Opinion

How blockchain can boost trade in Africa

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On Jan. 1, the African Continental Free Trade Agreement officially became operational. A few months later, reflecting on how the coronavirus pandemic would affect the agreement’s path to creating what will be the largest free trade area in the world, Wamkele Mene — secretary-general of the free trade area’s secretariat — doubled down, predicting that more “intra-African trade is what will drive economic development post-COVID-19.”

In many ways, that kind of 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 expand by 2.3% to 3.4% in 2021. At the same time, complex and unpredictable trade policies, as well as costly and time-consuming border procedures, continue to hold back African economies from their full trading potential. But to capitalize on the African trade agreement, 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, decentralized, and 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 others to develop and pilot new blockchain-based products for merchant payments and remittances.

In South Africa, the government is collaborating with others from the BRICS group of countries — which also includes Brazil, Russia, India, and China — 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 where it operates.

Despite its seeming complexity, blockchain has clear real-world relevance for improved trade facilitation. As the technology 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.

Here are four ways blockchain can boost trade flows with and within African markets:

1. Customs clearance. Implementation of the African trade agreement 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.

This red tape, typical of traditional customs systems, is a key impediment for small and medium-sized enterprises, or SMEs, that are ready to enter global trading networks but do not yet have the back-office capacity or financial resources to navigate the intricacies of the bureaucracy.

With blockchain, this complex process can be digitalized and streamlined, saving significant amounts of time and money — including a reduction of up to 80% in data entry requirements alone, allowing smaller traders to enter the market. This, in turn, extends the economic benefits of trade to a wider swath of society, boosting the sales and incomes of small-business owners, including women and young people.

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 Côte 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, opening up markets to a broader set of actors.

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 standardization, and are susceptible to interference and fraud. As such, the potential economic benefits of certification to producers often remain unrealized, making investments in higher-quality and more sustainable products an unjustified business expense.

Blockchain has shown great promise in increasing transparency to overcome these obstacles. Its open-source 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.

As supply chain actors see that investing in certifications and other standards pays off in terms of price premiums and higher productivity and sales, they will begin to incorporate these investments into their core business planning, resulting in more environmentally and socially responsible production practices at scale that generate benefits throughout the system.

3. E-payments and trade finance. In any given trade transaction, exporters, importers, and banks engage in a complex flurry of financial assurances and legal paperwork to show both sides that the other will make good on the deal. This paper-based system delays both the movement of goods and the payment cycle for such transactions.

Blockchain technologies streamline ways that organizations can track and verify the authenticity of such documentation, reducing transaction time and cost. Again, this development will disproportionately benefit entrepreneurs and SMEs that have less capacity to deal with this red tape and often do not have access to the working capital necessary to weather the delays in payment common under the status quo.

Addressing this bottleneck will further open up trading as a viable option for a wider group of business owners and enterprises, therefore driving inclusive growth.

The blockchain platform Wave, for example, recently partnered with Barclays to facilitate electronic signatures on bills of lading sent between shippers and carriers. The Eastern and Southern African Trade and Development Bank, meanwhile, recently completed a live $22 million sugar trade transaction using smart contracts, which automatically complete transactions once predefined conditions are met.

These kinds of streamlining and automation remove 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 those without bank accounts.

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 the 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. This allows them to make investments in their farms and businesses that provide them with viable pathways to prosperity.

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 standardization in the sector, which raises the risk that the platform, data format, and security protocol that a particular country adopts will not be able to “speak to” those chosen by trading partners. In addition, blockchain-based systems are not immune to hacks and cyberattacks.

Depending on a system’s design, privacy, confidentiality, and data protection concerns all apply, including single points of failure or compromise, in some cases. Finally, as blockchain systems scale and add 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 part of any trade facilitation toolkit. From lower transaction costs and less time at the border to improved traceability and accelerated digitalization, the implications of blockchain are immense for the world’s fastest growing continent.

African countries stand to benefit greatly as early adopters of this decentralized ecosystem to respond to drives for efficiency and positive impact. As the African trade agreement gears up for full implementation, blockchain will be a key tool to help unleash its $3 trillion in potential economic gains.

Rachid Benjelloun is an experienced trade and international development professional with over 22 years of experience managing and overseeing programs in trade policy, trade facilitation, World Trade Organization negotiations and compliance, regional trade agreements, e-commerce, and connectivity related to information and communications technology. He is currently chief of party on the U.S. and Egypt’s Trade Reform and Development in Egypt project, implemented by Palladium.

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