Moscow — allAfrica's Juanita Williams was in Moscow for the African Export-Import Bank (Afreximbank) meetings - one of the preludes to the October 24 Russia-Africa Summit in Sochi, co-chaired by President of the Russian Federation Vladimir Putin and President of Egypt Abdel Fattah el-Sisi, who also heads the African Union. Agreements on trade, economic and investment are expected to be signed following the high-level forum where dozens of African heads of state will participate.
Afreximbank's decision to hold their meetings and AGM outside of the continent for only the second time (the first time was in China) was driven by a vision "to push forward a new agenda for Africa", as the bank's President Professor Benedict Oramah said at the opening. "The Russian Federation represents one of such partners that Africa looks up to," said Oramah.
allAfrica spoke with Afreximbank's Chief Economist and Director of Research and International Cooperation Dr Hippolyte Fofack...
Why is it important to have the Afreximbank meetings here in Russia?
You heard the Nigerian speaker (Permanent Secretary of the Political and Economic Affairs Office of Nigeria Gabriel Tanimu Aduda) this morning (June 20) saying that for the second time after China, Russia became a shareholder of the bank last year and they injected a lot of money in the bank. They've also seen what the Bank is doing, the role that Afreximbank is playing in supporting development and trade within the African continent so they've decided to partner with us and join us for economic transformation in Africa, and expressed an interest in hosting our annual general meeting in Russia.
We felt that given the role and the vision they have for 2019 - Russia made 2019 the Russia-Africa year. You heard Minister Lavrov (Russian Foreign Minister Sergey Lavrov) saying that what we have this week it's just the first step towards the Russia-Africa summit in October where we are expecting more than 40 heads of state. It's a very important year in that relationship and we are playing our part to make sure that Africans are introduced to Russia and Africa is also able to reflect on the Russia-Africa relationship.
As you know being from Southern Africa, Russia played a major role in the liberation of this continent, whether it be Angola or South Africa. And something happened after the collapse of the Soviet Union and one can understand that they were in search of their own soul in a difficult world, now they seem to have stabilized and the old Russia is resurging again. It's not a bad thing to be part of that journey.
Our research clearly shows that what has helped Africa over the last 20 years has been diversifications of its trade partners. It used to be said when Europe sneezes Africa catches a cold - then more than 50% of Africa trade, if not 70%, was with Europe. You all saw the Euro fiscal and financial crisis, Europe was suffering but Africa was growing in part because Africa South trade today is way above Africa trade with Europe. And China and India alone today account for 23% of total African trade. If you add intra-African trade at 16%, you already at almost 39-40%. You can see things are changing, as Russia comes on-stream, that share of Africa South trade will expand even more and ultimately reduce Africa's exposure to global volatility.
What are your thoughts on what could be described as the backlash against the continent's involvement with China and Russia. I have seen a few articles about how colonisation has been started once again with China. With rising interest and involvement from Russia on the continent, the same ideas about Russia and Africa will be spread...
I was reading an article on the CNBC last week about Russia involvement in Africa and they said it was bad for U.S. interest. I think the fundamental question you are raising is one of geopolitics, which will intensify even more in the coming years as you heard from Dr. Ha-Joon Chang this morning. The global pie is shrinking, there are countries which for many years enjoyed global monopoly in terms of technology, in terms of trade and the manufacturing sector. There was no south ... now the south is suddenly able to complete. When you have not been used to competition, it can become very difficult for you to compete and that is a new world in which we are.
Of course people can talk about Africa as if Africa belongs to them, but we are 1.2 billion, projected to be 2.5 billion, so the continent is coming back after centuries of slavery and colonialism. What is happening should be expected. It's a historical legacy but I think if you take America, going back Ha-Joon Chang, and China they became a superpower by relying on British technology, on German technology. There is a very nice book which came out written by a very brilliant and wonderful lady, Annie Jacobsen, called Operation Paperclip.
She wrote this book about how after WWII America took over all the Nazi scientists to build Boeing, the Von Braun Center in Alabama and so that is German technology which went to help America. And Africa has to be where it needs help, if Africa needs technology and it's coming from China, from Russia, from America, or from the UK, from Portugal, we will take it. We need technology. Africa needs infrastructure to develop. It's painful that the Chinese are building it but if you do what we just discussed in terms of building the skills, engineering skills maybe tomorrow we will be in a joint venture, and then after that Africa will build their own infrastructure.
What do you think about the results of the negotiations between companies, bankers and entrepreneurs on the African Continental Free Trade Agreement?
The Africa we have all known has been a fragmented continent, and the processes of fragmenting Africa were born out of the Berlin conference in the 19th century which created microstates, with micro and fragmented markets which over the years has been a key constraint for large-scale investment. Why pour 10 million, 20 billion, 100 billion dollars' investment in a country of less than 1 million if you cannot sell good produce across the board. So that has been a major constraint to the development of this continent and precisely why the step taken by the African leaders, which started in Kigali last year in March 2018, when an overwhelming majority of African countries signed the African Continental Free Trade Area (AfCTFA) and later on the following months rushed to ratify has been a major historical event in the process of economic development.
And it's a watershed moment and the African continent because for once we are going to now have market, of course the African middle class has been growing but now we have the conditions for it to explode and naturally what would happen is that now we are now going to move away with the right condition from foreign direct investment, directed towards natural resources and primary commodity, towards a foreign direct investment driven more by a manufacturing industrial productions than in the past. And as that is done we will create opportunity for sustainable growth, sustainable per capita income increase, which is what it takes to help grow that middle class and set it on an irreversible path.
That will be motivated by economies of scale, it will also be motivated by the changing environment in a continent where macroeconomic stability has become the golden rule of policy making. It is no longer something that is actually pushed and promoted and fostered from certain institutions - it has become part of policy making within the continent.
I am personally very optimistic about the African Continental Free Trade Area and we see the results already, two or three months ago Germany's Volkswagen decided to open a plant to manufacture Volkswagen in Rwanda in that tiny what they call landlocked economy. They are not building the plant for Rwanda's market, but they will benefit from it. I can see them building that factory for Tanzania, for Kenya and so forth. As if one was not enough, after the German move, the French announced two months ago, Macron that French car manufacturers will be building an assembly plan in Kenya next door. So the competition for real investment in the manufacturing sector has started, mostly triggered by prospects by the Continental Free Trade Area agreements.
You will recall that when we look at Intra-African trade versus extra-African trade, why extra-African trade imports into Africa are essential manufactured goods, Africa exports to the rest of the world are essentially primary commodities and natural resources. But when you look at intra-African trade is overwhelmingly industrial products and manufactured goods, as we industralise we will also drive intra-African trade. And where I am very optimistic is that the moment intra-African trade rises to above 35 to 40% the issue of payment deficits will no longer be a thorny issue in this continent because we will actually act as an absorber. In other words when there's contraction in global demand it will not affect domestic demand within the continent.
There's been talk about, as you said, the middle class possibly exploding, and moving from being a resource-rich continent to focusing on manufacturing. And you use of Rwanda and Kenya as examples. They are really good examples but they can been seen as exceptions, whereas there are quite a few countries not on the same position as Rwanda. How will it work with countries like Liberia for instance, where lack of infrastructure is a challenge, and Central African Republic where peace is an issue?
That has been one of the concerns about moving the African Continental Free Trade Area forward. The fact that countries are at different stages in their development process has been viewed as a possible constraint. But the provision we have now in the free movement of goods and services will be followed by a new protocol investment and new protocol and free movement of labour. So that when the African Continent Free Trade Area is at full capacity, it will allow people to move to where opportunities are - that's the first thing.
The second thing is that what we have in terms of state failure and institution building and weak state is actually in our view a consequence of the fragmentations we've had in a continent and as we move towards implementing the Continental Free Trade Area agreements there will be space for regional investment. If we take the Inga Dam, for instance. We have been talking about the Inga Dam for decades. We've seen South Africa's growing interest in the DRC because of the possibilities from Inga, even though Inga is not at full capacity. So as we move towards the Africa Free Trade Area agreement there will be regional investment in strategic sectors, infrastructure which will actually create a condition for greater integrations with significant benefits for the smaller states that you just mentioned. We can see that happening.
But that will not be all, I think there are some initiatives taken into a short time because when we move towards the Continental Free Trade Area there will be short-term costs in terms of duties, custom duties. We are doing working with African Union Commissions is to establish what we call the African Continental Free Trade Area Agreement Adjustment Facility. If they are countries that are losing in terms of duties as a result of eliminations on 90% of goods, we will provide what is necessary as a stop-gap measure. But ultimately the growth prospects as such that as Kennedy put it so well: The rising tide will be able to lift all boats, the way things are going.
(Editor's note: "The rising tide will lift all boats" is associated with the idea that improvements in the general economy will benefit all participants in that economy. The phrase is commonly attributed to John F Kennedy who used it in a 1963 speech to combat criticisms that a dam project he was inaugurating ...)
What kind of opportunities will arise for companies and banks like Afreximbank because interest in foreign investments In Africa may drop because there are more markets than in the West?
That is what we called initially in our oldest discussions the potential benefit associated with economies of scale, which are such that where it use to take $100 to buy a book, you made bring the cost of that particular book down to $20 and still make a lot of money because of the size of the market. So the return investment is going to be significantly much higher and therefore the risk structure of investment within the continent is likely to change.
That's one important incentive for the Investor which cannot be ignored by any bank, but the benefits for investors and financial institutions are actually much broader. If you look at our current strategy, the Afreximbank strategic plan - the first pillar is what we called the arrowhead is intra-African trade, if you look at the current forecast it says that within a decade after implementation of the AfCTFA, after the ratification, intra-African trade could double. By doubling the intra-African trade you'll be reducing the risk of macroeconomic management challenges. So macroeconomic stability and restructure will also change and ultimately reducing the cost of lending.
What will happen is as the economic environment and growth improves, more African countries are going to see much increase in their sovereign rating. We have a lot of implications for a bank like Afreximbank where the majority of our shareholders are member states. We are very happy to have South Africa become a shareholder last year because they come with a very good rating which will boost the overall rating of the bank as an institution. So we can see the potential ramifications of this Continental Free Trade Area in the banking sector, in the investment sector, you name it.
Earlier you spoke about an adjustment facility for the AfCFTA, will it there be something similar to that in terms of sharing knowledge among countries that are have higher economic ratings and better infrastructure?
We will make sure that we provide the right advice to countries part of the African Continental Free Trade Area - on the right policies, a set of reforms to fully benefits from the African Continental Free Trade Area. We have met Ambassador Muchanga about that and the most important drivers of success will depend on the capacity of African countries and business leaders to increase these spaces of industrial production and manufacturing. We did some research recently, the intra-African export potentials were very high and largely driven by industrial products in the future, and to do well in that space in the digital age you have to build the right skills, engineering, technology, innovations to change the structure of African economies.
That will be the major challenge, and something we will be bring to African leaders to make sure that we move into a new era where African education system will be reformed to meet a need and aspirations of the continent.
If Africa's growth in trade - intra and extra - is as you expect from this new strategy, what do you expect relations with China and, in future, Russia will be?
It's always important when you are looking at relationship to look at this from a dynamic not always static manner. The nature of the relationship between Europe and America today is not what it used to be 30 or 40 years ago. Things have changed, what has changed is that Europe has become economically stronger. They even have their own currency now and America is coming to terms with that. The relationship between Africa and China will go through the same path. As we speak the Chinese population is ageing, the source of growth in China is changing from low-tech to medium-to-high tech, so they will have at some point to undergo manufacturing changes and go beyond Asia.
Another side is of the coin is, independent of China, or Russia for that matter, is that Africa's own strategy... for far too long we have embraced the world without our own strategy but now we have one.
In future partnerships, including this one with Russia, we are going to emphasise the technology transfer. Russia has expertise in the area of energy, natural resource management, the oil in Russia, unlike in Angola, doesn't belong to Chevron. What can Africa learn from that so that the oil in Angola is not for Chevron or Exxon Mobil but for an African entity. We are going to go to Russia with a clear agenda as to what we can get from them and so it is up to us to make sure that that partnership is truly a win-win partnership. And that the fragmentations of the continent to create a Continental Africa Free Trade Area will actually make it easier. Just imagine a moment that we decide to move away from national mining, and have a continental strategy for the mining sector whether we increase royalties by 5, 10, 20%, no single country will be targeted because it's a continental strategy. The continent and individual countries will be strengthened significantly under the current framework.
For more on the Afreximbank meetings and trade development on the continent, go to our Business page.