghana, Nigeria, and Senegal, many firms continue to be constrained by high trade costs despite improvements in competitiveness and expansion into new products and markets

Beyond Africa, the ECOWAS4 are also forging closer trade links with other regions of the world, particularly Asia. Imports of Chinese machinery and transport equipment have already increased 50–100 percent in the four countries in the six years from 2015, according to the UN. Meanwhile, Nigerian exports to China increased three-fold, while Senegal saw them multiply four times and Côte d’Ivoire saw a five-fold rise in value within the last decade.

Exporters from Ghana, Nigeria, Senegal, and Côte d’Ivoire have also been capturing bigger shares of the Indian market. Exports to India from Senegal and Ghana, have grown on average by over 20 percent annually since 2012.

A more diversified trade mix will require greater use of trade finance

Trade finance has been a key enabler of traditional exports and imports in the ECOWAS4. Pre-export finance is in high demand for the four countries’ main exports, including crude oil in Nigeria, cocoa and rubber in Côte d’Ivoire, and cocoa in Ghana. Large pre-export finance facilities are syndicated by either local or international banks and occasionally multilateral financial institutions when syndication proves difficult. Meanwhile, large importers of medicine and medical equipment, refined oil, transport equipment, and food benefit from import finance and letters of credit. International financial institutions improve access to international trade finance by extending credit lines and letter of credit confirmation guarantees or capacity to local banks.

Together, the four countries contribute to nearly 17 percent of the African continent’s total trade value. Their biggest export markets are in Europe, India, China, and the United States

Seizing new trade opportunities through global value chains and expansion into new products and services requires deeper and more diverse offerings of trade finance. For example, the expansion of the construction sector in West Africa to meet demand for new housing, industrial facilities, transport, and energy infrastructure as well as medical facilities has stimulated local production of cement, wood, metals, and other materials, some of which are now exported regionally. It has also generated demand for imported materials, machinery, and other equipment.

Chapter 2:

Trade Finance in the ECOWAS4

The ECOWAS4 trade finance market is estimated to be worth around $42 billion annually, supporting 25 percent of merchandise trade. At the individual country level, the share of trade covered by trade finance ranges from 15 percent in Senegal to 41 percent in Ghana.The comparable share for Africa is about 40 percent, according to the African Development Bank, while globally the share is around 60-80 percent. The estimates of total trade finance assets in the four countries were produced using two different methodologies, one developed for this study based on observations of bank assets, and the other previously used by the African Development Bank for its continental Africa Trade Finance Survey. Both methodologies lead to similar estimates of market size and gaps in provision, in large part because the high response rate to the survey has resulted in a sample that incorporates almost the entirety of the market in the four countries and therefore approximates reality.

Banks are the main suppliers of trade finance in the ECOWAS4

Scale matters in trade finance markets, and there are clear market leaders in each country. Although nearly all surveyed financial institutions (75 of 78 respondent banks) offer trade finance, the five largest banks by assets account for half of the trade finance market by dollar value while the 10 biggest account for slightly more than two-thirds of trade finance assets. The average trade finance portfolio of the 10 largest banks in the sample is four times larger than the average for their smaller peers, processing three times as many transactions with higher transaction values.

Pan-African banks with local operations, banks present in neighboring countries, and subsidiaries of international banks all have the advantage of being able to offer the largest local traders a bigger network of international correspondent banks, which allows them to more easily process and finance trade transactions globally. The survey confirms that banks with more trade finance activity are more likely to be larger and spread across more than one jurisdiction with over two thirds of respondents reporting operations in more than one country. Around half of the survey participants in Côte d’Ivoire, Ghana, and Senegal manage trade finance portfolios on average more than three times larger than their purely local counterparts. It also highlights the important role played by subsidiaries of international banks in offering trade finance to corporations working in multiple countries.

The trade finance market is dominated by traditional trade finance instruments

Letters of credit, mainly for importers, and loans that largely comprise revolving, short-term capital and pre- shipment export facilities, constitute the bulk of the existing market. Letters of credit have the advantage of providing legal assurances to the parties involved in a trade transaction and default rates are typically lower than for loans in Africa and elsewhere. Because of this security, they are often less costly than the average interest rate on a loan.

Nevertheless, securing a letter of credit is a laborious process requiring extensive documentation, thereby favoring bigger customers with more resources that are better able to meet all the demands set by banks. Swift data appears to illustrate that the market favors larger customers, at least for exports. The data has shown that average import letter of credit values in Africa are broadly in line with global rates.

Chapter 3:

The Impact of Closing the Trade Finance Gap

The costs involved in the carrying out of international trade are an important determinant of trade flows and comprise a range of transaction costs, including the cost of financing. Total prices for financing international trade transactions are determined by the instruments employed.

The analysis distinguishes between four modes of payment or financing employed, each differing in cost and transactional risk: cash-in-advance, export or import loans, exports financed with working capital, and letters of credit. For example, in using cash-in- advance, the importer pays for goods upfront and in doing so, pre-finances the exporter’s cash-flow, while incurring a (transactional) risk of not receiving delivery on time or at all, without the benefit of collateral.

In view of the high rejection rates for trade finance applications, high costs for facilities and low coverage revealed by the survey, four scenarios were carried out with the GTM. In the first, the share of trade supported by trade finance was increased to the African continental average of 40 percent. This concerns Côte d’Ivoire, Nigeria, and Senegal, which display shares of, respectively, 33 percent, 21 percent and 15 percent. For Ghana, which is already above the threshold, the rejection rate of trade finance applications was reduced from the 25 percent revealed in the survey, to the African continental level of 12 percent identified by the African Development Bank.

In the second and third scenarios, the cost of trade finance instruments (the price of import-export loans and letters of credit) was reduced to lower margins prevailing in more advanced economies. The fourth scenario combined the reduction in costs and increased availability of trade finance. The model generates trade cost reductions when the share of trade finance increases, and interest rates and fees are lower. An increase in the share of trade covered by trade finance, for example through more letters of credit, and a greater supply of trade finance, reduces overall trade costs. This reflects the fact that trade finance is a cheaper way to finance international trade than other, often riskier options such as cash-in- advance payments or using internal working capital. The reduction in trade finance costs consists both of reductions in the net letter of credit issuing and confirmation fees and in the reduction of net interest rates for import and export loans (net of refinancing costs).

 

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