The diversification of African exports and economies is the most viable means by which these countries can prosper in the global economy and survive vulnerabilities and economic uncertainties exacerbated by commodity price volatility, the United Nations Conference on Trade and Development’s (Unctad’s) 'Rethinking the Foundations of Export Diversification in Africa – The Catalytic Role of Business and Financial Services' report states.

African countries remain predominantly dependent on exports of primary products in the agricultural, mining and extractive industries, which has adverse impacts on inclusive growth in the long term, as it dims the prospects of industrialisation and human capital development, besides others.

"Enhancing the complexity and diversity of African exports requires a two-pronged approach that looks at the incentives for increasing services utilisation in the manufacturing sector and scaling entrepreneurship activities towards potential new products, with benefits for structural change, while optimising opportunities for deeper integration in regional and global value chains and catalysing conducive business and financial services," Unctad says.

This entails confronting the barriers that undermine the performance of trade in services.

It also requires improved access to competitive services, while reorienting national and regional investment and trade policies to strategically enhance the productive capacities of firms in developing new products and services with the potential to transform and sophisticate productive structures and market activities without necessarily crowding out the diversification potential of existing products and businesses.

Much of the debate over strategies or drivers of export diversification has focused on the role of the public sector, with a limited push towards more dynamic and game-changing agents, for example, in the private sector. High knowledge-intensive services sectors and systems, such as financial technology, are essential to transforming African export and overall economies.

Recommendations targeting niche areas where African governments and businesses can make improvements and investments to support effective export diversification on the continent identify key opportunities to build capacities to innovate and enhance technologies and infrastructure for industrialisation.

Key opportunities to support export diversification also include strategically catering to the financing needs of domestic businesses, fostering innovation and efficiency for financial services and business models and leveraging regional gains and potential to support export diversification and structural change, Unctad adds.

"Forty-five African economies are commodity dependent with highly volatile revenues owing to the nature of the market characterised by periods of price boom and bust.

“While many parts of Africa have enjoyed positive economic growth in recent years, such growth was in part owing to a commodity supercycle. The high concentration of exports in a small number of commodity products can create macroeconomic instability, especially during times of commodity price volatility and global shocks, such as those affecting supply and demand."

The disruptive effect of these shocks on trade balance, export revenues and financial flows can, in turn, generate a negative impact on productivity, economic growth, revenues of government and income and investment.

Commodity price shocks are also associated with lower levels of financial sector development in commodity-dependent countries, Unctad states.

"There is currently great potential for African economies to transform and achieve a higher level of diversification and competitiveness. The successful implementation of the African Continental Free Trade Area (AfCFTA), a growing middle-class, an emerging consumer market, the increased use of financial services and technology and dynamic private entrepreneurs will drive export diversification and sustainable economic growth in Africa," the organisation says.

However, when examining the various strategies put in place by African countries to diversify exports and foster competitiveness at the regional and global levels, what becomes apparent is the underestimated potential of the services sector as a cornerstone of productive activities for industry, manufacturing and agriculture, Unctad highlighted.

Further, many export diversification programmes overlook the potential of the private sector and financial services to reach their objectives. The private sector, which includes small and medium-sized enterprises (SMEs), can provide innovative and efficient ways of diversifying and transforming African economies; financial services can serve as a sustainable channel through which SMEs can mobilise financing to enter new markets, diversify exports, upgrade productive activities and improve competitiveness.

SERVICES
The services sector could be a forceful impetus for economic diversification, growth and structural transformation in Africa, Unctad states.

However, this requires that policies be aligned to build complementarities between the services sector and other sectors of the economy, especially manufacturing. The implementation of AfCFTA may help catalyse national efforts to link these services and industries and prioritise those services that are relevant to a value chain that is strategically important for a given country.

"If Africa is to better harness its services trade potential, services policies and their regulation need to better target areas of market failure, namely accessibility, quality, affordability, competition, the high costs of trade in services, protectionist policies, low levels of digitalisation and technology, difficult access to financial services and poor infrastructure.

"Addressing the limited productive capacities and strengthening regional integration will be key to enhancing the internalisation of key services," Unctad says in the report.

TRANSFORMATIVE FINANCIAL SERVICES
Although the development and deepening of the financial products and services markets have not yet reached the level of maturity required to influence a paradigm shift in export expansion and diversification in Africa, the potential for alternative finance to expand and upgrade the portfolio of financial products and services and to offer more innovative firm-centric products that can sharpen the operational efficiency and competitiveness of SMEs could be a game changer for export diversification, the report notes.

Effective implementation of export diversification initiatives will require rule-based governance frameworks and coherent financial sector policies, including those related to financial technology.

Further, although financing poses a challenge to all developing regions, the problem is worse in Africa. In the region, there are about 50-million formal small, medium-sized and microenterprises with an unmet financing need of $416-billion every year.

Exporting firms, particularly new entrants and small-scale exporting firms, need to secure external financing to cover large costs to enter export markets. Those costs include information costs to better understand the required regulations and standards of a potential foreign market; compliance costs to redesign exporting products that meet demand standards for a specific market and establish new processes to comply with foreign market regulations and standards; and other costs related to trade barriers, such as customs, logistics, lead time and tariffs.

"Given the specific financing needs of African firms and the difficulty in obtaining funding from traditional financial sources, such as the corporate banking sector, more innovative financial instruments, practices and technology could be optimised to secure access to credit and external financing," Unctad recommends.

"Unctad stands ready to provide cutting-edge economic research and policy analysis and data tools to support African countries in their efforts to reach export diversification and sustainable development objectives.

“In partnership with regional and national institutions, Unctad can deliver institutional and productive capacity-building programmes and offer support to build consensus on key policy and regulatory issues with a view to achieving effective structural change on the continent," the organisation says.