African countries must diversify exports to survive global crises: Unctad

African countries must strive to diversify their exports to survive economic shocks from global crises such as the Covid-19 pandemic and the Ukraine war, according to the UN Conference on Trade and Development (Unctad).

About 45 out of the continent’s 54 countries are dependent on exports of primary products in the agricultural, mining and extractive industries, Unctad said in its Economic Development in Africa report on Thursday. The UN agency considers a country to be dependent on commodities when these products make up more than 60 per cent of its total goods exports. "Dependence on commodity exports has left African economies vulnerable to global shocks and hindered inclusive development for far too long,” said Rebeca Grynspan, secretary general of Unctad.

"By addressing barriers to trade in services, boosting relevant skills and improving access to innovative alternative financing, the region’s manufacturing productivity can be enhanced, driving Africa’s economic growth and structural transformation for many years to come." The call for economic diversification comes as African food import bills soar with global prices trading near a record high after Russia’s invasion sharply reduced Ukraine’s exports of grain.

Food stress is expected to affect more than 60 million people in eastern and southern Africa by next month, with 43 million West Africans at risk from nutritional insecurity. Africa has "enormous potential" to break its commodity dependence and ensure that the continent is effectively integrated into high-end global value chains, Unctad said.

Knowledge-intensive services, such as information technology and financial services, could be a game-changer for Africa, according to the UN agency. But these account for only 20 per cent of the continent’s services exports, leaving vast room for growth.

The agency also urged African nations to promote the use of high-knowledge and technology-intensive inputs to produce and export more complex goods and services rather than primary commodities. Advanced technologies and smart services such as blockchain can improve access to diverse and competitive markets within and outside the continent, the report said.

Increasing trade in services can also reduce the environmental degradation caused by the exploitation of natural resources. Currently, Africa’s services sector is dominated by low-value-added transactions, making it difficult to support productive activities for industry, manufacturing and agriculture sectors.

Trade in services is low in Africa. Between 2005 and 2019, services made up only 17 per cent per cent of the continent’s exports, according to Unctad. Travel and transport accounted for about two thirds, representing a high concentration of traditional service sectors.

To diversify their economies, African countries should implement policies that link trade in high-value services with other sectors, especially manufacturing, Unctad said. Countries also need to cut costs of services trade, remove protectionist policies, expand digitalisation and boost the skills of workers in the sector, it said.

The private sector ― particularly small and medium enterprises ― will play a critical role in diversifying and transforming Africa’s economies. SMEs account for about 90 per cent of companies on the continent and employ aoout 60 per cent of its workforce. "Countries should better position African SMEs as engines of diversification by facilitating their access to affordable funds and financial services," the report said.

Given the huge financing needs and the difficult access to banks’ corporate loans, Unctad called for better financial instruments for African SMEs to secure financing. The agency urged policymakers to help companies to access specialised financial and non-financial products and services such as government loan guarantees that can better address the long-term financial needs of SMEs.

FinTech can also improve traditional credit channels and help bridge the huge funding gap if African countries implement policies to make better use of its potential, the report said.

Countries must also tackle other hurdles facing SMEs, such as poor integration to regional and global markets and lack of capacity to compete with large public and private firms. The African Continental Free Trade Area, which aims to create a single market for the continent’s 1.4 billion people, can also boost export diversification, the report said.

To make the most of it, countries must implement policies to boost production capacity, industrialization, encourage investment, and improve regional integration and infrastructure. "Global economic shocks, climate change and other challenges could undermine Africa’s export diversification efforts if countries don’t put in place the right policies, regulations and boost institutional capacities," the report said.