News Archive July 2017

Regional action crucial for financial inclusion of small enterprises in Africa

Accounting and insurance regulators and practitioners have outlined potential interventions for the increased access to financial services for Micro, small and medium-sized enterprises during UNCTAD’s Regional African Workshop in Nairobi, Kenya, from 19 to 20 July 2017.

Senior representatives in accounting and insurance from 11 countries participated in this event to exchange practices and formulate actions with the aim of expanding financial literacy and access to affordable financial solutions by Micro, small and medium-sized enterprises (MSMEs).

Participants drew attention to the needs of financial literacy training for business owners and the role of mobile technologies in driving innovation and affordability for financial services. Meanwhile, they encouraged UNCTAD’s efforts in supporting the region to generate an enabling environment for MSMEs to thrive.

Mr. Daniel Owoko, Chief of Staff at UNCTAD, on behalf of the Secretary General, highlighted MSMEs’ key role in promoting economic development and tackling youth unemployment.

He stated that “access to financial services in affordable conditions could be a determining factor in accelerating their contribution to attaining the Sustainable Development Goals and the African Union’s Agenda 2063”. He also underlined the importance of strengthening regional collaboration to address these challenges and UNCTAD’s commitment to facilitate dialogue.

Mr. David Gichana, Deputy Auditor General of Kenya, emphasized the role of regulators. saying: “Policy-makers are fundamental in creating a more enabling environment. It is thus imperative to join hands with all stakeholders.”

Mr. Edwin Makori, Chief Executive Officer of Institute of Certified Public Accountants of Kenya (ICPAK) and Mr. Geoffrey Ochieng, Regional Manager of the Association of Chartered Certified Accountants (ACCA), expressed the commitment of the professional bodies to deliver on this call.

UNCTAD organized this event through a project funded by the United Nations Development Account, with sponsorship from ICPAK and ACCA.

The event benefited from the presence of a network of experts from Benin, Botswana, Cameroon, Ethiopia, The Gambia, Kenya, South Africa, United Republic of Tanzania, Uganda, Zambia, and Zimbabwe.

BRICS countries: Emerging players in global services trade

BRICS countries – Brazil, the Russian Federation, India, China, and South Africa – have emerged as important players in global services trade in the past decade. BRICS services exports are growing faster than the developed countries; their share in global services markets is also expanding rapidly. Yet they still lag behind traditional major players and much work remains to tap into their potential.

According to the World Trade Organization (WTO), China was the world’s third largest exporter of services in 2015 and India the eighth, with India being particularly successful in areas such as IT and business process outsourcing.

But since the BRICS countries started from a relatively low base, they still account for only a modest proportion of world trade. Except for India, BRICS’ services trade tends to be concentrated in traditional sectors, such as transport and travel. The sectoral composition of services trade and production is important because sectors differ in terms of their productivity, their potential for future growth and their spill-over effects.

This report provides data on sector and modes of supply for each BRICS country, and analyses intra-BRICS trade. The analysis suggests that BRICS can better integrate into the global services economy by improving services regulations and reducing trade costs.

Executive Summary

Dynamic sectors

Dynamic services sectors, such as engineering and research and development, have seen rapid productivity growth globally in recent years. This has implications for policymakers, who need to have the right incentives to encourage high-productivity, growth-supporting services. It also means that the fact that manufacturing in developing countries and BRICS countries is peaking at lower levels as a percentage of GDP is not necessarily negative for employment and development, provided countries generate competitive offerings in dynamic services sectors.

One aspect of services trade which stands out for the BRICS countries is so-called ‘embodied’ services trade – services used as inputs in the production of other tradable goods and services. Services account for just some 20% of global exports in gross terms, but nearly 50% in value-added terms, reflecting the fact that most of the world’s cross-border services trade is in intermediate and not final services.

BRICS’ gross exports of manufactured goods incorporate between 30% and 40% of embodied services in value-added terms, primarily from domestic sources, but also from foreign suppliers, according to new TiVA data. This emphasizes the importance of developing services not only as a source of export earnings in a direct sense but also to facilitate the ability of manufacturers to be competitive in world markets.

Most data available for global markets cover only pure cross-border services trade, known as Mode 1 in the General Agreement on Trade and Services (GATS). However, a review of United States and European Union data on Mode 3 – sales by foreign affiliates – indicates that the BRICS, particularly China, are major sources of demand. Trade via Mode 3 is likely concentrated in flows with the main developed markets, as indicated by statistics on investment. The BRICS countries are taking initial steps in terms of Mode 3 exports; they are already well established as importers. Access to high-quality, reasonably priced services from the world market is important for consumer welfare and business productivity in BRICS countries.

For services trade involving the physical movement of people across borders – people-to-people connections – there are important factors that make the BRICS countries key players in this type of services trade, primarily GATS Mode 2 (as Mode 4 remains very restricted in most countries).

Natural advantages translate into vibrant tourism and travel economies in several the BRICS countries. At the same time, BRICS, particularly India and China, are themselves generating an increasing number of tourists as per-capita incomes rise.

The BRICS countries are also heavily involved in trade in educational services, primarily as sending economies. Their students study mostly in the developed markets of the United States and the European Union. Intra-BRICS exchanges are marginal.

Moving forward

The key finding from our data-driven analysis of services trade in the BRICS is that much work remains to be done to fully integrate BRICS countries into the global services economy. Economic forces will continue to pull in that direction; rising incomes will shift consumption towards services and increasing use of GVCs as production platforms will increase demand for intermediate services.

The major challenge for BRICS is to improve productivity in services trade, which would benefit trade integration, consumer welfare and downstream productivity and competitiveness.

Globally, costs are high in services trade, perhaps twice what is observed in goods. Policy plays a major role here. Although there are no explicit border restrictions, such as tariffs, other policies – both horizontal and sector-specific – affect the ability of foreign service providers to contest local markets.

Close gap

To leverage the global services economy and upgrade productivity, BRICS need to close a clear gap between aspiration and progress. Some BRICS, such as China, have taken major steps to open services markets, yet there remains scope to adjust policies to support more services trade integration.

It is important to look for other frameworks that could promote incremental change in services markets. Following the example of the Asia-Pacific Economic Cooperation’s (APEC) experience with goods, BRICS could seek a trade facilitation agenda in services, developing proposals to improve domestic regulation, facilitate investment and focus actions on dynamic segments of services trade, such as e-commerce and digital trade.

Through the G20, the BRICS could also push for a joint target to reduce trade costs by an agreed percentage over a set time, perhaps 5% in five years. As negotiating regulatory reform is very difficult, countries should be free to choose which regulations to reform to achieve their overall liberalization target. Experience suggests that such an approach can work when participants are committed to reform and act in good faith. Given that most experience with successful reforms of services’ markets has been unilateral, this kind of external anchor could provide needed support to domestic constituencies in favour of reform.

» Download: BRICS countries: Emerging players in global services trade (PDF)

‘A two-speed economy’: Mozambique Economic Update

Mozambique is increasingly “A two-speed economy” as extractives and mega projects drive recent growth whilst other sectors lag behind, according to the third edition of the World Bank Mozambique Economic Update, released today.

Trends in early 2017 show signs of improvement in the Mozambican economy as first quarter growth picked up and the currency stabilized. Much of this improvement is attributed to the country’s recovering coal industry and a great deal of the growth outlook depends on developments in the extractives sector. According to the report, strengthening prices for extractives, along with a post el Niño recovery in agriculture and progress in the peace talks, could steer growth to 4.6 percent in 2017, and towards 7 percent by the end of the decade.

But economic conditions remain challenging. Growth is well below the levels seen in recent years and inflation remains very high at 18 percent. Monetary policy has supported a significant adjustment in the economy. However, Mozambique’s reference lending rate is now amongst the highest in sub-Saharan Africa, and average commercial bank lending rates in the region of 30 percent are prohibitively high for much of the private sector. Hence, more needs to be done to help Mozambique’s economy recover, especially the small and medium enterprises.

In a special focus section, this edition of the Mozambique Economic Update explores the profile of the formal private sector and the impact of the ongoing economic downturn on its performance. It notes growth and increased dynamism as the number of firms in the formal sector doubled since 2002 and as the share of small and medium enterprises has grown, a phenomenon that bodes well for productivity growth. These are positive signs. However, the ongoing economic downturn is likely to have a disproportionately negative impact on the emerging micro, small and medium enterprises.

“While extractives and large industries are showing some resilience, the rest of the private sector, the green shoots of the economy, is facing reduced growth in demand, higher costs, and difficulties in access to credit,” said Carolin Geginat, World Bank Program Leader for Equitable Growth, Finance and Institutions. 

Reestablishing macroeconomic stability through a more balanced mix of fiscal and monetary policy is a priority. Slowly easing inflation and lower credit levels suggest that the monetary policy cycle could begin to loosen as the economy continues to adjust. However, making this transition smoothly will require a sharper fiscal policy response to restore the health of Mozambique’s public finances. Consolidation reforms to control the wage bill would help to ease pressures on the budget, and much rests on the outcome of the debt negotiations initiated by the Government of Mozambique. Equally as important for restoring sustainability would be a commitment from the authorities to pursue policies that help Mozambique build fiscal buffers and to increase the resilience of the private sector in the long-term.

While extractives like coal are driving recovery in Mozambique, smaller businesses vital to productivity are struggling

After a difficult 2016, the Mozambican economy is showing signs of recovery. Its first quarter 2017 GDP growth picked up to 2.9 percent, more than double the growth rate of the preceding quarter. Mozambique’s currency, the metical, is now more stable, inflation is slowly beginning to ease, and international reserves are recovering.

But economic conditions remain challenging, and the recent improvements rely heavily on the country’s recovering coal industry. And, with much of the country’s outlook for growth hinging on the extractives sector, fluctuations in global commodity prices will continue to pose large economic risks.

Also, although monetary policy has remained tight and supported significant adjustment in the external sector, Mozambique’s reference lending rate is now among the highest in sub-Saharan Africa.

Average commercial bank lending rates in the region of 30 percent are prohibitively high for much of the country’s private sector.

A stronger exchange rate, easing inflation, and lower credit levels suggest that the monetary policy cycle could begin to loosen as the economy continues to adjust. Making this transition smoothly will require a coordinated and robust fiscal policy response.

Although progress had been made, Mozambique’s fiscal position continues to be unsustainable, and overall fiscal adjustment has been limited. Subsidy reforms, a difficult area to tackle, have advanced, and will contribute to easing fiscal pressures, accumulating arrears and domestic financing are impeding the fiscal adjustment, and a sharper fiscal policy response is needed.

The country’s wage bill continues to be a significant source of pressure, while recent cuts to the investment budget are affecting the economic and social sectors, potentially worsening the composition of the budget.

Moreover, fiscal risks are materializing, especially from some of Mozambique’s large state-owned enterprises. If not managed proactively, they may compromise fiscal recovery efforts.

Small business affected most

Part Two of this Mozambique Economic Update explores the profile of the formal private sector and the impact of economic downturn on its performance.

It notes that smaller firms experienced growth and dynamism when Mozambique saw resource-driven growth acceleration. The number of firms in the country’s formal sector has doubled since 2002, for example, and these businesses now employ twice as many workers as in 2002. And the share of the economy that small and medium enterprises have is still growing, a phenomenon that bodes well for productivity growth overall.

These are positive signs. But despite its signs of recovery, Mozambique’s overall ongoing economic downturn is likely to have a disproportionately negative impact on these emerging micro-, small and medium enterprises.

The report notes that, while extractives and other large industries are showing some resilience, the rest of the private sector – the green shoots of the economy – faces reduced growth in demand, higher costs, and more difficulties finding access to credit.

Hence, re-establishing macroeconomic stability through a balanced mix of fiscal and monetary policy is a priority for private sector growth. Reforms to strengthen competition, the business environment, and skills are also essential for the resilience of firms, given Mozambique’s openness and its exposure to the commodity cycle. 

National policy on services trade will ensure competitiveness in the sector

A service is an intangible transaction between the consumer and the provider. It is a vital source of income and employment to our economies and in some countries, over two thirds of the work force is engaged in the service sector.

In Uganda, over the last five years, services have been the leading contributor to the National Gross Domestic Product (GDP) and the fastest growing sector. Currently, the services sector contributes 48.7 per cent of GDP with an annual growth rate of 6.5 per cent (UBOS 2016), and is predicted to be at 58 per cent by 2040 (Vision 2040).

The services sector is composed of both formal and informal players, with more than 70 per cent operating informally. These include distribution of retail and wholesale goods, tourism services such as hotels, bars and restaurants, massage and gym, tourist guides, travel agencies and tour operators.

Others are financial services such as banking, mobile and telecom banking and insurance; recreation services such as museums and entertainment industry; transport services such as air transport, cargo and marine handling services; car rental services like UBER, Friendship taxis; health services like hospitals and social services; Computer-related services such as Internet cafes and business process outsourcing; environmental services such as garbage collection and sewage services; Professional services for consultants such as engineers, lawyers, accountants, auditors, doctors, teachers, chefs and others; agri-business services; communication services such as postal, courier and telecommunications; education services for higher learning, primary and secondary and vocational.

Services are becoming more tradable in their own right and the increase in digital technology is making it easier to export them. For instance, Uganda has positioned itself as a trade hub for higher learning, providing both face-to-face and online education services.

Uganda has continued to supply quality higher learning education to the African continent and beyond with Ugandan institutions enrolling foreign students from neighbouring countries and beyond.

Uganda’s exports of education-related services, according to available statistics, were $30.2 million in 2013 mainly exported to the region (Kenya, South Sudan, Rwanda, Tanzania and Burundi).

The influx of South Sudanese nationals to Uganda recently has seen increase of Sudanese nationals enrolling for pre-primary and primary education in Ugandan schools. Empirical analysis of the educational sector in Uganda reveals a growing trend of foreign students subscription at all the three levels of the educational ladder namely Kindergarten/primary, secondary and tertiary.

Another example is in the health sector where Ugandans are accessing specialised healthcare services for complex ailments via telemedicine. In this case, a Ugandan patient does not have to travel long distances within or abroad to access health services, but instead, would get treatment at home using telecommunication and information technologies.

For instance, on March 3, 2014, a team of doctors based in Kampala led by Dr John Bwanika, administered treatment to patients at Nadunget Health Centre in Karamoja using skype.

Despite the 6.5 per cent growth in the services sector, there are number of gaps in policy and regulatory frameworks that have rendered service provision suboptimal.

For example, the logistics and distribution services are currently unregulated to better support the sector players leaving a heavy burden on growth and development of quality and delivery of services in Uganda.

Such policy gaps require the government through the Ministry of Trade, Industry and Cooperatives, to develop a coherent National Policy on Services Trade, which was recently approved by Cabinet for implementation to ensure competitiveness in the services sector.

The policy will positively impact on different sector groups in the following areas:

Improved quality and quantity of services; enhanced competitiveness of the services industry; regulate market order; safeguard the legitimate rights and interests of entities in business activities; foster formalisation of businesses; increase the share of services exports; support mutual recognition agreements for professionals in the EAC and COMESA regions; stabilise negative changes in GDP by addressing export shocks with services exports; and increase household incomes by creating and diversifying employment by the services industry.

In conclusion, in order for the country to benefit from this policy, there is need to review and reform the institutional and regulatory framework, promote domestic capacities, deepen regional integration and mainstream services trade in national planning.

Ms Kyambadde is MP and Minister for Trade, Industry and Cooperatives.