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Philippe Le Houérou (IFC): ‘Intra-African trade could increase by 52%’

By Olivier Caslin
Posted on Wednesday, 27 March 2019 15:45, updated on Friday, 29 March 2019 15:25

The Philippe Le Houérou says the IFC must develop infrastructure to facilitate the continent's future free trade. AP Photo/Jose Luis Magana

The CEO of the International Finance Corporation (IFC), the private-sector arm of the World Bank, discusses the reforms needed to create a continental free trade area effectively.

Assisting the private sector, developing of formal sector and providing support for agriculture, the digital economy and infrastructure development: the French leader outlines his institution’s policies as new international donors join the African scene.

Does the recent rise of new development partners push an institution like the IFC to review its procedures, change its objectives and redirect its investment?

Philippe Le Houérou: Africa has indeed changed a lot over the past two decades. Our teams must therefore constantly reassess the way we invest there. Our priorities have not changed. The IFC continues to seek to reduce the continent’s infrastructure deficit, to build a productive real sector and to be a leader in supporting inclusive trade approaches.

What is different [today] is our strategy for achieving results on a larger scale, for example by working more with sister institutions in the World Bank Group to create investment opportunities, and through reforms led by governments targeting the private sector.

We never operate alone, and the IFC looks forward to working with more players, especially when they have the capacity to bring significant capital and expertise to promising projects that are also in line with development challenges.

We are also seeing the emergence of a number of large African companies that are leaders in their domestic markets and have the capacity to invest elsewhere on the continent. The IFC is therefore adapting to meet the needs expressed by changing partners, while always working to reduce extreme poverty and promote shared prosperity – its mission.

What are the priorities to support the development of the private sector?

The development of sub-Saharan Africa is a priority for the IFC, and it will not be possible without private capital. Our presence across the continent has grown significantly. We work out of 20 offices, and our long-term financing has increased from $163m in 2003 to $3.1bn on average over the past ten years.

The IFC is committed to helping the private sector play a greater role, particularly in fragile or post-conflict countries. The latter most often have small markets, which are impacted by security challenges, political instability and weak institutions. These are all constraints that hinder international investors’ commitments.

We have created a $2bn private-sector support window that helps us prioritise support for high-risk projects

To reduce risks, together with the International Development Association of the World Bank we have created a $2bn private-sector support window that helps us prioritise support for high-risk projects, and also to increase businesses’ access to loans in local currencies. Other risk-reduction tools are being deployed to help companies that want to enter the most challenging markets.

What is the role of the private sector in the development of the continent, given that 80% of African companies are informal?

Africa needs an additional 1.7m jobs every month, and the private sector can contribute 90% of this. It is therefore essential. But to do this, we must work with the informal sector. Financial regulations and services must meet its expectations in order to encourage entrepreneurship and to support business development and employment. For these companies to one day join the formal economy and provide employment, they must first be identified and targeted by banks, which can then offer them the financial services they need.

To achieve this, a digital transition is crucial. This allows small businesses to migrate from an informal ecosystem based on cash to electronic payments. There is therefore an urgent need to reduce the technological gap that prevents too many of the continent’s entrepreneurs from participating fully in trade. Finally, governments and the private sector must work together to increase access to markets and finance. To achieve this, formalisation – including business creation and compliance with regulations – must be less costly and bring more benefits.

How do you explain that your portfolio includes many more transactions in the financial or banking sectors than in sectors such as agriculture?

We are funding many agribusiness projects and are looking to do much more, but we must first find a way to increase the size of the energy facilities needed to bring these projects to life.

Scaling Solar, for example, has enabled us to build high-capacity renewable energy infrastructure in Zambia, Senegal and soon in other countries. We are already working with agro-industrial companies across the continent. For example, we are helping [Senegal’s] Sosagrin-IBS to conquer new markets in West Africa.

While financial inclusion has increased from 23% to 43% in 10 years, access to formal financial services remains insufficient in rural areas.

In Côte d’Ivoire, we are facilitating access to finance for agricultural cooperatives working with Cargill. Our work with financial institutions allows us to support the local private sector, particularly in the agricultural sector. While financial inclusion has increased from 23% to 43% in 10 years, access to formal financial services remains insufficient in rural areas. Helping to build a strong and inclusive financial sector is essential.

What will be the impact of the agreement creating the African Continental Free Trade Area? Are you optimistic about its implementation?

Numerous studies show that, in general, the implementation of such an area will have a positive impact. Today, intra-African trade represents about 20% of total African trade. Some studies estimate that in the years ahead intra-African trade could increase by 14% thanks to the removal of tariff barriers. This rise could reach up to 54% if non-tariff barriers are eliminated. The overall impact on GDP could range from 0.1% to 1%. The main gains will come from the reduction of non-tariff barriers, the effective implementation of trade incentives and the reduction of regulatory barriers in the service sector.

The objective of this agreement, which is to create a single continental market for goods and services, is very ambitious. To enhance its impact, we must develop and finance many more infrastructure and connectivity projects.

Governments will also need to implement the necessary reforms to facilitate cross-border trade in goods and services. More generally, the IFC and its partners must offer more solutions to facilitate private-sector development across the continent.

This article first appeared in Jeune Afrique.

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