Intra-Africa trade presents a significant opportunity for economic growth and prosperity across the continent; however, Small and Medium Enterprises (SMEs) face numerous challenges in harnessing its benefits.
To excel in this landscape, SMEs must understand and address these challenges through strategic collaborations, leveraging governmental support, and embracing innovative solutions.
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In this article, I will look at the main challenges in intra-Africa trade, and in the following weeks, I will discuss in detail how SMEs can excel in the intra-Africa trade terrain.
Key Challenges in Intra-Africa Trade
SMEs face considerable challenges in intra-African trading; however, they are not insurmountable if the necessary developments and improvements are made.
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A. Infrastructural Deficiencies: One main challenge is the lack of infrastructure (or weakness in its development), which is crucial for the success of Small and Medium Enterprises (SMEs) in inter-African trade. Infrastructure deficiencies create barriers for importers and exporters.
The lack of adequate infrastructure connecting African countries makes it difficult, and unnecessarily expensive, to move goods between countries within the African continent.
Deficiencies in roads, railways, and shipping increase transportation costs and impede the movement of goods. For instance, moving a 40-foot container by sea from Nigeria to Gambia can take as long as four months (the average travel time of one truck from Mile 2, Lagos to Banjul is actually 91 days!).
These costs are amplified when factoring in the additional expenses of moving goods to other countries. For example, the cost of packaging can be overwhelming.
Labelling a product “fragile” can add an extra $100 to transportation costs. Addressing these deficiencies can significantly reduce obstacles to trade and boost SMEs’ participation in the Africa Continental Free Trade Agreement (AfCFTA).
B. Logistical Hurdles: Inefficient logistics exacerbate trade challenges. They include:
1. High Costs and Delays: Moving goods costs excessively, reducing profit margins. Transporting goods takes an unreasonably long time. Long shipping times can drastically affect trade.
The absence of an intra-ECOWAS shipping service is responsible for the earlier cited example of a four-six-month time to move a container from Nigeria to The Gambia by sea.
Unpredictable timing in transportation further compounds the problem, making it hard for businesses to plan their logistics adequately and execute trade transactions.
High transportation costs can make it difficult for SMEs to trade profitably. The high cost of air transport and limited flight options further complicate logistics.
For instance, air travel from Nigeria to neighbouring countries can be more expensive than flying to Europe.
While it is possible to undertake a one-hour flight from Lagos to Abuja at around one hundred thousand Naira, the 45-minute commute from Lagos to Accra costs as high as 400,000 Naira. Limited flight options between African countries also constitute an impediment to trade.
For example, only a few airlines may operate flights between Nigeria and a neighbouring country, which may not be daily.
2. Limited manufacturing capabilities and high operational costs within many African countries affect the competitiveness of SMEs: high energy costs, cost of access to funds, and technical logistics further strain manufacturing. High operational costs within countries make it more expensive to manufacture goods.
3. Border and Customs Delays: Numerous border checkpoints and extensive documentation requirements cause significant delays. Inherent barriers at borders add to traders’ logistical nightmares when moving their goods. Transporting goods by truck from Nigeria to neighbouring Cote d’Ivoire, which should ideally take about six days, can extend to three weeks due to these factors.
4. Policy and Trade Barriers: Non-tariff barriers, protectionism, and a lack of harmonisation in trade policies impede the free movement of goods. Some countries do not honour the ECOWAS Trade Liberalisation Scheme (ETLS) protocols, continuing to impose duties on goods that should be duty-free.
Inconsistent application of trade protocols, the ECOWAS Trade Liberalisation Scheme (ETLS), results in the collection of unexpected customs fees while undermining free trade agreements, thereby hindering the smooth movement of goods.
C. Inadequate Payment and Financial Systems:
Problems with payment systems, including internet connectivity issues, complicate financial transactions. Unreliable internet connectivity and payment systems hinder smooth transactions. Payment solutions are vital for Small and Medium Enterprises (SMEs) to facilitate trade, especially within the Africa Continental Free Trade Agreement (AfCFTA) framework.
The lack of efficient and reliable payment systems poses significant barriers to SMEs, hindering their ability to trade effectively across borders.
Here’s how payment solutions can support SMEs:
• Fintech solutions: Creating fintech platforms that facilitate secure and efficient cross-border payments can address the challenges of unreliable payment systems.
• Innovative Payment Systems: SMEs can adopt innovative payment systems to overcome challenges related to traditional banking and currency exchange.
Adopting innovative payment systems can facilitate trade by enabling easy and reliable transactions.
• Addressing Financial Constraints: Financial constraints and payment issues create opportunities for developing tailored financial services and payment solutions.
SMEs can also leverage technology, such as e-commerce platforms, to broaden market access and enhance payment systems.
ALSO READ: 76% of cash-only SMEs planning to invest in new payment technologies, Visa Report finds
However, these platforms must be well-developed and supported by reliable internet infrastructure, which may require collective efforts to improve connectivity.
D. Lack of Information and Limited Market Access: SMEs often lack information about market opportunities, regulations, and standards in other African countries. These trade information gaps and limited market access restrict their ability to trade effectively.
Trade information gaps can significantly affect SMEs’ global profitability by creating obstacles that hinder smooth, successful, and profitable trade.
These information gaps include:
• Lack of Information on Trading Partners: Ignorance about the countries and entities one trades with. This includes not knowing their policies, regulations, import/export frameworks, and overall business environment.
• Inadequate Awareness of Global Trends: Insufficient knowledge about global events and trends can affect trade.
• Incomplete Understanding of Trade Dynamics: There is a lack of awareness regarding existing challenges, which hinders the formulation of solutions by government agencies like the Nigerian Export Promotion Council (NEPC) and the Standards Organisation of Nigeria (SON).
These information gaps lead to several challenges that negatively impact profitability. These include:
• Increased Costs and Risks: Without adequate information, businesses face higher risks and costs due to unforeseen regulatory hurdles, logistical challenges, and market uncertainties.
Inefficient Operations: Ignorance of optimal trade practices and available resources results in inefficient operations.
• Missed Opportunities: A lack of information about potential markets and trade opportunities causes businesses to miss out on growth and expansion opportunities.
• Difficulty Addressing Challenges: Developing effective strategies and solutions becomes difficult without clearly understanding the problems.
Trade challenges within Africa, though daunting, also present significant opportunities for SMEs and other stakeholders.
These opportunities often involve turning existing obstacles into viable business prospects. I firmly believe that, notwithstanding these challenges, SMEs can excel in intra-African trade and even globally.
Next week, I will examine how SMEs can excel in these tricky trade terrains.
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