On 1st January, 2021, the African Continental Free Trade Agreement (AfCFTA) officially became operational. Three months later, reflecting on how the coronavirus pandemic would affect AfCFTA’s path to creating what will be the largest free trade area in the world, Secretary General Wamkele Mene doubled down, predicting that “increased intra-African trade is what will drive economic development post-COVID-19.”
In many ways, that recovery has already begun.
Despite a regional economic decline in 2020, over a dozen African economies experienced positive growth rates this past year, and the regional economy is projected to grow by 2.3-3.4 percent in 2021. At the same time, complex and unpredictable trade policies, and costly and time-consuming border procedures continue to hold back African economies from their full trading potential. But to capitalise on AfCFTA, additional innovative solutions are needed to address these long-standing challenges.
One such innovation is blockchain, the secure peer-to-peer system to record transactions that has become the electronic ‘ledger’ of choice thanks to its transparent, decentralised, nearly fraud-proof structure. It is increasingly considered a viable and scalable technology in emerging markets, including many African countries. In Ghana, for example, the central bank recently launched a “regulatory sandbox” that will allow banks, companies, and other actors to develop and pilot new blockchain-based products for merchant payments and remittances.
In South Africa, the government is collaborating with other BRICS (Brazil, Russia, India, China, and South Africa) countries on research into blockchain’s potential for trade and other enablers of growth. Meanwhile, Standard Bank - the continent’s largest financial institution - has joined Marco Polo, a blockchain-based trade finance network, which will help unlock access to blockchain finance throughout the 20 African countries in which it operates.
Despite its seeming complexity, blockchain has clear real-world relevance for improved trade facilitation. As blockchain continues to make inroads in global supply chains, governments, companies, and donors have the chance to accelerate its adoption and reap the benefits of lower transaction costs, efficient delivery, increased exports, and more inclusive growth.
Four ways blockchain can boost trade flows with and within African markets:
1. Customs clearance: AfCFTA implementation is still in its early stages, and customs processes vary across Africa. Countries, trading blocs, and even individual ports have their own procedures, which can involve hundreds of documents, information exchanges, and supply chain actors. With blockchain, this complex process can be digitised and streamlined, saving significant amounts of time and money - including an up to 80 percent reduction in data entry requirements alone.
One such platform, TradeLens, allows traders to upload documents to a single chain and track the progress of their paperwork and shipments. Over 20 port and terminal operators around the globe have signed up, including for terminals in Benin, Nigeria, Liberia, Mauritania, Egypt, and Cote d’Ivoire, demonstrating the demand for such blockchain-simplified solutions. This and other blockchain-enabled systems have the potential to reduce risk, time, and money for cross-border traders in African countries.
2. Traceability: The ability to accurately track cross-border shipments is crucial to the verifiability of standards and certifications, as well as the reliability and timeliness of delivery. While various standards exist to help ensure quality control and compliance, traditional methods of tracing are opaque, lack standardisation, and are susceptible to interference and fraud.
Blockchain has shown great promise in increasing transparency to overcome these obstacles. Blockchain’s open-sourced-yet-secure nature allows companies to assign and verify certifications easily, while facilitating audits of data within the system. Already, blockchain is enabling a range of African products – from Tunisian olive oil and Rwandan coffee, to Zambian cassava – to reach end consumers through ethically verified supply chains.
3. E-payments/trade finance: In any given trade transaction, exporters, importers, and banks engage in a complex flurry of financial assurances and legal paperwork to assure both sides that the other will make good on their agreement. This paper-based system delays both the movement of goods and the payment cycle for such transactions. Blockchain technologies streamline ways firms can track and verify the authenticity of this documentation, reducing transaction time and cost.
The blockchain platform Wave, for example, recently partnered with Barclays to facilitate electronic signatures on bills of lading sent between shipper and carrier. The Eastern and Southern Trade and Development Bank, meanwhile, recently completed a live USD 22 million sugar trade transaction using smart contracts, which automatically complete transactions once certain pre-defined conditions are met. Streamlining and automating transactions in this way removes the administrative barriers that cost time and money for traders throughout the continent.
4. Inclusive Supply Chains: Electronic blockchain-based transactions also facilitate access to finance for smallholder farmers and other upstream actors, including the unbanked. For example, the company Everest has developed a digital wallet and identity verification tool to optimize cross-border trade and remittance transactions, which are then stored via blockchain and made available to the relevant banks. Such mobile banking systems establish digital identities and accessible transaction histories for individual farmers, reducing risks to the bank and increasing access to finance for smallholders.
Of course, all technologies also have drawbacks, and blockchain is no exception. First, adopting a new technology, integrating it with existing legacy systems, and maintaining it over time all require significant investments for countries with limited resources and many competing priorities. This challenge is exacerbated by the overall lack of interoperability planning and standardisation in the sector, which raises the risk that the platform, data format, security protocol, and beyond, that a particular country adopts will not be able to “speak to” those chosen by their trading partners. In addition, blockchain-based systems are not infallible to hacks and cyberattacks.
Depending on the system’s design, privacy, confidentiality, and data protection concerns all apply, including single points of failure/compromise in some cases. Finally, as blockchain systems scale and add on users, data transmission can slow. This latency issue can become problematic for transactions, such as payments, that require near-instantaneous response times.
As the international community works to address these challenges, the fact remains that blockchain should be considered a key tool in any trade facilitation toolkit. From lower transaction costs and less time at the border to improved traceability and accelerated digitization, the implications of blockchain are immense for the world’s fastest growing continent.
African countries stand to benefit greatly as early adopters of this decentralised ecosystem to respond to drives for efficiency and positive impact. As the AfCFTA gears up for full implementation, blockchain will be a key tool to help unleash its USD 3 trillion in potential economic gains.
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