If suppliers were to offer African companies payment terms of 30 days after delivery of goods and services, rather than demand payment in cash in advance, this could release more than USD 33.5 billion of additional working capital to be put to more productive use. These were last year’s findings by Euler Hermes, a company specialising in trade credit insurance.
In 2015, Euler Hermes estimated that if a payment term of 30 days were to be granted on the share of imports paid in cash (cash in advance), then it would free up over USD 40 billion of working capital for African companies.
Since then, the trade picture has changed; a commodity shock hit resource-rich African countries and slashed their exports revenues, reducing their capacity to finance imports even further. This contributed to the -22% fall in African import values from USD 800 billion in 2014 to USD 623 billion in 2016.
“Taking into account the new trade picture, our estimate was at USD 33.5 billion of working capital freed up for African companies. Lower imports combined with lower payment terms (64% of imports are paid in advance) explains this result,” says Euler Hermes Chief Economist, Ludovic Subran.
Imports to grow
Euler Hermes expects imports to grow at a +8% annually and should suppliers lengthen their payment terms by 30 days, this would free about USD 45 billion by 2020. The parallel development of trade finance is key to seize this great opportunity for the African continent.
This huge amount of money wasted each year is a clear indicator to develop domestic production capacity, since imports come with a cost due to low Days Sales Outstanding (DSO).
Here are a few examples:
- Oil exporters (Algeria, Nigeria, Angola, Libya) account for USD 14 billion wasted in cash as a result of short DSOs, with Algeria (USD 5 billion, 3% of their GDP) at the top of this ranking. The Republic of Congo for instance would free up the equivalent of 11% of its GDP (USD 0.9 billion) with longer DSOs.
- In fast growing East African economies, greater DSOs would also be a non-negligible growth boost. In
- Kenya for instance, it would free USD 1.6 billion (2% of its GDP), and about the same amount in Ethiopia.
- Potential gains are weaker in value in West Africa (USD 0.4 billion in Senegal, 0.7 billion in Côte d’Ivoire) but range from 2 to 2.5% of their GDPs. On the contrary, it means that these gains are lower in relative terms in countries with the highest income level. For example South Africa (0.4% of its GDP) and Morocco (1% of its GDP).
The world is suffering from too long DSO in many places, but African figures show some divergence. Stéphane Colliac, senior economist for Africa at Euler Hermes, says, “Big players are often bad payers, when small players have no opportunity to pay late. It is especially true in Africa: there is a paradox when we see that key State Owned Enterprises are able to postpone their payments by several years (eg, in Angola or in the past in Egypt) while others have no other choice than cash payment. As an example, Moroccan main corporates have 84 days of DSO but 30% of the transactions (those involving smaller ones) are still paid in cash.”
Euler Hermes Group