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 33.5bn dollars of additional working capital to be put to more productive use in 2018, according to Euler Hermes.
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 40bn 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 further their capacity to finance imports even further. This contributed to the -22 percent fall in African import values from USD 800bn in 2014 to $ 623bn in 2016.
“Taking into account the new trade picture, our estimate stands at $ 33.5bn of working capital freed up for African companies in 2018. Lower imports combined with lower payment terms (64 percent of imports are paid in advance) explain this result,” Euler Hermes chief economist Ludovic Subran said.
Euler Hermes expects imports to grow at a +8% annual rate in this region. Should suppliers lengthen their payment term by 30 days, this would free about $ 45bn 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 argument to develop domestic production capacity, since imports come with a cost due to low DSO. Here are a few examples.
Oil exporters (Algeria, Nigeria, Angola, Libya…) account for $ 14bn wasted in cash vaults as a result of short DSOs, with Algeria ($ 5bn, 3 percent of GDP) at the top of this ranking. Republic of Congo for instance would free up the equivalent of 11 percent of its GDP (USD 0.9bn) 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 $ 1.6bn (2 percent of GDP), and about the same amount in Ethiopia.
