Commodity dependency stunting Africa’s export diversification, warns UNCTAD

Perennial dependency on the export of commodities no longer augurs well for the economies of many African countries in the wake of soaring global food and energy prices as well as the impact of the COVID 19 pandemic, climate change and the war in Ukraine.

UNCTAD says 83 per cent of African countries are highly dependent on commodities

Image: UNCTAD

The warning comes in the Economic Development in Africa Report 2022 by the UN Conference on Trade and Development (UNCTAD), which says that to cope with current crises and insulate themselves against future shocks, African countries must diversify their economies.

The continent of 1.4 billion people is among the least diversified regions in the world in terms of exports, with 83 per cent of African countries highly dependent on commodities.

They account for more than 60 per cent of total merchandise exports in 45 of the 54 countries in Africa, leaving them highly vulnerable to global commodity price shocks and undermining the continent’s inclusive growth and development prospects, the UNCTAD report says.

However, businesses that deal with Africa have pointed out some of the obstacles that African countries will have to overcome if they are to successfully diversify their economies: weak financial bases, poor regulatory measures and infrastructure deficiencies.

Geneva-based Paramount Energy and Commodities said that to overcome these obstacles, African countries needed to first create “political stability through effective state building across the region, [which] is vital to draw in the foreign investment that will allow growth to occur”.

Then there is the issue of poor supply of electricity in many African countries, which is hampering production.

Paramount said: “African development is always going to be hamstrung by the fact it does not have regulated, cost efficient, and clean energy generation.

“Africa has plentiful resources but for the potential to be reached, a significant amount of capital expenditure is required – and international institutions and investors must help create the right environment for capital to be deployed to support African nations striving to reach this goal.

“Electrification and access to energy is the lynchpin to economic growth.

“Until electricity generation is consistent and reliable, African countries will always struggle to attract significant foreign direct investment in sectors that depend on state-produced electricity,” Paramount added.

“Businesses in Africa are at an automatic disadvantage due to the high cost of electricity production on the continent.

“African development will be held back until the price of generation drops and businesses are able to operate on a level playing field to their international counterparts.

“Governments must take steps now to invest in critical national infrastructure that helps to reduce costs on both the private sector and on ordinary citizens,” Paramount said.

It noted that developing access to new sources of energy that were cheaper and cleaner must be a priority for Africa, as it sought to recover from the recent global economic challenges.

The company, which has been running a programme called Empowering Africa since 2017, said that this lack of electricity across the African continent could affect the fundamental aims of the African Continental Free Trade Area (AfCFTA).

The goals of the AfCFTA, which has its headquarters in Accra, call for collaboration through the creation of a single market and the movement of capital, which ultimately aim to boost economic prosperity and unleash the potential of the region’s resources.

Paramount noted: “While the aims of AfCFTA target significant societal imbalances and inequalities, these issues can best be resolved by prioritising energy supply in the region

“In order to produce tangible results and realise the benefits of a free market and free movement of capital and labour, electrification is crucial.”

Paramount has been supplying affordable electricity to a number of African countries through investment in various power-generating projects, which will allow these countries to reliably supply affordable electricity to citizens and businesses to boost economic development.

As part of its Empowering Africa initiative, Paramount is also supporting Africa’s food independence through sustainable investments.

The company invested $500 million in a local food distributor in Angola towards the construction of a large food processing plant that will create thousands of jobs and reduce the prices of basic food.

The UNCTAD report also shows that neglecting the potentially transformative role of high knowledge-intensive services, such as information and communications technology, business services and digital financial services, is among the key reasons why export diversification remains a challenge in Africa.

In welcoming the report, Benedict O. Oramah, President and Chair of the Board of Directors of African Export-Import Bank, said: “As African countries work to rebuild their economies post COVID-19, Economic Development in Africa Report 2022 brings a new perspective on how the services sector contributes to export diversification and promotes structural change.”